EU bailout for Cyprus will punish citizens, take 10% of their savings

In what may be the most immoral bailout yet, the European Union has forced the most offensive deal yet on Cyprus. Whoever may still have cash left in the bank in Cyprus will quickly learn a lesson to never again leave a cent in a local bank.

According to the new EU-forced bailout conditions for Cyprus, bank depositors will be required to hand over up to 10% of their savings in order to get the bailout. Besides the insanity of asking the victims to pay for the crimes committed against themselves, the EU is effectively telling the world that anyone who deposits cash in an EU bank could be forced to pay for future bailouts.  Which thus provides an incentive not to save, which is a problem economically.

This is a loud warning to the world that your money is not protected in Europe.  As Krugman mentioned last night, this is the EU holding up a neon sign saying “time to stage a run on your banks.” Those who have the means can and will move their money, while everyone else will again be left twisting in the wind.  Or will move their life savings into their mattresses, which is hardly secure.  It also means that in the future, people will do more than ever to hide their income so that the government doesn’t know about it, and can’t just take 10% of their savings by fiat.

European Union Flag via Shutterstock.

European Union Flag via Shutterstock.

Previous EU bailouts across Europe have resulted in worsening economic conditions, due to ill-timed austerity, and there’s no reason to think this bailout won’t do the same for Cyprus. The EU choices for Cyprus are essentially death by bankruptcy or death by financial torture. Sooner or later, one country is going to choose bankruptcy and move on. Extending the economic pain with brutal conditions has provide no relief to Greece, Portugal, Ireland or Spain, where unemployment numbers are setting record highs, while the economies continue to flounder.

The bankers who gambled away and lost trillions still have their comfortable lifestyle, but for everyone else it’s “tough luck.” The EU, like the US, is showing the world in clear terms that there is a two-tiered justice system when it comes to bailouts.

Public policy in Europe and the US has been all about punishing anyone with cash in the bank for years, though this is a significant step too far. Prior to last night’s announcement, central banks punished depositors with horrendous interest rates and low inflation. Those policies have been painful for many, though delightful for the bankers, who get free money from the central banks and then gamble for higher margins.

As the banking crisis continues to unfold, Iceland appears to be the country that got it right. Instead of inviting banking executives to the White House and treating them like royalty, they arrest them and throw them in jail.

As bad as the low interest/low inflation numbers have been for the general population, it was still a more discrete attack on the middle class than this. The European Union needs to do some serious soul searching after forcing this brutal deal on Cyprus. They also need to step back and determine whether or not they want to have a banking industry that people trust, or if they prefer to have people of the EU keep money under their mattress at home.

This latest move to protect the guilty and punish everyone else shows us that even though we’re years past the initial banking collapse, we’re still nowhere near solving this problem. Whether the banks are receiving $83 billion per year or $780 billion per year, it’s clear that their “profits” are all smoke-and-mirrors. And when the game ends, it’s the little people who are stuck with the bill, yet again.

An American in Paris, France. BA in History & Political Science from Ohio State. Provided consulting services to US software startups, launching new business overseas that have both IPO’d and sold to well-known global software companies. Currently launching a new cloud-based startup. Full bio here.

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35 Responses to “EU bailout for Cyprus will punish citizens, take 10% of their savings”

  1. Ninong says:

    Cyprus rejected the offer (36 votes against, 19 abstentions, 1 absent). The revised plan they voted on would have exempted deposits below 20,000 euros from any tax at all. Hey, maybe Vladimir Putin will come to their aid?

  2. Ninong says:

    Maybe he didn’t; he just turned 20. On the other hand, the neo-Nazi movement is active in Greece under a new name, “Golden Dawn.” I believe John wrote something about them a year or two ago. They have been getting about 7% of the vote in national elections. (Think David Duke goes to Greece and you’ll get the picture.)

  3. Ninong says:

    I didn’t say it was “worthwhile.” I just said what was happening. Perhaps the EU should just leave Cyrpus to fend for itself. Do you think that would be better? When a country engages in that sort of shady enterprise they can expect problems when times get tough. Now they expect the Germans to bail them out.

  4. rmthunter says:

    Any guesses on how long before people start rioting?

