That’s wrong, they are breaking their own legal guarantees to do this. Plus, blindsiding people with something like this is very different from levying a tax that people can plan for.
That’s nonsense, this is political suicide for them, and would never happen save for the massive outside pressure. Quite possibly literal suicide, depending on how large the resulting anger and unrest grow. And it hits the locals hardest because they have the least money.
What makes you think this is anything other than yet another “growth-crushing austerity program”? Destroying the Cyprus banking system, gouging away a hefty chunk of the populace’s savings and creating major political unrest isn’t conducive to growth at all. And even that is assuming the panic doesn’t spread beyond Cyprus.
How convenient the people still apparently have time to run to the nearest ATM and start yanking their money out. If I were a paranoid conspiracy theorist I’d say someone’s bluff got called.
Banks in Cyprus lack adequate capital because they lost money on sovereign debt of other countries - not because Russians deposited “dirty” money there.
The promise that they made is to insure deposits. That’s what they’ve broken, and they broke it by revealing that it was a promise that they didn’t have the power to keep. They didn’t break any promise to avoid using their power of taxation. Note that I don’t think that this is a good outcome, I’m just observing that it has happened.
I don’t suggest that it’s not bad for Cypriots. I only mean to state that this is a tax that they can levy on foreigners, and they’re taking advantage of that fact. Most any other policy would be a tax exclusively on their citizens, while this hits both domestic and foreign assets kept in Cypriot banks. I don’t suggest that it’s going to save their hides, only that as a tax, it’s structured to hit disenfranchised people hardest.
Oh, I do very much believe that it’s another growth crushing austerity program. Europe cannot get its act together, and they’re going to sink if they keep themselves in a state of perpetual crisis - such as this.
This isn’t their “power of taxation”, it’s a foreign imposed money grab. It’s tribute, not tax.
This is a foreign imposed money grab. It’s not their idea, it’s not designed for their benefit in any way. On the contrary, it’s practically custom made to ruin them; both “them” as a nation, and to destroy the political careers of any politician who goes along with it.
“People” is a pretty vague category. The depositors here have a substantial foreign contingent that aren’t “ordinary” Cypriots. The usual tax-base on the other hand, is made up of Cypriots. The people paying a substantial part of the bailout are French and German taxpayers. The three aren’t interchangable, one group paying is different then another group. And all three groups are pretty aware of where their money is going, so I don’t think the transparency issue that you suggest exists either.
Anyways, the exercise seems kind of pointless. I can’t imagine why anyone would keep money in a Cypriot bank after this, and if no one keeps money in said banks, then they’ll collapse bailout or not, so why bail them out in the first place.
Cyprus can’t borrow money - their debt is listed as junk. It is only “foreign imposed” if you think that the ECB doesn’t have the right to demand concessions from Cyprus.
How is it not a tax? Sure, the circumstances that force them to go this route are pretty well beyond domestic control, so “foreign imposed” I suppose I agree with. But any government money grab is a tax. That’s more or less the definition.
It doesn’t benefit Cyprus directly, in so far as it’s the least bad among many bad options. But plenty of things could be worse. Among them would be that the banks collapse, and nothing above EUR100,000 is covered; something has to be done to prevent that outcome. In the United States since 2008, the USD100,000 limit has been explicitly expanded to $250,000 and implicitly expanded to cover all deposits at many institutions. Cyprus doesn’t have that option because they don’t have that money on hand and cannot borrow in their own currency. They have to find someone to lend them Euro, or levy tax, or both.
Agree its not really Cyprus’s choice. But this seems a poor choice by the EU in general. I don’t see how it really stops a collapse, everyone is going to pull their money out of Cypriot banks now anyways, and possibly other small-country banks as well.
Seems a wiser choice would’ve been to just default on accounts above the 100k limit. That would mean they’d loose their big depositors, but small depositors (which I suspect includes most citizens of Cyprus) would be reassured that the banks are safe, Cyprus could stick to the letter of its guarantee and a bunch of sketchy Russians would loose their money.
