But Cypriots have money. As measured by GDP per capita Cyprus is in the Top 50, right up there with Saudi Arabia and Oman.
So how does a one-off tax in Cyprus have such a hugely negative – and instant – impact on indices across the world including the Nikkei (down 2.7%), Hang Seng (down 2%), Spanish Ibex (-1.6%), S&P 500 (-1.5%), the Dax and FTSE 100 (-1%)?
Is the market retrenchment an opportunity to top up equities? Find out here…
Dangerous precedent
The fact that Cyprus is having to put its hand in its own pocket is not a surprise, but those pockets its government is putting its hands in is setting a very a dangerous precedent.
According to a note from Kleinwort Benson, just over 20 years ago Italy’s Prime Minister Giuliano Amato made a one-off bank account levy but this amounted to just 0.6% as opposed to the close to 10% proposed on accounts over €100,000 in Cyprus. Tellingly, the note says: “It is still widely blamed for a permanent loss of faith in the Italian banking system”.
A half-century before this, a proposed bank deposit tax in Norway in the years leading up to what would become World War II was reversed as money flooded out of the country.
What makes the situation in Cyprus that much worse is that the proposal for a 9.9% levy on balances over €100,000 and 6.75% for any amount held under that has been made with the backing of the European Central Bank, the European Commission and the IMF.
According to the BBC, before the €10bn bailout package will be given this troika “demands that all bank customers pay a one-off levy”.
Individuals are now being asked to directly stump up cash to pay for the failings of their government and financial institutions. The situation calls into doubt the whole premise of protection for deposit holders, over and above the events that led to a run on Northern Rock back in 2007.
Pushed towards investment
Former UK Government policy adviser Ros Altmann hit the nail squarely on the head when she said this morning: “It is essential that those putting their money into banks believe their funds will be safe. The whole point of depositor protection is to reassure ordinary people they can trust the system and know their money is going to be protected at least up to the promised level. As soon as that trust is lost and depositors want their money back, the banks will no longer be able to function.”
Can you imagine anything similar being allowed to happen here? Or in Germany? Or even in Italy, Portugal, Spain, Ireland or Italy?
A number of arguments have been made today to explain why this plan for Cyprus is a one-off, but such is the way that banking systems, governments and markets are linked it will be far from a one-off.
When push comes to shove, the deal as outlined this morning is unlikely to go through. It will probably be watered down to hit the larger deposit holders hardest, with possibly some form of further protection offered to those in retirement.
But the damage has already been done. The message from the European Central Bank, the European Commission and the IMF is that your savings accounts are not protected as they should be.
Combined with stubbornly low interest rates and securities propped up by mountains of quantitative easing it is hardly surprising people are turning to riskier assets in a bid for yield.
Time to invest not save?
