Cyprus Bailout Taxes Bank Deposits
Posted by Steve Markowitz on March 17, 2013
Cyprus is a miniscule part of the 17 country European Union accounting for only 0.2% of the EU’s total economic output. Its total economy is valued at only €18 billion.
Cyprus has become the fourth EU country requiring a bailout after Ireland, Portugal and Greece. Spain has so far avoided an official bailout, but its banks have been given assistance by the European Central Bank. Other countries are not far behind including Italy with a much larger economy.
This weekend the European Union announced a bailout of Cyprus that includes an unusual requirement. In return for €10 billion, CNN reported that all depositor accounts in Cyprus’s banks will be taxed a one-time fee on Tuesday. Those with less than €100,000 in deposits will pay a tax of 6.75% and those with over €100,000 will pay 9.9%.
Not surprisingly citizens of Cyprus have responded with panic, mobbing ATM machines in attempts to withdraw deposits. However, the banks placed a limit on withdrawals of only €400 and it is reported that there is a shortage of cash.
After making the announcement, Cyprus’s President Nicos Anastasiades justified the action Sunday saying, “A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation”. In other words, Anastasiades offered the same Progressive doubletalk that the steps were required to protect the people. However, this justification will be more difficult to accept given the tax levied on depositors.
The reality of the Cypriot bailout is similar to bailouts that have occurred for banks and sovereign debt throughout the world in recent five years. These actions were taken to protect the banks and their investors, both private and sovereign investors. These flawed policies have also resulted in economies worldwide jumping from one crisis to crisis in a downward spiral.
Attempting to pay for bailouts by taxing bank depositors is a ratcheting up of wealth redistribution towards the financial sector, protecting large banks and fiat currencies. While the policies may have some success in the first two goals, this move in Cyprus will increase the pressure on fiat currencies. It is only a matter of time until fear contagion spreads. If the Cyprus can take money from bank depositors to pay for the irresponsible behavior of others, it is only a matter of time until other countries take similar steps.
In justifying bailouts and irresponsible government spending, those supporting these actions often refer to the learned economist John Maynard Keynes who was a proponent of government spending to offset slowdowns in the private sector. However, such rainy day Keynesians ignore the second half of Keynes’ theory that requires governments to save for a rainy day during more vibrant economic times. This part of the equation has not been met in decades.
Economist Keynes was well aware of the dangers of inflation and the related issue of governments debasing a fiat currency. Keynes’ written below in a 1919 essay says it all.
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…. Those to whom the system brings windfalls… become “profiteers” who are the object of the hatred…. the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.