Eurocrats would like to put Cypriot savers on the hook for the rescue package the European Union and the International Monetary Fund have proposed for Cyprus, as Matthew Feeney noted here yesterday.
The $13 billion package will require Cyprus to raise $7.6 billion by taking it out of savings accounts in Cypriot banks. Many account holders in Cyprus are Russian and Russia's president, Vladimir Putin called the proposed levies "unfair, unprofessional and dangerous." A public outcry over the across-the-board levy (9.9 percent for accounts holding at least 100,000 euros and 6.75 percent for accounts holding less than that) led the Cypriot government to suggest an exemption for accounts holding less than 20,000 euro. That exemption, of course, doesn't change the nature of the large-scale theft of savings being proposed.
Cyprus is not the first country to receive an EU bailout, but it is the first that will have to partially fund its own bailout in this manner, which is leaving observers in other EU countries wary about their futures. An op-ed in the Irish Examiner warns that what may happen in Cyprus may happen in Ireland (an earlier bailout recipient). From the unsigned op-ed:
The raid on Cypriot bank deposits, held in the name of ordinary people, businesses, institutions, communities, and prudent savers, breaks one of the fundamental trust-based relationships that has sustained western societies for centuries.
It means, too, that the link between property and material security is weakened for all Europeans living in societies with a weak economy…
It sets a precedent that will reverberate across Europe and find particular resonance in other supplicant countries dependent on external finance to sustain state services.
The comparison is obvious — if bank deposits can be raided by a government in one bankrupt eurozone country, then why not in another? As Spain has requested a €40bn bailout for its banks, can Spanish depositors be certain or even confident, that they will not face similar demands?
… Our Government welcomed the deal describing it as a "positive development for Cyprus, the eurozone as a whole, and Ireland". It might not have been so positive if our financiers had forced it to raid Irish bank accounts to sustain a toppling system.
It is more likely that, in those circumstances, our Government would echo the sentiments of Cypriot president Nikos Anastasiades, who sought to assuage popular anger by urging Cypriots to support the deal, insisting that the alternative was instant bankruptcy of the island's two main banks and the banking sector, with the loss of 8,000 jobs and economic collapse.
Live by the debt die by the debt?
The U.S. Treasury Department is "monitoring the situation in Cyprus closely" and wants a "responsible and fair" resolution (no details on what "fair" means to the administration this time). Banks in Cyprus, naturally, have been closed by the government to prevent a bank run, while Alistair Darling, Britain's former chancellor of the exchequer (a Treasury Secretary, more or less) warns of bank runs elsewhere in Southern Europe as a potential result.
If the bank levy in Cyprus moves forward and their government survives, expect other governments to become interested in how they can "levy" savings accounts to "raise revenue," and deincentivize savings and private investment in the process.