Cyprus Bailout: Tax the Cypriot Bank Account Holders

March 18, 2013

By: Kelly Diamond, Editor

Insolvent Banks are receiving bailouts all over Europe; Cyprus is getting shock therapy in the form of a levy on all Cypriot bank accounts.

Individuals usually deposit money into a bank to keep their money safe… or at the very least KEEP their money.  The recent bailout for Cypriot banks dashes that concept as the Cyprus government makes a monumental money grab on all Cypriot accounts ranging from 6.7% to 9.9%.

The European Union, in its desperation to maintain stable appearances, bails out another country: Cyprus.  Ireland (85 billion Euros), Spain (41 billion Euros), Portugal (78 billion Euros) and Greece (380 billion Euros and two rescues) already received their EU assistance packages.  France and Italy await in the dugout for their chance at bat.

Cyprus banks suffered considerably from the sovereign debt restructuring in Greece and originally requested 17 billion Euros.  Almost equal to their annual output, concerns rose as to whether such an amount would seem daunting, leaving many to wonder if such a debt could ever be paid off.  The compromise resulted in something rather shocking and disturbing: a one-time tax of 9.9% on all accounts above 100k Euros, and 6.7% on accounts below 100k Euros.  In addition, the corporate tax rate is set to increase by 2.5% to 12.5%.  And, with nearly half of their accounts held by Russians, it comes as no surprise that Russia offered up their assistance with a 2.5 Billion Euro loan over five years at a reduced rate.

The average person is accustomed to seeing corporate tax rates hike and fluctuate.  The average person, however, puts their money in a bank to keep it SAFE, and perhaps even enjoy a little interest.  What they don’t do, is put the money into a bank account expecting a sudden commandeering of 6.7 – 9.9% of their invested wealth to bail out insolvent banks!  Account holders, predictably, made a run on the banks.  However, the Cyprus government anticipating this, preempted money transfers and withdrawals the weekend leading up to the levies.

President Nicos Anastasiades won the election three weeks ago on the promise to arrive at a swift solution to the impending bankruptcy: a solution which avoids seizures of private bank accounts.  “On Tuesday … We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” he said in a written statement.  This deal also meant no cuts to salaries or pensions of public sector workers.  No doubt a bankruptcy would lead to some civil unrest, to say the least.  But the idea of a “controlled management of the crisis” is unnerving… especially the “controlled” part.  “Controlled” as in socializing the consequences to those who THEY think should bear the brunt?

The two banks hold about five times the annual output of Cyprus in assets.  I would think this is largely attributable to some modicum of trust depositers had in the banks!  In addition to the now blatant vulnerability of Cyprus accounts to the government vultures, a “withholding tax” will be levied on all interest earned in Cypriot banks.  Could they concoct a greater disincentive package for anyone to put their money into an EU bank?  All these measures tell me I’m better off keeping my money under my mattress!

Ironically, while these measures are supposed to project the image of a stable Euro insofar as global markets are concerned, the private sector – specifically the Cypriot account holders and on-looking neighboring countries who know they are not far behind – knows better.  They no more trust a bank with their money than a wolf with their flock!

Even more ironically, the president decided to steal from private accounts to prevent the inevitable chaos invoked by the collapse of banks.  Chaos such as looting?  So he looted, to prevent looting?  Is that like fighting a war for peace?  Spending to save?

From my vantage point, I see a domino effect: the bailout solutions for Greece, propelled Cyprus into their current situation.  Which country stands in the wake of these mounting bankruptcy “solutions” adjudicated by the EU?  I also see governments treating real economies like a game of chess: with utter impunity!

• “In order to have burden-sharing, you extend the tax base to residents and also to non-residents,” says top European Central Bank official Joerg Assmussen.  Extending the tax base and burden-sharing?  Is that what this is?  Sorry, when someone suddenly says they are going to take anywhere from 6.7% to 9.9% of my money, and takes measures to prevent me from withdrawing that money, such soft concepts as “burden-sharing” and “extending the tax base” don’t exactly come to mind.  Images of a bank heist come to the forefront.
• “As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders,” says Dutch Finance Minister Jeroen Dijsselbloem, who chaired the ministerial meeting in Brussels.  Contribution?!  So is murder just a mortal kiss then?  When speaking to the sudden levy of up to 9.9% on existing wealth in bank accounts, I find it rather disingenuous to romanticize such actions.

Other countries insist this is unique to Cyprus.  While I loathe corporate welfare and bailouts from the very depths of my soul, Cyprus requested 17 billion Euros, which is a pittance next to Spain, Portugal, Ireland and Greece.  Yet, it seemed acceptable in a government bailout that private account holders and businesses should foot the bill over the government itself and its spending?  Tax the savers, not the spenders?  Ideally, you let the banks fail then pick up the pieces and move on.  But why, when such a relatively small amount was sought, were officials content to tax unsuspecting and innocent depositers?  Because the full amount appeared overwhelming?  Am I really meant to accept that as a valid reason?

My guess is political posturing.  Cyprus is responsible for .2% of the EU economy.  It receives very little press in general.  However, it is part of the EU nonetheless.  If allowed to fail entirely, it would be a blight on the Euro and on the promise of the EU to never let any of its members fail.  But it’s not big enough to warrant a full bail-out like the other countries.  So, as is customary for most government initiatives, the solution was half-baked.  But Cyprus itself had a choice in the matter: they could’ve opted for the austerity measures, but chose theft instead.

If this can happen to a small island country off the coast of the Mediterranean, other than the “solemn promise” of a politician, what makes us think it cannot happen anywhere else?  At the VERY least citizens of other unstable nations within the EU should think long and hard if banks are a good place to KEEP money.  By “keep” I don’t mean “save”, I mean “not lose” it!  But Americans are not immune to such measures.  Our government repeatedly demonstrates that our legal protections pertaining to property rights are fair-weather at best.  We tax the dead, for crying out loud; it’s not completely unforeseeable that the government, under the guise of some crisis, would lay claim to our transparent and idle assets sitting in a bank.