The Cyprus 'one off' bank deposit tax

The nature and impact of financial issues

The Cyprus 'one off' bank deposit tax

Postby Tom » 17 Mar 2013, 15:22

Yesterday, on the Saturday before a bank holiday, the Eurozone bailout package for Cyprus was announced. The terms of the bailout included the seizure of a proportion of the funds of bank depositors: 6.75% of accounts less than 100k euros, and 9.9% of accounts larger than this threshold. I think this action is telling for two different reasons.

The first aspect is the justice of the action. The seizure was described as ‘just’ by Jeroen Dijsselbloem, the Dutch finance minister who chaired the meeting in which the decision was made (although he described it not as 'to seize', but to ‘ask for a contribution’!). Christine Lagarde MD of the IMF welcomed the agreement. One reason given for the action was that Cypriot banks are used by Russians for money laundering, but that raises the question of why the tax wasn’t restricted to large foreign deposit holders.

I think taking money from German taxpayers to bail out Cyprus is also unjust, and clearly some unpleasant outcome is inevitable, but there is a recognised order for the payments from a bankrupt company. Firstly the shareholders should lose their stake (the company goes bankrupt), then company bond holders and lastly creditors (such as bank account holders). Since most account holders don’t even realise they are creditors, I think there’s an argument that they should be paid before other creditors. If you are going to confound the issue of the confiscation with accusations of criminality, then you should have a hearing for each account you tax.

So, I believe that this seizure is unjust, but also I believe it is dangerous. One of the exacerbating factors of the great depression was the occurrence of bank runs. Bank runs occur because banks lend out almost all the money that is deposited with them, and so would only be able to repay a small proportion of their depositors at short notice. This is true even for solvent banks. This behaviour gives rise to the potential for a vicious circle: if a few worry about whether they can retrieve their money, they may make withdrawals; it then becomes rational for others to worry about whether they can retrieve their money, and in a short space of time, there is no money to retrieve.

States have learned that they can prevent bank runs by guaranteeing bank deposits up to some moderate level (100k Euros in Cyprus). The problem with this seizure is that it circumvents the state deposit insurance. This shows that bank accounts in Cyprus aren’t safe, but also raises the question of where bank accounts are safe. Presumably Cypriot bank accounts have the same legal safeguards as banks in other EU countries, and I don’t suppose those safeguards are much worse than those across the world. For the sake of seven billion euros, these eurocrats have undermined one of the main pillars of economic stability. Economies run on confidence, and when the state is making arbitrary confiscations, who can have confidence?

These are the same people who disdained the advice of economists to push through monetary union before political union, and we’ve already seen some of the tragic consequences of that. The whole project is reminiscent of the Great Leap Forward. I’m not predicting certain disaster, but I think disastrous consequences are possible. It seems to me as though we lived in a giant game of Jenga in which another vital support has been removed and the tower is ponderously – sickeningly - swaying across.
Tom
 
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Re: The Cyprus 'one off' bank deposit tax

Postby Charlie » 17 Mar 2013, 18:04

It's absolutely staggering news, isn't it?

That the EU is able raid the private bank accounts of its citizens is cause for much concern.

With the Leveson vote due in the UK and the potential for upheaval and civil unrest in Europe, this looks like it could be a very big news week indeed.
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Re: The Cyprus 'one off' bank deposit tax

Postby Charlie » 17 Mar 2013, 18:20

...here's some
media
coverage.
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Re: The Cyprus 'one off' bank deposit tax

Postby Nathan » 17 Mar 2013, 20:06

Like Tom said, it is startling that the EU are allowed to do something which looks like just stealing private wealth so blatantly, but in essence, aside from the fact that the decisions are largely being made by foreigners, is it really that different from what would happen by defaulting or what would happen over a longer period by some other such currency devaluation such as QE, or higher taxes? In theory, a short, sharp shock may well do good in making people realise how unsustainable our debt reliance has become and how we need become more fiscally responsable and live within their means, but I agree with Tom in that in practice this is likely to have a very dangerous effect on public confidence in the banking systems - and most of all in the warmer-blooded southern European countries who aren't as shy as some about making their opinions heard! - and trust in the Cypriot government, who'll be well and truly caught between a rock and hard place in having to vote on this tomorrow, and the credibility of the whole European project. The idea seems very poorly thought out.
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Re: The Cyprus 'one off' bank deposit tax

Postby Caleb » 18 Mar 2013, 00:59

Nathan wrote:Like Tom said, it is startling that the EU are allowed to do something which looks like just stealing private wealth so blatantly, but in essence, aside from the fact that the decisions are largely being made by foreigners, is it really that different from what would happen by defaulting or what would happen over a longer period by some other such currency devaluation such as QE, or higher taxes? In theory, a short, sharp shock may well do good in making people realise how unsustainable our debt reliance has become and how we need become more fiscally responsable and live within their means, but I agree with Tom in that in practice this is likely to have a very dangerous effect on public confidence in the banking systems - and most of all in the warmer-blooded southern European countries who aren't as shy as some about making their opinions heard! - and trust in the Cypriot government, who'll be well and truly caught between a rock and hard place in having to vote on this tomorrow, and the credibility of the whole European project. The idea seems very poorly thought out.


