NOTE: An edited version of this piece was published in the Shenzhen Daily.
It was announced that the European Union wants Cyrus to impose a one time levy of 6.75% or 9.9%, on all bank accounts in the island nation. Accounts over 100,000 Euros would pay 9.9%, smaller accounts, the smaller amount. Accounts of foreigners would be included, as would those of businesses. The demand was made on Saturday with a vote by Parliament set for Sunday. The Sunday vote was pushed back until Monday, which is a bank holiday.
The news media has reported a run on ATMs across the country where customers can withdraw 400. Euros each day. Most quickly ran out of cash to dispense. The announcement set off an immediate scramble among top European officials, with reports that the European Central Bank was pressuring Cypriot authorities to hold the vote without delay.
Cyprus agreed to vote on the unprecedented tax on bank deposits in exchange for a 10 billion euro ($13 billion) aid package for the country. Cyprus has received several aid packages since a global financial slump hit the EU in 2009. The levy is expected to yield some 5.8 billion Euros.
At their peak, Cypriot banks had assets totaling eight times the country’s 17.5 billion Euro economy. Those numbers have prompted accusations from some European countries, primarily Germany, that Cypriot banks serve as money laundries for dirty Russian cash. Russians are estimated to have some 20 billion Euros sitting in Cypriot banks. Some politicians are using getting at this filthy lucre for an excuse to partially justify the tax.
Jeroen Dijsselbloem, the president of the group of euro area ministers, declined early Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered.
Cyprus’s newly elected president, Nicos Anastasiades, said taxing depositors would allow Cyprus to avoid implementing harsher austerity measures, including pension cuts and tax increases, of the type that have wreaked havoc in neighboring Greece.
That thinking appealed to some Cypriots, including Stala Georgoudi, 56. “A one-time thing would be better than worse measures,” she said. “Procrastinating and beating around the bush would be worse.” As usual, politicians expect the people to sweep up after the mess they made, and some unthinking individuals like Georgoudi accept it with hardly a blink.
The fact is that Cyprus, and most of the rest of the world, finds itself in trouble because of poor financial and political management by its government. Governments over-spend, over-borrow, over-tax, and over-promise as they lurch from one crisis to another. They talk like this single time levy will solve the current financial crisis, but will it?
If the money is taken out of the accounts before the banks re-open Tuesday, who will have even a scintilla of confidence they government won’t find another reason to make a new levy sometime in the future? How many people will close their accounts completely and move their money to places where this is seen as less likely to happen.
Even if the levy is defeated in Parliament, the mere fact that it was seriously considered will cause many, including foreigners, reconsider keeping their money in Cypriot banks. How will that effect the economy?
What business will deposit money in Cypriot banks, knowing an amount that what might represent its annual profit may suddenly disappear at the whim of the government. This plan, or even its threat, may well be the death knell for banking in Cyprus. In turn, that could create havoc and hardship for both business and individuals.
Beyond Cyprus, the EU has demonstrated it is willing to dip into the personal assets of people with little or no warning in an emergency. That has to have cautious people everywhere wondering if they should re-arrange their finances to be less exposed to such chicanery. This could lead to a future slowing of business as assets are shifted to more defensive positions.
From time to time in America a suggestion to tax retirement savings is thrown around. As recently as April, 2012, the U.S. House of Representatives was toying with the idea of for a sort of tax or levy on retirement savings accounts that were supposed to be safe from taxation. From small seeds such as a seemingly innocent discussion, a giant oak tree may someday grow.
It is hard to see exactly how this bit of lunacy will play out, but it’s not hard to see what caused it – irresponsible governments who manage their economies two steps below moronically. So far have been few protests in Cyprus, but eventually people will have enough of irresponsible, stupid and corrupt governments. The time to clean house will arrive.