Cyprus bailout scheme won’t happen here

First, a reality check. There is zero chance the Cypriot bank tax would happen in the United States.

At least, we’re far from that point. For one thing, sequestration is leading us in the right direction.

The larger question is whether what Cyprus decides to do (the subject is scheduled for debate in the Cypriot parliament Tuesday) will have a ripple effect here and, more likely, in Europe.

It would be hard to imagine a worse way to handle an economic crisis than to tax bank accounts. Cyprus got into this problem because its two largest banks made irresponsible loans to the Greek government equal to 160 percent of the GDP in Cyprus.

You shouldn’t even loan Greece a buck for a cup of coffee.

As part of an agreement to bail out those banks to the tune of $13 billion, the European Union is requiring Cyprus to raise money from its bank customers. The deal could be framed this way: Either let the government confiscate some of your hard-earned savings or lose your bank and all of your savings and watch your nation fall into a severe recession to boot. Oh, and you’ll likely lose your job in that recession as unemployment skyrockets.

You could hardly design a more disastrous bailout. It is a textbook recipe for creating moral hazard.

One would think the EU could find an easier way to help its smallest member, an island nation of about 1 million people.

It should go without saying that a key to any stable economy is confidence in its banking structure. President Frankly D. Roosevelt spent much of his first two terms trying to urge Americans to pull their money out of their mattresses and stick it back in a bank. People, understandably, had lost faith in banks after so many of them collapsed at the start of the Depression, but that loss of faith was crippling the economy.

One of the remedies was to create the Federal Deposit Insurance Corporation, which now guarantees deposits up to $250,000.

If Cyprus succeeds in taxing bank deposits (one early proposal was to charge 6.7 percent on accounts worth less than 100,000 euros, and 9.9 percent on those that are larger), other Europeans would be justified in thinking their accounts are not as secure as they once believed, either.

Already, ATMs in Cyprus are empty, according to news reports. Banks are on a holiday much of this week to avoid a full-scale run.

And because perception can be more powerful than any facts, figures or public assurances, banks in Spain, Italy and perhaps other European countries may be in danger of runs, as well.

I doubt U.S. depositors will make a run here. However, Rush Limbaugh has tried to draw connections between Cyprus and the way the Obama administration operates things, insinuating in this transcript that it could happen here. That kind of talk could be a self-fulfilling prophecy.

This blog by Scheherazade Rehman of George Washington University, on the other hand, is a good analysis of what’s going on, and the hazards at play. Cyprus has been a haven for Russian depositors, much of it part of an alleged money-laundering scheme.

The EU, and particularly Germany, doesn’t like this, which is why it not only wants to tax depositors, it wants to require an international anti-money laundering audit. This also is why Russian President Vladimir Putin is among the most vocal opponents of the plan.

But of course, confiscating money from even the smallest bank depositors would likely severely harm Cypriot banks, cause panic in other parts of the EU and shake confidence in other parts of the world, as well.

That’s a heck of a price to pay to get at some corruption.

Categories: Washington

About the Author

Jay Evensen

Jay Evensen is the Senior Editorial Columnist for the Deseret News. He has 32 years of journalism experience covering politics and a variety of other assignments at news organizations ranging from United Press International in New York City to the Las Vegas Review-Journal and the Deseret News, where he has worked since 1986. During that time, he has won numerous local, regional and national awards. Most recently, he was given the Cameron Duncan Media Award, given annually in Washington, D.C., by the advocacy group RESULTS, to the journalist judged to have done the most to further the cause of the world's poorest people.

One comment

  1. Andrea

    It won’t happen here in the near term, but I would not rule it out in the long term. Governments and individuals do desperate things when they run out of options. Government could justify this type of action by saying they will give depositors “bank equity” or promissory notes in exchange for the one-time levy. Of course, they will say that the value of the bank equity will be equivalent to the tax, but we know that probably won’t be true, especially if the redemption occurs at nominal value many years later, if it occurs at all.

    In the 1930s, the U.S. government did something similar to what Cyprus is proposing now. For years, investors had purchased treasury gold certificates which would allow owners to convert the certificate to gold coins of the same nominal value. The attraction of the gold certificate was that investors could protect themselves against the devaluation of paper/fiat currency relative to gold. In 1933, the U.S. ended conversion of gold certificates and forced owners to accept payment in paper currency. Once this was completed and the US government owned most of the gold, the dollar was devalued relative to gold, which is exactly what the owners of gold certificates were trying to protect themselves against in the first place.

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