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.
Your numbers are off — the levy is 6.75% on deposits of under 100,000 euros and 9.9% on deposits of more than 100,000.
That being said, I completely agree that this is a crazy plan.
Mano Singham says
Thanks. I have corrected it accordingly.
Marcus Ranum says
It seems like “in order to save the banks, we had to trigger a run on them.” Sort of like bombing the village in order to save it.
I’m betting that we’ll see a bank freeze on tuesday, followed by some ratcheting back on the amounts. If they’re truly insane they’ll simply levy the tax immediately against anyone withdrawing their money: “Hey, I withdrew 100,000 euros and you only gave me 90,000!” “Yes, sir, we took the tax out of the withdrawal. Plus a service fee, of course.” There won’t be enough cash anyway.
This is sort of like: when you’re drowning in the toilet you try to pull yourself out using that big chrome lever up there.
I’m waiting to see what Krugman has to say; he may be able to explain this, somehow, so it makes sense. Or maybe he’ll explain why it doesn’t. :\
Marcus Ranum says
Krugman’s in: http://krugman.blogs.nytimes.com/2013/03/17/the-cypriot-haircut/
and, short form: this is going to be interesting.
I hadn’t realized that Cyprus is being used as a money-haven. That does make a bit more sense, basically they’re nationalizing foreign wealth. Still. Wow.
Mano Singham says
Ed Conway’s post that Salmon linked to goes into more detail on the role that Germany, Russia, and the UK play in this unfolding drama.
As an EU citizen this freaks me out, the beacon of socialism that the EU once was is being systematically destroyed. We were like this 70 years ago and no good came out of it.
Since I don’t work or reside in the EU I’ll change my savings to an offshore but I pity my fellow citizens that are being robbed.
We go back to the rule by law as opposed to the rule of law.
“So what we are seeing here is the old familiar story of ordinary people being compelled”
Perhaps not. According to Dutch TV-news yesterday -- usually reliable -- there is a lot of white wash money from the Russian maffia stalled on Cyprus. Makes things look a bit different, don’t you think?
Usually you’re not that hasty with conclusions.
Mano Singham says
But why not target that tainted money? This kind of blanket solution seems to be aimed primarily at reimbursing the banks and investors that lent money to Cyprus and only tangentially at getting part of that tainted money. In the process ordinary Cypriots are being hard hit. It is not easy for many people to suddenly lose 6.9% or more of their savings, while the Russian mafia likely won’t miss it that much.
Marcus Ranum says
the Russian mafia likely won’t miss it that much
Yeah, but when they miss something, they really miss it hard.
Steve LaBonne says
MNb, perhaps you missed the fact that the plan also includes a smaller levy on the under 100,000 Euro deposits of Cypriot citizens whose deposits were supposedly INSURED. Aside from the brazen theft involved, fucking with bank deposit insurance is a REALLY bad idea and the resulting bank runs surely won’t be limited to Cyprus.
The Cpyrian Parliament has delayed a vote on this plan. It may be unraveling. Reading Krugman, I was amazed to discover how big a money haven Cyprus has become, as much as Iceland before its banks collapsed.
Meanwhile, the dollar is up against the Euro and the price of gold is up and the price of oil is down.
Steve LaBonne says
Even if this falls through, just by seriously proposing it they’ve opened up a can of worms. If you were an Italian or a Spaniard or especially a Greek, wouldn’t you be thinking pretty hard right now about getting your money out of the local banks? I sure would.
Surely financiers are familiar with the range of financial vehicles and know that they could have done a one-off tax bomb on something other than cash? Why not then a 10% land grab + resale on mortgaged properties? Why not a 10% grab on all commercial paper’s principal or a 80% grab on the civil bonds interest streams? (all terrible ideas but they hit differently based on the vehicle) Even with the tainted mobster cash piles, why don’t they confiscate those piles in a court action? Regardless, I can’t think of a faster way to promote distrust of banks at the general population level. If this is what the regulators think is the best way forward, they should abdicate responsibility and go with an internet poll on best solutions instead.
Today in the newspapers:
“But why not target that tainted money?”
That’s what the EU wanted first.
“het plan om de ‘gewone’ Cyprioot te laten opdraaien voor het dreigende faillissement van de Cypriotische regering zelf komt.”
“The plan to make the ordinary Cypriot pay for the threatening bankrupcy is initiated by the Cypriot government itself.”
Now ain’t that funny? And sure enough the EU doesn’t have any problem with sparing the ordinary citizens:
I’m sorry fellows, you all were too hasty. It’s not the first time I have seen European news covered one sided and superficially in American media -- including Wall Street Journal. I guess it’s the same the other way round. Be warned the next time.
LaBonne: me being a Dutchman watching Dutch TV-news and reading Dutch newspapers, how likely is it I miss something about European news you Americans actually do know? Everything regarding the crisis is hot in my home country, you know.
There is more to the Cypriot crisis MS hasn’t addressed. To avoid bankruptcy the country needs 17 billion Euro. About 10 billions comes from EU. Now guess which are the countries to pay for it? The northern ones, among them specifically The Netherlands and Germany. Now guess what the sources of these countries are? Ordinary Dutch and German civilians who pay taxes. And The Netherlands suffer from quite a crisis as well. That means high unemployment and a serious budget deficit, which leads to harsh government savings. Indeed ordinary Dutch citizens will feel those savings. Remember: they are just as ordinary as their Cypriot counterparts.
So the question is: how fair is it that Dutch citizens, who have problems of their own, have to pay for Cypriots? It doesn’t look like any of you Americans have thought about this question.
My answer is that it’s fair to some extent. Example. If any Cypriot owns 90 000 Euro I don’t have any problem if he/she has to pay 6,75%. When I lived in The Netherlands I had to work 3½ years for that money. I have never had such a large amount on my account and I never have been poor.
At the other hand I can feel for someone who has saved 5 000 or even 10 000 Euro. So I would propose to set them free indeed. As Dutch socialists like to say: the strongest shoulders have to bear the heaviest burden.
My main point: just calling the plan crazy is quite superficial. It doesn’t mean it’s perfect though.
But to whom is this $17 billion OWED, MNb? Wealthy people who invest in government bonds? Why is the risk these people took being socialized, be it by Cypriots or, as you claim, by Dutch taxpayers? Why is the rentier class being made whole to begin with? They gambled…they lost.
There is a strong assumption here exemplified by our use of pronouns. “We” owe this money to investors. “We” need to pay it back. Given how, and for whom, modern nation states are run, despite nominal “democracy”, I question that.