Political Animal


March 18, 2013 12:53 PM Panic!

By Ed Kilgore

So we should apparently all be panicked by the possibility that a bank deposit tax the Cypriot government has proposed as part of a broader EU “relief” package for that country will lead to a European and then a global financial meltdown.

Other than confirming the occasional impression that the world’s bankers and investment managers are (a) uncomfortably incestuous and (b) have the psychology of overcaffeinated adolescents, what’s actually going on here? Well, it’s complicated, but here are the basics from Matt Yglesias:

What happened, essentially, is that the Cypriot banking system needs a bailout. But the Cypriot banking system is large relative to the (small) size of the Cypriot economy. So a big government bailout would just create a public sector debt crisis. Consequently, Cyprus needs to tap the larger European Union (i.e., mostly German) bailout fund. And with an election coming up in Germany, Angela Merkel was feeling in a less generous mood. The most straightforward way to reduce the cost of a bank bailout is to simply not give people 100% of what they’re owed. In other words, make creditors take a “haircut.”
But formal haircutting of bank creditors is still considered too hot and too likely to provoke panics and runs. So what they’ve come up with is a de facto haircut.
The bailout will be paid for, in part, through new higher taxes in Cyprus—austerity, in other words. But the specific tax in question will be a one-off wealth tax. And not just any wealth tax, but a wealth tax specifically levvied on bank deposits. A tax of 9.9% on deposits over €100,000 and 6.75% on deposits below that level. This will raise €5.8b to help defray the costs. Is this in any real way different than depositors taking a haircut? No. But for whatever reason the relevant officials seem to prefer to phrase it this way. And now the question is how many Spanish and Italian people are going to look at this precedent and try to shift money out of local banks.

There’s a lot of sentiment in Cyprus for shifting the deposit tax fully onto larger depositers, in part because Cypriot banks seem to be a favored location for Russians interested in offshoring and/or money-launderering. In the meantime, there’s been a local bank run by regular folk. So the Cypriot government has temporarily closed the banks and postponed a referendum on the whole scheme, amidst rumors of what it might do next and how that might affect investors and bank-depositors in the countries most likely to take a similar route to avoid general public-sector austerity and/or to pressure the EU (or really, Germany) to get more flexible.

Yglesias half-seriously proposes that Ben Bernanke should defuse the whole crisis by paying off the 5.8 billion euros the deposit tax would raise, since the potential global (and thus, U.S.) financial damage of a European-wide panic dwarfs that sum many, many times over. Maybe the Germans will ease off and make fewer demands of the Cypriot government. Or maybe said government can come up with some formula that distributes the “haircut” in a more politically feasible way. But it’s another example of how Europe’s austerity policies, couched as they are in the moralistic language of justice and stability, often produce their opposite.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.


  • c u n d gulag on March 18, 2013 1:12 PM:

    We are ruled (and not just financially) by some really stupid and evil motherfeckers.

    May I suggest an "Austerity Tax," on anyone who even mentions the word, "austerity," in context to other, poorer, people, instead of themselves?

    $1 Million the first time, $2 million, the second time - and then we add the last two amounts, for everytime some rich @$$hole mentions it again.

  • Walker on March 18, 2013 1:27 PM:

    Cypress banks paid a deposit insurance to the EU which the EU has now explicitly declared worthless. Anyone with money in a bank in Greece, Italy, Spain, Potugal, or Ireland shoukd pull that money out now.

  • Mark-NC on March 18, 2013 1:43 PM:

    On another site I saw a good suggestion (sorry, I don't know where): The people of Cyprus should take out all their money right now. Then, since banks cannot fail, more money will magically appear so that the banks won't collapse. Then, those who didn't get their money the first go-round should cash out. Again, money will magically reappear.

    Problem solved. The banks are still there and the people still have their money!

    Stupid? Oh yes! But this has become a stupid world.