  5. rmthunter says:

    Iceland was the counter-argument I came up with, too — not only did they jail the banksters, they nationalized the banks.

    As for the EU fiscal gurus (and the IMF — don’t forget them), Krugman was absolutely right: they might as well have taken out full-page ads in all the European dailies saying “Time to yank your money out of Cypriot banks.” That’s not only boneheaded on its face, but it gives away the game — does anyone doubt any longer just who’s running the show?

  6. RyansTake says:

    The EU was a fine idea. The Euro, on the other hand…

  7. RyansTake says:

    They people are “promised” utterly worthless stock in return from the very same people thieving them?

    Wow!! Awesome!! Genius!!

    Since you think that’s so worthwhile, I have this little enterprise that I run. Why don’t you give me 6% of everything you’re worth, and I’ll give you some “stock” back! You won’t regret it!

    /snark off

  8. RyansTake says:

    Actually, as I understand it, the initial deal was made to *protect* a lot of those 1%ers… because if Cyprus only targeted the 1%ers, the rate would have had to be much higher than 6%. Ultimately, they feared they’d lose too many of those international customers if they targeted them… and so decided to target their own people instead.

    Pretty sick.

    Thankfully, there’s been blood-boiling rebukes coming from all corners over this “deal” and different organizations and countries that have thrown their weight on Cyprus to get that deal have been backpedaling fast, trying to pin things on Cyprus’s government (while Cyprus’s government has tried to pin it on them). It looks like the “deal” will be restricted… but no matter what, it’s still probably going to be very harmful to regular people and no where near going after the people who caused the mess in the first place.

  9. RyansTake says:

    Getting people ‘not to save’ isn’t a problem economically, at the macro level. More money spent = more growth = more jobs.

    On a micro level, you’re absolutely right. Penalizing regular people for being able to save together a few scraps is absolutely going to cause them to not put money in the bank. I bet the same people who were saving will still probably save, they’ll just stuff their money under their mattresses or put it into things like gold, neither of which are as good for them as putting it in a bank… so long as that bank isn’t at risk of being heisted by the EU/IMF/ec.

  10. BeccaM says:

    No can do. I own a small business. My clients aren’t going to give me cash.

    We also don’t use a US bank — we’re with a credit union.

  11. tsuki says:

    Seems the Germans have gone from shitting their lederhosen in ’68 to the Fourth Reich in 2013. It is time that the rest of Europe revisits the Maastricht Treaty.

  12. tsuki says:

    BeccaM, you need to check your US bank. I’ve pulled most of my money except for bill payment. My Depression Era Aunts knew best…a cigar box in the upstairs closet and a closed mouth.

  13. nicho says:

    I’m not so sure. The guy claims he didn’t know the origin and significance of the salute. That may seem outlandish, but I encountered US college students in the ’90s who didn’t know who the Nazis were.

  14. nicho says:

    Except that the ultimate goal of the IMF is precisely to impoverish the middle class. If they have to wound a few Russkies in the process, all the better.

  15. TheOriginalLiz says:

    It will never happen in America. We’re too busy watching crappy reality shows, gorging on fast foot and attacking each other over made-up political wedge issues to go after the real problem.

  16. Indigo says:

    Who ever thought the European Union was a good idea in the first place? Not me.

  17. BeccaM says:

    True, we’re operating from different story sources, but neither of us is wrong here. Assets and deposits are two different things. The former can include investments, bonds, debt liabilities and so on. What’s about to be taxed/confiscated aren’t the assets, but the cash deposits, a profoundly regressive move.

    I’m still trying to wrap my head around the assertion that a banking system having too much money ‘threaten(s) to sink the nation’s economy.’ It seems more to me that the Cypriot gov’t was too much in hock in the self-serving opinion of the EU central banks and IMF, the banksters saw a big pile of privately-owned money and, like pigs to a freshly filled slop-trough, decided to go for it, consequences be damned.

  18. BeccaM says:

    Pretty much, yeah. If I had any money in any of the ‘PIIGS’ nations — Portugal, Italy, Ireland, Greece, or Spain — I’d be pulling it out right about now. They’ve merely guaranteed more panic and more pre-emptive bank-runs in any nation with an economy deemed ‘troubled’.