I'm glad you mentioned this, especially the bit I have highlighted (which I was going to mention). QE and inflation are even more insidious because they're like the proverbial frog in a pot.

We're entering a very, very weird period right now. Many nations around the world are actively trying to cause inflation, there are brewing currency wars all over the place (particularly between Japan and Korea), commodity prices (and hence, the price of food and other basic goods) have gone through the roof in the past decade. There's all sorts of really, really crazy stuff on the horizon. I think the guns and gold crowd are crazy, but they look less and less crazy every time one of these events happens.

Even aside from having their deposits stolen, I'm not really sure why people would have their money in a bank right now. In many places, the nominal return may be okay (well, let's be honest, not that great), but the real return (i.e. minus inflation) is actually negative. This is forcing people to chase yield in extremely risky ways, which is leading to huge bubbles in both the bond and stock markets.

It's all pretty crazy, and is going to lead to two possible outcomes. The first is local populism that will only make things worse, both economically and socially. Everyone is going to bay for the blood of "rich" people ("rich" being anyone with a positive net worth, no matter how small). This may create a warm, fuzzy feeling at first, but it will essentially turn many Western nations into Latin American nations, i.e. poor and socially volatile/dangerous, not to mention, ironically, less egalitarian. The second is that the second group of scapegoats (after rich people) is always foreigners. In some places, this may play out against non-nationals within a country. I know, to some extent, people here would be glad for that, but the trouble is that along with the local Jihadist, the Jewish or Chinese guys minding their own business get targeted too. I also wouldn't want to be a German living or travelling in the Mediterranean when it all goes pear-shaped.

The worse situation is growing nationalism of the form of state versus state. It's probably not so likely to happen in Europe (I expect there would be far more internal bloodletting than external), but East Asia is a tinderbox right now over the Senkaku Islands, and China generally bullying pretty much all of its neighbours. Any war between Japan and China would not only inevitably drag a whole lot of other players in (most notably the U.S.), it would also destroy any vestiges of the world economy.

Frankly, the guys running the show -- be they politicians or bureaucrats -- are playing an absolutely insane game right now. This could turn out to be a rather "interesting" period of history in future textbooks. It's not necessarily great living through it though.
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Re: The Cyprus 'one off' bank deposit tax

Postby Jonathan » 18 Mar 2013, 08:06

Tom wrote:For the sake of seven billion euros, these eurocrats have undermined one of the main pillars of economic stability. Economies run on confidence, and when the state is making arbitrary confiscations, who can have confidence?


I think this may be the trigger which unleashes disaster. Consider Greece. It's constantly teetering on the edge of another bailout. Now with the Cypriot precedent, who can guarantee that Greek banks will no be similarly raided next time another bailout is necessary? Who would be foolish enough to keep even ten euros in a Greek bank? And what about Italy?

Nathan wrote:is it really that different from what would happen by defaulting or what would happen over a longer period by some other such currency devaluation such as QE, or higher taxes?


I think it is very different, because with these confiscations people have a way of saving their money (withdrawing it) which will cause a disaster if done en masse. This is not to say that people do nothing when faced with inflation, but I think what they do (buy real estate, invest in index-linked bonds, speculate in foreign currency) causes less damage than a bank run.
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Re: The Cyprus 'one off' bank deposit tax

Postby Andreas » 18 Mar 2013, 16:59

Calling this action a "tax" sounds like a tasteless joke. This is the kind of thing the Nazis or the Communists would have done.
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Re: The Cyprus 'one off' bank deposit tax

Postby Nathan » 24 Mar 2013, 23:04

A little update on the bailout situation: after a week of constant changes of plan and insecurity, the deadline to reach an agreement, or risk having the emergency funding turned off and the country cast adrift is tomorrow (Monday). In the meantime, because of the insecurity, businesses in Cyprus have not been accepting credit or debit cards because they don't know if they will ever get their money, yet the banks have been closed the entire week and restrictions placed on getting money out of cash machines, so the economy has become paralysed.

The Cypriot president has been in talks in Brussels non-stop since 1pm to sort something out; it's 11pm and nothing has been agreed on. This summit just sums the politics behind the eurozone up perfectly: they don't know what they are doing and are just making it up as they go along.
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Re: The Cyprus 'one off' bank deposit tax

Postby Caleb » 25 Mar 2013, 04:58

Nathan: One interpretation is that they don't know what they are doing. A much scarier interpetation is that they know exactly what they are doing.