  • howard on March 18, 2013 1:49 PM:

    throughout the entire horror show that has been the european response to the collapse of 2008, i have been reminded again and again how unfortunate it is that germany has concluded that world war ii was a long time ago and it doesn't need to continue a humbler approach to global affairs any longer.

  • paul on March 18, 2013 1:51 PM:

    Anyone who believes this is on "one-off" operation is an idiot. The next step will simply be to write it into the deposit agreement: "If we take a loss that in the opinion of the CEO might impair capital or bonuses, we will debit your account in an amount sufficient to cover that loss. If we subsequently return to excess profitability, your money will not be returned."

    Since this is effectively an infusion of capital, the victims, er, participants, should really be given shares in the enterprise in line with their payments.

  • Rick B on March 18, 2013 1:52 PM:

    If a bank deposit tax in Cyprus is all that it takes to cause a global banking meltdown then the banking system as currently structured is too flimsy for the world economies to depend on.

    There is no other solution to such a weak and dangerous system then rigid bank supervision by government, or government takeover of those weak and very, very dangerous institutions. We cannot allow our economies to be dependent on such flimsy financial foundations.

    That conclusion is where the stupid scare tactics being practiced in the financial media right now will take us. Considering how poorly the banks have performed for the world economy that may not be a bad solution.

    Bankers are too childish to be allowed to run banks without tight supervision. That's what a run on the banks will again prove, although 2007 meltdown should be all we need as proof.

  • kordo on March 18, 2013 1:55 PM:

    I don't see a huge run of big depositors. I'm not saying your money is automatically ill-gotten if you're banking in Cyprus, but I will note this idea has nothing in it about increased oversight. Guaranteed bailout of a known tax haven, and no /EUIMF bean-counters sniffing around? 10% is likely just the cost of doing business for those folks. The little people will get screwed, of course...

  • Bob M on March 18, 2013 2:05 PM:

    Good for the EU. Nailing a tax haven, taxing wealth, not supporting the corrupt: what's not to like?

  • Rugosa on March 18, 2013 2:13 PM:

    Why shouldn't the creditors get the haircut? In good times, they tell us they deserve the profits because they take the risks.

  • boatboy_srq on March 18, 2013 2:17 PM:

    Since this is effectively an infusion of capital, the victims, er, participants, should really be given shares in the enterprise in line with their payments.

    On one hand, this sounds like an excellent idea - assuming, of course, that the banks remain in business long enough for the stock to be worth anything long term. OTOH, we've seen what a mess the US has made in its drive to the "ownership society" and I wouldn't want to wish the US' recent gyrations on anyone.

  • boatboy_srq on March 18, 2013 2:31 PM:

    @Bob M and Rugosa:

    Cypriot banking is something of a modern anomaly: the lion's share of the banks' assets are ordinary deposit accounts. No bonds, no exotic instruments, just basic funds. So while there's plenty of Russian mafia money flowing through, it's sitting in bank accounts right alongside Grandma's bingo money, Dad's retirement stash and the kids' college funds. Giving the top "creditors" a haircut might not be too bad: telling each and every citizen with a bank account it's suddenly only worth 90% of what the last bank statement says is something a little different.

    If Walker (above) is right, then the depositors would have recourse to the EU for the difference, if time, trouble and attorneys' fees could be tolerated to collect it: the trouble with that is the people most affected by small changes in net worth are also the ones least able to petition successfully, and least able to afford the various fees, expenses and time required to collect the difference.

    The US put the FDIC into place explicitly to prevent the banks from paying out less than the value of the account (up to a certain amount). Essentially, the EU is demanding Cyprus do the exact opposite: discount the value of the accounts to preserve the banks.

  • Shane Taylor on March 18, 2013 3:31 PM:

    Brad DeLong directed readers to this account of what the Cypriot government is doing:


  • exlibra on March 18, 2013 3:44 PM:

    All they're doing is going back to the 15th century practices, when one paid the bank to keep one's money safe (and available, via a letter of credit, should one, travel abroad), not the other way 'round as it is now :)