Raiding customer’s bank accounts in Cyprus is very dangerous

There is danger in the air.

Over the weekend, the Cyprus government levied a one-time ‘tax’ on all bank deposits. The rate is 9.9% on accounts over €100,000, which is about $129,000. Tax on accounts under that amount is 6.75%.

Why the tax?

Their national banking system needs a major bailout. Conditions imposed by the European regulators require depositors to take a hit in order to fund the bailout.

What’s the danger?

Loss of depositor confidence.

After the 2008 financial crisis, governments around the world, including Europe, guaranteed that bank deposits would be safe in the event of another crisis.

The haircut to bank accounts in Cyprus negates that promise.

Far more seriously, it generates a question whether this special, one-time-only, never-to-be-used-again haircut will be eventually be used elsewhere. That is a very destabilizing thought.

Depositors in Portugal, Ireland, Spain, and Greece have to wonder if they are going to take a hit.

The far more serious question is whether that question will now enter into thinking of depositors in places like, oh, say Argentina, or northern Europe, or even the US.

If your bank deposits are not safe in the event of a financial crisis, why would you keep your spare money in a bank account? Bank accounts would no longer be a safe means of storing value.

Bank runs in the near future?

The question in discussion over the weekend is whether there will be a bank run in Cyprus when banks open on Tuesday.

Will there be a bank run in other southern European countries soon?

The far more serious danger is if depositors elsewhere around the world realize that an invisible line has been crossed. Could governments or regulators consider their accounts fair game if things get bad enough?

Some comments from others over the weekend

A column in The Telegraph, Cyprus bailout: this bank raid sets a disgraceful precedent, points out the dangers:

The idea that a government which has chronically misspent may order the banks to close and deduct a sum of its choosing from a person’s balance before allowing it to re-open is beyond parody. …

The establishment of the principle that a government can, and at times of economic strain must, help itself to your savings, and that this is a legitimate tool of statecraft, ought to provoke riots.

Rephrasing his point – How is it okay that an irresponsible government can take a portion of your savings accounts to fix the problems they caused? Said portion of your account they confiscate is determined by them. A very bad precedent:

An article at points out the dangerous idea that now is in the back of the mind for anyone with a bank account anywhere on the planet:

Now, all across Europe, especially southern Europe, people think their savings may be stolen. The idea has now been introduced to the world’s savers as well. How is this in any way constructive?

The Wall Street Journal says in The Cyprus Bailout that senior bondholders of the biggest banks in Cyprus will not take a hit, which will increase the risk of negative perceptions.

Could it happen here? Perhaps it already is.

That is the suggestion from W.C. Varones: Think Cyprus can’t happen here? It already did.

Warning: his post uses an off-color joke with some naughty words. On the other hand, the joke makes the point quite clearly.

His point is the nearest zero interest rate environment created by the federal reserve is essentially taking 3% or 4% away from savers every year. That is a slow motion punishment on the frugal, savers in general, and especially people in retirement taking a low risk approach to investing their retirement assets.

I’ve discussed this idea previously. See How to crush retirees – 1970s vs 2010s, or, QE3 kicks off.

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