The problem is that the banks aren’t safe, and any reassurances to the contrary would be false. The banks will have failed under this scenario. Deposit insurance exists mostly as a precaution against bank runs, in the hope that depositors will be confident in the safety of their assets and will see no need to run on the bank. It’s most effective when it’s not used. The unofficial agreement here in the States is that in order for it to be fully effective, all deposits need to be 100% insured, statutory limit be damned. That’s where the Temporary Liquidity Guarantee Program came from.
Cyprus cannot do this on its own, and cannot secure the support of the EU (read:Germany) for the full amount. When you move beyond the hours-long time window, the risks multiply throughout all of the Mediterranean, and likely in Ireland. That domino effect has been ongoing for some time, and is likely to have picked up speed this week no matter which resolution Cyprus pursues.
It looks like Cyprus is dealing with its own “TBTF” too big to fail problem here.
According to data available, assets of local banks in Cyprus are 7 times GDP. That right there is crazy for a small nation whose capacity to deal with disruption is very low. The growth and Greece exposure is partially driven by increase in deposits as in for every dollar of deposit they converted it to invested $9 to $12 of asset. Over time, they simply grew too much.
Add to this the following: credit rating agencies often notch up the ratings of big banks to account for the probability of sovereign support that such banks would receive in case of financial distress.
In other words, the fact that three major banks were that big contributed to rating agencies to actually INCREASE their credit worthiness. That is, I think, the most fantastic piece of logic here but no country yet is bursting that bubble.
This isn’t an “alternative” to collapse however. It’s just a particular variety of collapse.
Money extorted by foreigners is tribute. Or just plain “loot”. Not a tax. And calling it a “tax” when it is so different than normal taxes is disingenuous, and not going to convince anyone who doesn’t already want to be convinced. It sounds like something from the extreme libertarian “all taxation is theft” crowd.
Worse? Short of a military invasion probably not. I expect this to wreck the country, just somewhat slower than an outright default.
The banks are as good as gone thanks to this proposal, no matter what else happens. Simply announcing this has doomed them.
OK, but there isn’t enough money to guarantee 100% of deposits. In that case, I’d think the obvious choice would be to guarantee some subset of deposits, so that at least some depositors would feel safe. You’d loose high-end depositors, but at least some part of the banking system would remain. Instead they’ve made all of their depositors take a more limited loss.
Making everyone take a haircut just seems like a guarantee that everyone will leave Cypriot banks. Why wouldn’t you? especially since the currency in question is used by banks in 16 other countries, so you don’t even have to pay conversion costs. Is there any downside to a Cyprian using a German bank instead of a Cyprian one?
Huh? The depositors are taking their haircut-- they can’t help but do otherwise-- but they’re withdrawing as much of the rest of their money as possible to avoid further haircuts, which may be inevitable because the banks may fail if everyone’s withdrawing their money. I don’t understand what you’re suggesting.
Were natives who kept their wealth in overseas accounts “taxed”? Those with gold? Banknotes under the mattress? If you want to compare it with a property tax, I’d suggest a property tax with an arbitrary character, e.g. where those with even deed numbers pay double, and odd numbers not at all.
Legal? Maybe. Best way forward? Maybe. But nevertheless ridiculous? Definitely.
I don’t know enough about the crisis to comment intelligently. But it would seem to demonstrate that the international financial system has made and continues to make huge blunders, mistakes that would be of baffling stupidity if sincerely intended to serve public interest. This became obvious five years ago but, instead of calling in the financial system for major overhaul, the windshield was polished a little, and the car-keys handed right back to the same maniacs who keep almost driving over a cliff.
Out of curiousity, what was the last time a government guaranteed deposit in a western industrialized country failed to be honored? Iirc the Icelandic crisis ended without any depositers taking a haircut, and ICeland had a much larger shortfall then Cyprus did.
No money is being extorted by foreigners, they are being given billions of euros by these foreigners, and being expected to contribute a small amount of their own money as well. Cyprus is another corrupt mediterraenean country who’s citizens refuse to pay tax, but expect northern Europe to subsidise them. It’s about time we told them they need to pay their share. Hopefully Greece will be next.
