Sunday Morning Thoughts on Cyprus

A man reads a newspaper at a cafe in the Cypriot capital Nicosia on March 17, 2013.

Photo by BARBARA LABORDE/AFP/Getty Images

Obviously the risk with the Cyprus bank tax is that it’ll lead to mass panic in other countries dependent on EU lifelines (Portugal, Spain, Ireland) which in turn will spark secondary panic in Spain and Italy and the whole edifice of European monetary union will collapse in chaos. But while I suppose yesterday’s news makes that somewhat marginally more likely, I think everyone ought to be affirming the basic reality that runs and panics are unlikely and unnecessary.

The real issue here is that your typical middle class Cypriot seems to be getting royally screwed.

The European Union demanded that bank depositors take a haircut here for two reasons. One is simply that Germany would rather spend less money than more money. The second is that a lot of large depositors in Cyrpiot banks are thought to be Russian tax dodgers. That made the politics of a more generous bailout especially unlikely. It’s also what specifically made taxing Cypriot bank deposits look attractive rather than some other form of tax. Makes the Russians pay!

So fair enough. That’s why you have the 9.9 percent levy on deposits over €100,000. But why the 6.75 percent tax on deposits below
€100,000? After all, those are the deposits that had received official FDIC-style insurance. Why break that promise? Most simply, you need the 6.75 percent tax to prevent the levy on large deposits from becoming more confiscatory. But, again, why? The official response seems to be that keeping the tax on large deposits low helps preserve Cyprus’ viability as an offshore banking center. As Cypriot President Nicos Anastasiades put it in his official statement, this plan will save “8,000 jobs in the banking sector and thousands of others which would be lost as a corollary of not maintaining the operations of banks.”

But will it? I’m not an expert in the psychology of Russian money-launderers, but the 9.9 percent tax seems like enough of a pinch to ruin the party. On the other hand, surely not every single large depositor in a Cypriot bank is Russian. Surely some of them are just wealthy Cypriots. Wealthy Cypriots whose interests the government is protecting at the expense of ordinary depositors.