I've been following this whole debacle via Zero Hedge for the past week. To say the general consensus there is cynical would be a major understatement. The comments under the articles there are absolutely hilarious.

It's slightly off topic, yet absurdly on topic in another way, but there's this article there about how a bank in Spain is now offering Spiderman towels (yes, seriously) to attract deposits. You can't make this stuff up. Spiderman towels have become kind of a meme at that site for all things financial and European.
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Re: The Cyprus 'one off' bank deposit tax

Postby Gavin » 25 Mar 2013, 11:24

Caleb, when I saw the first heading over at Zero Hedge - "The Importance of Owning Your Own Bullion" - I knew this was the kind of site for me! ;)
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Re: The Cyprus 'one off' bank deposit tax

Postby Caleb » 25 Mar 2013, 12:51

Yes, that's a great heading. A great comment below one recent article was "It puts the money in its wallet. If it asks for gold it gets the hose again." (A play on gold vs fiat currency, a conspiracy regarding the new world order, and this scene from Silence of the Lambs.)

It's a pretty crazy site, full of apocalyptic conspiracy theorists, gold bugs and gun nuts, which means you have to take a lot of it with a grain of salt, though I expect a lot of it is a lot closer to the bone than many realise. The comments sections never fail to crack me up. What is really interesting and amusing though is that many of said would be apocalypse survivors work on Wall Street. Apparently, Bank of America even blocked its employees from reading the site!

The funny thing is they've been running about half a dozen to a dozen articles every day for the past week about how the world is about to burn because of what's happening in Cyprus. This afternoon, I was reading Yahoo! news and there was an article that basically said, "Cyprus is saved and the world economy is fine". Hilarious. Zero Hedge is over the top, but the MSM is ridiculous in the opposite direction.
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Re: The Cyprus 'one off' bank deposit tax

Postby Charlie » 26 Mar 2013, 21:11

I felt a mixture of anger and sheer bemusement as I opened a copy of The Times this morning and read one of the opinion pieces - perhaps some of you have seen the offending composition. It was written by an economist, Andrew Sentance, and it was about the situation in Cyprus. Evidently pro-EU in tone - hence my initial suspicions about it - the author managed to go throughout the whole article without ever specifically mentioning the obvious: money being taken from bank accounts. Instead this opinion piece offered some (darkly?) comical euphemisms - I'll offer here, if I may, two choice quotes:

"But events in Cyprus provide an important reminder of changes in economic management of the eurozone that are needed if the currency union is to survive and prosper. Greater financial and economic discipline will be needed to avoid the problems that Cyprus and some other countries have experienced since the financial crisis."


and:

"It is frequently argued that the euro is doomed and tensions between the member states cannot be managed. I disagree. To avoid the problems that have affected Cyprus and other countries, there will have to be a much stronger framework of economic and financial discipline for members."


Please excuse the italics, but, put that way, the author's idea of discipline sounds particularly sinister to me - not a big stretch of the imagination admittedly, given what's been happening with Cypriot bank accounts.

Perhaps the best part though was the second paragraph, in which the author claimed that things in the EU were probably looking up:

"The most likely scenario for the EU is still for a gradual recovery of growth this year and next, led by the better performing economies of northern and eastern Europe. Export-orientated economies, such as Germany and the Scandinavian countries, should benefit from a gradual improvement in the global economy."


Well that's that settled then, eh?
When it comes to those defending this whole Euro project as it goes down, I'm sure someone has already made the Comical Ali reference - this opinion piece certainly reminded me of our Iraqi friend. However, I don't know if it's ignorance, arrogance, vested interests, or perhaps even a mixture of all three, which motivate such authors and their opinions. I don't go for conspiracy theories, but anyway, as far as this article is concerned, I can't figure out if I should just laugh at it or tear it to shreds.
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Re: The Cyprus 'one off' bank deposit tax

Postby Caleb » 27 Mar 2013, 02:14

The thing that is most pathetic about middle class journalists shilling for these things is that they're not part of the club. They're like the horse in Animal Farm. They'll never get to eat with the pigs, and when they've outlived their usefulness, they'll be sent to the proverbial glue factory also. Regardless of whether it is conspiratorial or merely arrogance and incompetence, when the Euro and EU implode, those in the club, be they bankers or politicians and bureaucrats, will still get their golden handshakes and parachutes. What's that clown Andre Sentance going to get, other than a notice from his bank saying his deposit has been "levied" or the insidious effects of increased taxes, inflation, etc.? What a useful idiot.
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Re: The Cyprus 'one off' bank deposit tax

Postby Caleb » 02 Apr 2013, 01:52

I just found this via Zerohedge. Hilarious. Very clever marketing ploy.
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Re: The Cyprus 'one off' bank deposit tax

Postby Caleb » 03 Apr 2013, 02:29

Cyprus' situation visualised
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