  19. Ginger_FL says:

    Having a personal safe with funds is sound fiscal policy imho.

  20. MyrddinWilt says:

    In order to save confidence in the banking system we must destroy confidence in the banking system.

  21. Ginger_FL says:

    Thats what safes are for. Better than mattress imho. :-)

  22. Ninong says:

    Becca, we must be getting our figures from two different sources. Here is what Bloomberg is reporting:

    Depositors at Cypriot banks have been ordered to contribute to a financial bailout after the lenders, like Iceland’s, grew so large that they threatened to sink the nation’s economy.

    Cyprus’s bank assets swelled to 126.4 billion euros ($164 billion) at the end of January, seven times the size of the 18 billion-euro economy, from 78 billion euros in 2007, data from the European Central Bank and the EU’s statistics office show.

    The Cypriot government announced an unprecedented tax on deposits two days ago, seeking European aid after its banks lost 4.5 billion euros on Greek sovereign debt and failed to meet European capital requirements. Troubles on the Mediterranean island have resembled those of Iceland, which seized control of its banks in 2008 when they were unable to finance debt 12 times the size of the economy.

    “The banks grew as they amassed funds from wealthy foreigners and now that size is too much for the country to handle on its own,” Philipp Haessler, a European banks analyst at Equinet AG in Frankfurt, said by telephone. “Cyprus is being made an example of.”

  23. nicho says:

    Well, keep some under the mattress, John. If — no when — the shit hits the fan, and the banks are closed, or you have no power for 10 days (or more), it’s a good idea to have enough cash on hand to get you through a week or two. If ATMs and credit card machines aren’t working, and all you’ve got in your wallet is $15, you’ll be glad for the stash under the mattress.

  24. Naja pallida says:

    To be honest, I’m shocked it hasn’t already happened on some level. With as many people as there are who are out of work, lost their savings, and have few prospects, with nothing better to do with their time but think about their situation and how they got there. I’m stunned that someone hasn’t come to the conclusion that a CEO or banker needs to be taught a lesson. Of course, the reality of it is that there is always another leech ready to take the place of any that disappear. Most of the big taker corporations are ridiculously top-heavy. They will have no problem continuing the same crimes… and have the money to buy their own security.

  25. Bcre8ve says:

    First, I agree that this is a bad idea, but…

    Cyprus is a massive tax haven for the Russians, Brits, and other 1%-ers. There is an article in this month’s VF that is ostensibly about high-end real estate in London, but is really about who lives in it – and how they hide their money from taxation. This is a must-read IMHO, as it details the web of former British colonies that now operate primarily as tax havens and to shield these people from criminal prosecution and court orders for confiscation.

    In Cyprus, the “finance” industry is 8 times as large as their yearly economic output. They have a corporate tax rate of 10% (set to go up to 12.5% in this deal). The people that the “freeze” was truly meant for were these tax fugitives, in an attempt to prevent them from wiring it out of the country to yet another tax haven. The actual citizens, at least until they ran dry, were able to remove cash from the ATM system, and while the banks were open Saturday.

    In a just world, there would not be two tiers of levies on the deposits in Cyprus (9.9% over E100,000 and 6.7% under that amount), it would have left the smaller depositors, resident Cypriots, free from this levy, while still imposing it on the tax fugitives.

    In an economy that sees their banking sector swell to 8 times their economy, yet refuses to tax this shadow economy in a way that allows them to pay their bills, it was only a matter of time until some sort of levy was placed on depositors. Its just a shame that the average retiree and frugal Cypriot will be hit for a situation created by greedy bankers, politicians, the criminal class, and the obscenely wealthy.

  26. BeccaM says:

    Not entirely true, that second sentence. From the story I linked below:

    Of the $90 billion deposits held in Cyprus banks, a little under half is held by non-residents, mostly Russian.

    (Emphasis added.) Also, although the 10% confiscation is to be applied to deposits in excess of 100k Euros, they were still proposing to take 6.7% of any deposits lower than that. At that point, it’s not just wealthy tax-avoiders getting hit, but regular folks like this guy:

    “They shouldn’t touch the deposits. They’re just killing the people,” 58-year-old Miltiades Papamiltiades, an unemployed former construction worker, told the English-language Cyprus Mail news site. “No-one will ever deposit money again into the banks on the island. It is the end of our economy,” he added.

