It can happen in any nation. m/r
Bold Cyprus by Nicole Gelinas - City Journal
The tiny nation’s revolt against Germany may prevent future financial crises.
20 March 2013
Banks got bailed out, and Cypriots got sold out—almost. Last weekend, the 1.1 million citizens of the tiny island nation learned that even savings accounts aren’t safe. The European Union and the International Monetary Fund, seeking to keep the country in the euro system, offered a €4.2 billion ($5.5 billion) bank bailout, but with one major condition: Cyprus would have to raise €5.8 billion on its own, for a total of €10 billion. Center-right president Nicos Anastasiades agreed, proposing a levy on bank deposits—one that would fall not only on the wealthy, but also on the life savings of the working class, in the form of a 6.75 percent tax on deposits of less than €100,000. Families with less than €10,000 in savings would have to fork over €675. But notwithstanding the agreement Anastasiades made, members of Cyprus’s parliament voted down the plan Tuesday.
That “Europe”—that is, the European Commission and the European Central Bank—agreed to this idea shocked just about everyone. The proposed tax on guaranteed bank deposits is the type of measure that makes people rush to buy gold bars. Cyprus isn’t some Third World nation, where residents must constantly worry that the government will grab their assets, as Argentina did five years ago when it nationalized $30 billion in private pension savings. Cyprus is a member of the common euro currency. Like all European nations, Cyprus offers a version of FDIC-style deposit insurance for people with under-six-figure savings. If you put a modest amount of money in a Cypriot bank, you’re supposed to be able to rest easy, knowing that your savings are safe, should the bank fail.
Analysts who insist that Cyprus is too small to set a precedent are missing the point. If this can happen in one euro nation, it can happen in any. Yes, Cyprus is unique. Because Russians use it as a tax haven, its banking system is eight times the size of its domestic economy. And Cypriot banks invested heavily in Greek debt and lost big when the EU allowed Greece to default on that debt two years ago. Nevertheless, like Ireland in 2010, Cyprus now faces a choice between letting its large banks fail or taking European bailout money that comes with harsh conditions.
The harshest new condition is German. Facing political pressures, Chancellor Angela Merkel won’t approve Irish-style bank rescues that don’t include some kind of loss on the part of bank investors. Small bank depositors learned last weekend that Europe includes them in that category. And with Cyprus banks closed on Monday for a Depression-style “bank holiday,” they would have no chance to act on this new information before seeing a chunk of their money removed from their accounts.
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