At this moment politicians in Nicosia are (assuming it hasn’t been postponed again) giving up their bank holiday to discuss the false choice presented to them by the Eurozone finance ministers: accept a deeply damaging bailout agreement or face bankruptcy.
In a statement released on Saturday, the Cypriot President was optimistic that the bailout “would put a definitive end to the uncertainty and restart our economy.”
I think it is safe to say that his optimism is not shared by the Cypriot people – nor many others not on the Greek half of the island.
Much, if not all, of the anger is focused on the decision that bank deposits in the country – previously thought to be safe because of deposit insurance – are to be subjected to a 6.75% levy whilst all amounts above the protection level of €100,00 are to be decimated*. The immediate (and not unsurprising) result of this was that the Cypriots tried to trigger a bank run – only to find that their government had introduced restrictions on the movement of capital. Can’t have people deliberately evading superstate-sponsored theft, can they?
However, as Frances points out, it isn’t quite that cut-and-dried…
The description of this as a “tax” or levy is a bit of a fudge. Under what type of taxation scheme are people provided with shares to compensate them for the taxes they have paid? But that is what is happening here. Depositors will be provided with bank shares to the value of their losses. They are being “bailed in” in the same way as junior bond holders: a percentage of their deposits are being converted to equity. The money taken from the depositors will go to the sovereign to compensate it for the cost of bailing out the banks. At the end of the process, the sovereign will be left with a manageable amount of debt, and the banks will be owned by their depositors and junior bondholders. In effect they will have become mutuals.
…before going on to explain the flaws in the plan.
Olli Rehn, European Commissioner for Economic and Monetary Affairs and the Euro, has said that this will be a one-off but given the number of one-off’s the Eurozone has seen in the last few years, it is unlikely that he will be taken as seriously as he might like – especially given the situation in Greece, Portugal and Spain. I imagine that the Italians are suddenly looking over their shoulders as well. How much money is going to flow out of those countries in the next few days?
Frances Coppola: Reaping the Whirlwind
Tim Worstall: Welcome to another Great Depression
Tom Paine: Governments, gangsters… Same thing, different name
Richard North: A massive own goal