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What’s happening in Cyprus says more about the world’s financial leaders than it does about the economic significance of Cyprus. And what it says is not encouraging.
Based on recent comments, it appears the world’s financial leaders are more likely to create problems than solve them.
Cyprus is a member of the European Union and uses the Euro currency.
The country’s banks are bankrupt to the tune of $22 billion. In return for providing just over half the funds, the EU has insisted Cyprus place a one-time tax on all bank deposits to pay the remainder. The tax would be 6.75 percent on insured deposits and 9.9 percent on uninsured deposits.
Taxing deposits is the same as confiscating a portion of the funds individuals have entrusted to banks.
It sets a precedent that will lead individuals to lose faith in banks, withdraw their funds and seek alternative places to store their money. Such moves are highly disruptive to both the financial system and the economy.
Confiscating bank deposits is a really dumb idea.
Comments by the architects of this idea suggest they did not give it a lot of thought and continue to micromanage the plan.
France’s Finance Minister Moscovici now suggets the levy should be less for “insured” deposits and more for uninsured deposits.
“Things were confused,” he said. “Once the confusion was born, we had to re-visit the decision.”
German Finance Minister Schaeuble indicated there was no other option to the tax on deposits.
The most useless contribution to the issue came from the newly appointed U.S. Treasury Secretary Jacob Lew who offered the following advice.
“It is important that Cyprus and its euro-area partners work to resolve the situation in a way that is responsible and fair and ensures financial stability.”
Statements from the world’s financial leaders make it clear they either never thought of the serious consequences of confiscating bank deposits or, equally disturbing, have no substantive ideas for more constructive course of action.