I was stunned this morning to read that the government of Cyprus was going to immediately impose a one-time levy of 6.75 percent on deposits of less than 100,000 euros and 9.9 percent of more than that on the savings deposits of all Cypriots in order to receive $13 billion in bailout money from the European Central Bank to rescue the banks in Cyprus that were threatened by default. In other words, the money that the people of Cyprus had saved in their bank accounts was going to be used to bail out … the banks.
The reason this is crazy is that in addition to Cyprus, if people in other countries fear that this might happen there too, there will be a run on the banks, causing chaos.
The decision was announced by the Cypriot president during the weekend when the banks are closed. The parliament is balking at granting approval and the vote, which the European Central Bank had demanded be held today, has been postponed to tomorrow, which is a bank holiday.
If nothing is done by the time the banks open on Tuesday, the whole deal will have to be called off because people will simply withdraw all their money, which they will likely do anyway whatever the outcome. The government could still impose a tax on all amounts that people had in their accounts before the weekend but that would undoubtedly create even more anger.
Apparently long lines have already formed in front of ATM machines. What a surprise.
Felix Salmon has more on what a dangerous precedent this sets and the mess that will ensue.
Don’t for a minute believe that this decision is part of some deeply-considered long-term strategy which was worked out in constructive consultations between the EU, the IMF, and the new Cypriot government. Instead, it’s a last-resort desperation move, born of an unholy combination of procrastination, blackmail, and sleep-deprived gamesmanship.
And of course it’s not only Cyprus where a bank run is a very real fear. If bank deposits can be seized in Cyprus, they can be seized in other EU countries as well. Ed Conway has a fantastic post explaining exactly why this is a horrible idea:
Given that this policy was not merely rubber-stamped but engineered by Eurozone finance ministers and the IMF (indeed, the IMF wanted an even deeper cut of deposits), it sends a disquieting message to anyone with deposits in a euro area bank. Although the ministers were quick to insist that this is a one-off and is “exceptional”, anyone even vaguely acquainted with the initial Greek bail-outs will remember precisely how long such exceptions last.
What we’re seeing here is the Cypriot government being forced to break one of its most important promises — the promise that if you put your money in the bank, and your deposits total less than €100,000, then they will be safe. What’s more, there’s no good reason for insured deposits to be hit in this manner: the same amount of money could be raised just by taxing the uninsured deposits at a slightly higher rate. The insured depositors are being hit, it seems, just so that the uninsured depositors can be taxed at single-digit rather than at a double-digit rate.
Meanwhile, people who deserve to lose money here, won’t. If you lent money to Cyprus’s banks by buying their debt rather than by depositing money, you will suffer no losses at all. And if you lent money to the insolvent Cypriot government, then you too will be paid off at 100 cents on the euro.
So what we are seeing here is the old familiar story of ordinary people being compelled to shell out so that wealthy investors are completely protected.
It used to be that investors took risks in order to get higher returns while ordinary savers accepted lower returns in exchange for security. Now the wealthy investors get both high returns and security while ordinary people get neither.
Welcome to the brave new world of finance capitalism.