Horrific 10% bank deposit tax proposed in Cyprus.

[reformist2]

The austerity crowd is back, more evil than ever.

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A hit imposed on Cypriot bank depositors by the euro zone has shocked and alarmed politicians and bankers who fear the currency bloc has set a precedent that will unnerve investors and citizens alike.

After all-night Friday talks, euro finance ministers agreed a 10 billion euro ($13 billion) bailout for the stricken Mediterranean island and said since so much of its debt was rooted in its banks, that sector would have to bear a large part of the burden.

In a radical departure from previous aid packages - and one that gave rise to incredulity and anger across Cyprus - the ministers are forcing the nation's savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.



http://www.reuters.com/article/2013/03/17/us-eurozone-cyprus-risk-idUSBRE92G0BG20130317

[dipsydoodle]

1. Figures have since been revised

and voter moved to Tuesday.

[reformist2]

2. A tax on all assets makes sense. A tax on just savings accounts is arbitrary and unfair.

Just think how little money the truly rich keep in savings accounts. The real money is tied up in bonds, stocks and real estate. Are they going after that? Of course not!

[dipsydoodle]

3. Their government needs funds NOW.

The proposed tax is the only effective means of doing that. Most other assets would take time to realise. The main issue here is the risk of Cyprus actually declaring itself bankrupt and leaving the Euro. Given that choice their population may decide the tax to be preferable especially given that the tax would pale into insignificance compared with the inevitable effect on inflation of using a new currency and the fact that most of their current loans are secured against state assets.

[reformist2]

4. Says who? The European banks??? The EU government should step in with a reasonable plan.

[dipsydoodle]

5. There is no EU "government"

.

[reformist2]

6. There is an EU though - a proto-government is developing.

[dipsydoodle]

7. That would reuire the agreement of ALL member countries.

An unlikely event - one single veto would squash it.

[AngryAmish]

8. Best get your money out of all the PIIGS

When there is a bank run it makes sense to be first. If I had money in a bank in any of the PIIGS, Canadian banks would be real nice right now.

[pampango]

9. Krugman: the Cyprus story has obvious parallels with both Iceland and Ireland

...the Cyprus story has obvious parallels with both Iceland and Ireland, with RMML — Russian mobster money laundering — as an extra ingredient. All three island nations had a run of rapid growth as banking havens that left them with banking systems that were too big to save. Iceland, at peak, had banks with assets that were 980 percent of GDP, more than 10 times the US number; Ireland was at 440 percent. Cyprus, at around 800 percent, was closer to Iceland in this respect. For a good summary, read this.

Iceland got through the crisis with less damage than Ireland, for two reasons. First, it let the banks default on liabilities to overseas creditors, including deposits in offshore accounts. Second, it had the flexibility that comes from having your own currency.

The own-currency advantage helped the real adjustment of the economy; it also allowed some fairly undisruptive financial repression, because the depreciation of the krona (coupled with temporary capital controls) led to a brief burst of inflation that eroded the real value of deposits. Savers were hurt — but with banks having grown to 10 times GDP, that was going to happen one way or another.

Cyprus, unfortunately, seems to be making a hash of it. To be fair, the proposed levy on depositors is actually smaller than the real losses Icelandic depositors took (and they lost on their currency holdings too). But this is just the beginning! Even with the effective default on deposits, Cyprus will need a huge loan from the troika, and the condition for this loan will be harsh austerity. This looks like the beginning of endless, inconceivable pain.

And while it looks as if the terms of the deposit tax are being revised, overseas creditors are still getting a much better deal than in Iceland. I’m still trying to figure out the technical aspects here, but it seems clear that one big problem is that Cyprus, unlike Iceland, isn’t willing to put its banking excesses behind it; they’re still trying to hold on to the RMML business, which means less taxation of the RMs and more taxation of locals.

http://krugman.blogs.nytimes.com/2013/03/18/island-nightmares/

Krugman seems to be saying that the Iceland way of dealing with an out-of-control banking sector (10 times bigger than the whole economy) was currency depreciation and a resulting burst of inflation which hurt ordinary savers - probably more than the 10% hit that has been proposed in Cyprus - but the pain was contained after that and recovery ensued. In Cyprus, the government seems to be trying to hang on to their big international savers, apparently largely Russian oligarchs and mobsters, rather than cutting them loose and containing the pain to ordinary savers as happened in Iceland.