  27. karmanot says:

    Yep, Oligarch and cartel Russian swill be pissed and that is not a good thing.

  28. Ninong says:

    Cyprus is a notorious tax haven and I don’t think it can be compared with other European countries. Most of the money in Cypriot banks comes from offshore. The proposed deal would offer them stock in the banks as compensation for the assessed tax on their deposits. And the 9.9% only applies to deposits above 100,000 euros, which is the limit covered by deposit insurance. Below that it’s six-point-something.

    The people who hide their money in Cyprus do so thinking that the EU would never let Cyprus go bankrupt, just as they have refused to allow Ireland, Portugal or Greece to go bankrupt, so as to avoid the collapse of Spain and Italy. It’s ridiculous that a tiny little country with an 18 billion-euro economy should have 126.4 billion euros in bank assets, up from 78 billion euros in 2007.

    Too bad letting Cyprus’ banks fail is not an option because that’s what some people deserve. Maybe not the local citizens but all those tax dodgers like Mitt Romney, for example. I believe he prefers the Cayman Islands.

  29. Security. If you have some savings, you have to save it somewhere safe, and i wouldn’t trust leaving a couple thousand bucks at home under the mattress.

  30. Boy I’d be pissed

  31. eahopp says:

    I’m sorry to say this, but there will come a time when poor and middle class people will have nothing left to lose. Will they storm the banks? Will they start killing the bankers? The politicians who cater to those bankers whims of austerity and punishing the nobody class for their own, outright greed? Will the ubber One Percent feel the need to lock themselves away in their armed, luxurious compound for fear of attack by angry mobs who have nothing? I think it is only a matter of time when we start seeing violence.

  32. nicho says:

    Yeah, closing the banks always gives people a sense of reassurance.

  33. BeccaM says:

    And it gets worse: Cyprus banks have been ordered to stay closed until Thursday to prevent a run on deposits to ensure the money stays there until the kleptocratic banksters can steal it.

    Banks in Cyprus will remain closed until Thursday to prevent panic withdrawals in the wake of a surprise bailout plan that has sent money markets into a tailspin, the country’s government announced Monday.

    Ministers met Monday to revise a plan to seize up to 10 per cent from bank accounts held on the Mediterranean island – the price of a deal, brokered by the European Union and the International Monetary Fund (IMF).

    Cypriots and foreign investors emptied ATMs following Saturday’s unexpected 10 billion euro ($13 billion) deal under which savers must surrender up to 10 percent of bank deposits. Banks in Cyprus were due to remain closed because of a public holiday Monday.

    A debate on the measure has been delayed until Tuesday. Meanwhile, the country’s banks, already shut on Monday for a bank holiday, will remain closed on Tuesday and Wednesday to avert any panic.

    I have news for them: While this may prevent people from getting at the money that is rightfully theirs, it will not prevent a ‘panic.’ They’re guaranteeing it.

    Oh, and say goodbye to the Cypriot economy. They just flushed it down the toilet.

  34. BeccaM says:

    For the regular people in Cyprus, or in other EU nations who deposited in banks there, it’s already too late. Yes, the ATMs were open, but they pre-emptively banned electronic transfers and put limits on how much people were allowed to withdraw.

    This is bankster confiscation and plundering, pure and simple. And Krugman and so many others are right: This incredibly stupid move is a knife to the heart of worldwide banking and currency-based economics. What’s worse if they’ve already said theft from people’s checking and savings accounts is on the table for Spain, Portugal, and Greece.

    The fact the Cypriot government is going for this option rather than declaring bankruptcy is proof that they — along with so many other nations — have been taken over by the Plutocratic Bastard Class. I fear that before much longer, we won’t be looking at the prospect of strategic national bankruptcies, but violent revolutions.

    Unfortunately, due to the nature of revolt, we’re also very likely to be seeing images such as this.

  35. Ginger_FL says:

    Why would anyone put money into a bank period. We only leave enough to pay bills.

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