People are asking me what I think of the Cypriot bail out. Actually, to be more precise, I think they're asking me what I think of depositors in Cypriot banks losing part of their balance to contribute towards that bail out.
So, first some facts. Cypriot banks are bust due to spectacular over lending and poor decision making.
Second, with loans of many times GDP Cyprus permitted this to happen: it was a choice.
Third, it was a bad choice, but there isn't a Cypriot who did not know their country was being used as a tax haven. People can be excused for not knowing that in the UK, but not in Cyprus; there everyone knew.
Fourth, so big is the loss of capital in the banks and so small the tax base in proportion to it there is no way that Cyprus could ever cover the cost from taxation of income: a capital levy was the only thing possible.
Fifth, with no bail out the banks would have failed and as depositors would have ranked as unsecured creditors and with the government not good to make up the loss Cypriots with cash in their banks faced disaster.
So, as part of an overall package the depositors have been asked to make a contribution to the cost of the bail out. It's 6.75% on balances below €100,000 and 9.9% on those above.
Let's though, for a moment compare that with what is guaranteed in the UK in the event of bank failure - which was what Cyprus was facing. Here we guarantee deposits to £85,000. Above that it's total wipe out time - a 100% levy.
So before everyone goes wild about what's happening in Cyprus let's appreciate that the deal offered, whilst I think inappropriate on small balances, is extraordinarily generous to large depositors. They keep 90.1% of their cash when facing a loss of 100% having held it in banks that almost anyone could see where shot through from a solvency perspective - as has been discussed openly for some time.
A capital levy in this case on those with some wealth seems to me to be reasonable. Although I would expect total shareholder wipeout and a bond haircut too. But candidly, the fuss on this issue seems to me inappropriate. Remember we saved banks in the UK to preserve the wealth of the wealthy at cost to the rest of us. It's much the same in Cyprus. Some contribution in return seems to be a not unreasonable quid pro quo.
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The levy is surely in contravention of EU deposit protection under €100k?
Describing it as ‘tax’ is not sufficent to avoid this obligation.
As I have said, I have reservations about the lower rate charge
You mentioned that you considered it to be ‘inappropriate’ – a moral assessment – rather than unlawful. Naturally this is an important distinction.
The charge is clearly not unlawful
Because?
As I understand it (based on the EFTA ruling on the Icelandic action, which is also binding on the EU) the obligation is not to ensure those covered by the deposit protection are actually compensated: it is to ensure that there is a reasonable scheme in place: the actual payments are not the responsibility of governments, who merely hold the ring. Payments are the obligation of the scheme itself, funded by the banking sector in much the same way as the system which covers travel agents’ customers when the agency fails.
More details from that court ruling here:
http://thosebigwords.forumcommunity.net/?t=46943326&p=373912947
As you mention with regards to ‘bondholders’ taking a haircut. Why would they be excluded in a fair solution? Their bonds are the equivalent of deposits aren’t they. I mean they are liabilities of the banks in question just like depositors. Could it be that the bondholders are primarily other Cypriot/Greek/Russian banks?
I do not know the answer to that
Why do you think this is a better solution than what Iceland did?
I didn’t say it was
I made it clear that it was a fair deal given the risks
And the problem from the viewpoint of Cyprus was it did not have a currency of its own – Iceland did
I do not see why the existence of a sovereign currency makes any difference to this. Cyprus could allow the bank to go bankrupt and replace it with a nationalised bank just as Iceland did: the currency is irrelevant so far as I can see.
It is not a fair deal at all. Ordinary people do not consciously “lend” to banks: they put their money somewhere safe. The idea that they are risking it is the very antithesis of their decision to deposit it: that only exists in the heads of financial players and the ambiguity is a consequence of all the different hats that money wears.
People should realise they do lend, unsecuredto banks
And have no natural right to protection
Then they may demand more reform
Richard, Fiona pointed out “Cyprus could allow the bank to go bankrupt and replace it with a nationalised bank just as Iceland did: the currency is irrelevant so far as I can see.”
Could this have worked in this instance?
Anthony
Candidly people more expert than me would have to answer that
Richard
The fact that the deposit insurance requirement covering the first €100,000 in EU banks can be circumnavigated by the imposition of a tax, will cause concern in many quarters. It could certainly be argued that the large investors have escaped lightly, but small local savers will be hit in a disproportionate way and a fair exemption limit should have been set.
I agree with the last point
I disagree here too, Richard. People have no alternative, and they have been encouraged to believe that a bank is like a great big safe to keep their money in. That is not quite true, even when the banking system is functioning better through effective regulation and separation of retail from “investment” banking, but coupled with the deposit guarantee it is pretty much true. It is not at all true now, but the governments have not openly rejected the guarantee and unless and until they do that is nothing less than fraud. Folk are not just slow to catch on: they are wilfully and consistently misled about the implications of plutocratic policy change.
Well, well……..this one is difficult for you isn’t it!
Normally wealth taxation is your preference and you would be fully behind this but having seen the backlash over the weekend you are now being all coy!
Now you are arguing that only those above 100k should lose out but that would mean 40% loss across all big accounts…..Not to mention your unsubtle “well if you bank in a tax haven, you deserve it!” remarks.
I think you are going to be very quite about this one because unlike the mansion tax this wealth tax is not getting the public behind it……
Bizarre
Could I have been clearer?
Please do not waste my time again
http://www.golemxiv.co.uk/2013/03/eu-imposes-collective-punishment-on-cypriots/ a link your readers might be intersted in.
Weak response to the confiscation of money from the people by government.
Is tax confiscation?
What n absurd idea
This is not tax, as I understand it.
OK
But in that case your understanding of tax has just been expanded
Hardly, Richard. If you call a tail a leg a dog does not have 5 legs. Tax is not something whimsically imposed overnight at the behest of a foreign power. It is rather a democratic agreement about what we should provide for our commonweal and how we should pay for it. Demands from the Troika do not qualify
Suppose people had lost 100% instead
Would that be better?
Sorry, absurd double standard:
“People can be excused for not knowing that in the UK, but not in Cyprus; there everyone knew.”
If people in the UK can be excused, so can those in Cyprus – either you have one system where by people are accountable for the actions of their government, or they are not – this is just nonsense. following on from your similar approach to Guernsey, it’s starting to feel a bit petty nationalistic.
Ever heard of scale?
Yes, and the scale of involvement is bigger in the city than in Cyprus, the city of London is where the whole thing is masterminded from, Cyprus, Guernsey, where ever, these are pawns in a much bigger game, even if they opted out of the massive web of City of London based financial escape systems, then there would be other places, even more on the periphery to take their place.
Points TJN makes often
I fail to see why they have to lose anything at all. Nobody lost in the Iceland crash, at least not more than is lost to austerity elsewhere, and for a shorter period. There is no need for this
This is hardly a tax as depositors have been issued with shares in the relevant banks, equal in value to their losses.