It is rather telling that the Cypriot bank-deposit confiscation idea surfaces in Europe, at this time. The Eurocracy is no doubt getting desperate when it comes to saving their super-state project with it common currency and its welfare state. No one should doubt that the confiscation idea was conceived in closed, anonymous, tainted-window offices at the heart of the EU power machine.
More on that in a moment. First, let’s listen to a voice on what this totally game-changing deposit confiscation can lead to for the Cypriot economy. From EUBusiness.com:
Russians are preparing to withdraw billions of euros from Cyprus and the island will plunge into a recession lasting for decades due to the onerous terms of a EU bailout, economists warned on Monday. “The Russians are already indicating they want to withdraw their money. Why should they stay? They will go somewhere where they can be protected; we can’t protect them,” economist Simeon Matsi told AFP. “We have indications that billions (of euros) will be withdrawn, we already know of about three billion that is ready to move. They are already asking lawyers to draw up documents to withdraw money.”
It’s ironic. Wealthy Russians make tons of money in an economy where protection of property right is precarious. They then take their money to Europe, the birthplace of the ironclad definition of property rights – only to see their property be subjected to an unprecedented confiscation campaign from government.
As a condition for a desperately-needed 10-billion-euro ($13 billion) bailout for Cyprus, fellow eurozone countries and international creditors Saturday imposed a levy on all deposits in the island’s banks. Deposits of more than 100,000 euros will be hit with a 9.9 percent charge, while under that threshold the levy drops to 6.75 percent. The controversial tax is seen hitting Russian pockets hard, with experts estimating that Russian deposits in Cypriot banks amount to at least 15.4 billion euros ($20 billion) of the estimated 67 billion euros of deposits held by Cyprus banks.
If the EU could apply the 9.9 percent confiscation to all the 67 billion euros, they would only get two thirds of the money they are after. If the Russians withdraw their money before the confiscation kicks in, they only collect a bit more than half of what they are after. And that is under the assumption that there are no other major withdrawals, an assumption that is obviously unrealistic.
Talk about creating a bank run… but the long-term consequences for the Cypriot economy are far more ominous:
Economist Castas Apostolides said the Cypriot government went unprepared into negotiations with the eurogroup. “We should have called Europe’s bluff,” he said. “A bank haircut on deposits is unacceptable; they should have walked out because without a business sector there is no Cyprus economy,” Apostolides said. “Cyprus will be unable to exit recession for the next 20 years. Our children will pay for this mistake.”
Indeed. One of the most important pillars of economic freedom is the credit system. It allows for a functional separation of property rights and rights of use, without destroying or eroding the status of the former. A credit system can only function if people feel that their property – their bank deposits – are always protected. If bank deposits are not protected, there will be no money for the banking system to lend. If they have no money to lend, there will be no credit available for small businesses to grow.
But even larger businesses can start feeling uneasy. They often bank internally – set up their own internal credit system for funding investments – but they, too, need to have their money deposited somewhere. Unless they own their own bank they need to expose themselves to the same world as the rest of us. When government can arbitrarily come up with a reason to confiscate ten percent of your deposits, even large corporations are going to get nervous.
Once that uneasiness sets in, people and corporations with large assets will start comparing risks on a broader scale. One immediate question is: are your bank deposits safe in other EU member states? The EU Business again:
An analysis by IHS Global Insight said there was a “potential for contagion from the move to impact bank sectors in other troubled economies on the periphery of the eurozone.” “A mass of withdrawals from eurozone periphery banks could heat up the debt crisis once again after the international financial community had decided that lending to countries such as Spain and Italy would not require the extremely high risk premia it had earlier demanded,” it said. “The financial markets’ immediate bad reaction to the part funding of the Cypriot rescue by taxing bank depositors has highlighted the concerns that it could be opening a nasty can of worms.” UBS Investment Bank managing director Reinhard Cluse said the deal “raises the obvious question whether the depositor bail-in in Cyprus is a ‘one-off’ or whether it will eventually be repeated elsewhere in the future”.
Let us not forget that the reduction of the risk premiums for investments in Spanish and Italian treasury bonds happened only after the European Central Bank had promised to buy an unlimited amount of their treasury bonds. In other words, the ECB did precisely what it is not allowed to do according to the EU constitution, namely bail out countries with unmanageable government debts.
The ECB allowed itself to break the constitution – and the EU accepted it – to achieve a political goal, namely to save the common currency and the Spanish and Italian welfare states. In other words, the respect for the rule of law is already rather scant in the hallways of European power. It is therefore not very surprising that this bank-deposit confiscation idea was concocted in those very same hallways. Euractiv reports:
Cypriot President Nicos Anastasiades said yesterday (17 March) he had no choice but to accept a painful tax on the country’s bank deposits in return for international aid, saying the alternative was bankruptcy.
For government, mind you.
In a nationally televised address, the president called it the least painful option under the circumstances before going on to accuse eurozone finance ministers of forcing Cyprus into this deal, Euronews reported. Breaking with previous EU practice that depositors’ savings are sacrosanct, Cyprus and international lenders agreed at the weekend that savers in the island’s outsized banking system would take a hit in return for the offer of €10 billion in aid. … The news stunned Cypriots and caused a run on bank machines, most of which were depleted within hours. Electronic transfers were halted. Outside Cyprus, the move unnerved depositors in the eurozone’s weaker economies and investors fearing a precedent that could reignite market turmoil.
There you go. Once the Eurocrats have gotten away with doing this to one country, they will most certainly do it elsewhere. They have done it with austerity, and they have already set a precedent for not caring too much about the rule of law.
It is easy for the Eurocrats to concoct all these power-grab schemes. It is a lot harder for the nationally elected officials to deal with the wrath of the people – as Greek and Italian voters have shown. When it comes time to confiscate people’s bank deposits, things get even more tense, which explains why, according to Euractiv, the Cypriot president is making a desperate promise:
Anastasiades promised those savers they would be compensated by being given shares in banks guaranteed by future natural gas revenues. Cyprus is expecting the results of an offshore appraisal drilling this year to confirm the island is sitting on vast amounts of natural gas worth billions.
And if that is not the case? If the reserves are not “vast”? Let’s not forget that the global-market price of natural gas has dropped significantly over the past year, as new resources have come on line, primarily in North America. And more is to come. By the time the Cypriot report is done it could turn out that only a fraction of the reserves is commercially viable.
At that point, what will the Cypriot government do? Can it even survive such a crisis, on top of a massive bank run?
Ultimately, the bank customers in Cyprus are just another cluster of victims of the reckless European attempt at saving what cannot be saved: the European welfare state. Let’s not forget that this entire thing did not start with a financial crisis, but with government deficits. The financial trouble in 2007-2008 would have been contained if it was not for the fact that banks over the previous decade had invested profusely in treasury bonds. The philosophy was that such assets would offset the rising risks elsewhere.
When governments like Greece, Portugal and Spain started having serious debt problems the low-risk end of bank balance sheets basically evaporated.
Bottom line: had the governments of Europe not borrowed so much money to save their unsustainable welfare states, the banks would have been able to handle the crisis on their own.