Cyprus’ deposit grab sets a bad precedent. Money had to be found to prevent its financial system collapsing. But imposing a 6.75 percent tax on insured deposits – or even the 3 percent being discussed on Monday morning – is a type of legalised bank robbery. Cyprus should instead impose a bigger tax on uninsured deposits and not touch small savers.
Confiscating savers’ money will knock confidence in the banks. Trust in the government will also take a hit, since Nicosia had theoretically guaranteed all deposits up to 100,000 euros. Small savers should be encouraged not penalised. They are the quiet heroes of the financial system, who squirrel away their savings, not those who drag it down by engaging in borrowing binges.
Nicosia has not technically broken its promise to guarantee small deposits. That’s because it is not the banks which are failing to repay savers – something which would have triggered the insurance scheme. Instead, it is the government itself which is grabbing a slice of deposits. The pill is also being sugared by giving savers shares in the banks and some of the hoped-for revenues from a possible natural gas bonanza as compensation. That said, the mechanism is still an effective breach of promise.
There’s no denying that Cyprus needed a solution. The small Mediterranean island was on the brink. Its banking system – which had grown to eight times GDP on the back of inflows of Russian money and aggressive expansion in Greece – was technically bust. Its exposure to the Greek economy, Greek government debt and Cyprus’ own burst property bubble had seen to that.
Nicosia’s euro zone partners made clear there was no time to waste. They had chosen the date of their finance ministers’ meeting on Friday night, knowing that Cyprus already had a scheduled bank holiday this Monday. The country’s president says the European Central Bank was threatening to cut off liquidity on Tuesday if there was no deal. The banking system would have collapsed.