Should we worry? After all, Cyprus is a tiny island in the Mediterranean, much smaller than Greece, surely it couldn't put the Euro-zone in danger. What is at risk here is a mere €68 billion deposited in Cypriot banks (of which €19 billion is said to belong to foreigners) - surely peanuts compared to the vast sums sunk in Greece, Ireland, Portugal and Spain...
The answer is: this is not peanuts. The situation is highly dangerous for two reasons that have little to do with the size of the bailout:
(1) instead of asking bondholders to take a "hairline cut", the lenders this time - under pressure from Germany as usual - are asking bank depositors to take the brunt: accounts below €100,000 will be taxed 6.75%, and those above, fully 9.9%! Yes, you read that right. This means that about €5.8 billion of the bailout is going to come directly from depositors in Cyprus’s banks, in the form of what the EU has delicately termed an “upfront one-off stability levy”. A stability levy? What happens is that the authorities simply seize funds from private bank accounts and in doing so, they are putting in jeopardy the whole banking system!
You thought your savings were safe in a bank? Think again! Not surprisingly, within 24 hours, the cash machines on the island were empty as people scrambled to save their money. Electronic transfers were stopped.
This is by far the most dangerous and irresponsible move by any modern, democratic government - a government is supposed to protect its citizens and not steal from them. Furthermore, the fact that it has been imposed on Cyprus by the Euro-zone authorities makes it truly scandalous.
(2) the decision, as was pointed out by commentators here in Italy goes counter to the European Union treaties, in particular article 56 and 60 that establish the free circulation of capital: the Euro-group ministers of finance seem to have forgotten that taxing bank accounts is tantamount to rescinding one of the basic tenets of the European Union.
What constantly amazes me is how stupid our political class is. Everybody with a minimum of common sense can understand that you Do. Not. Adopt. Austerity. Measures in times of recession. Likewise, you Do. Not. Tax. Bank. Accounts to finance international bailouts. Elementary, my dear Watson.
But this is of course yet another dose of the German Central Bank's medicine, obviously concocted by its president, Mr. Jens Weidmann, a rigorous monetarist à la George Osborne , though he is different from him in that he hasn't attended a top university and he has acquired some bizarre experience (e.g. a stint in Rwanda) that would seem to ill prepare him for the management of the Euro. Alas he's got the support of dear Angela Merkel and since he runs the biggest central bank in the Euro-zone he can force the European Central Bank to follow his diktats.
|Dr. Jens Weidmann, President of the Deutsche Bundesbank|
You can't blame them. And on the blogosphere (take a peak at the articles listed below), the panic is spreading like wildfire.
Mr. Weidmann, is that what you want? Don't you realize that every time you impose austerity and unfair taxes on Euro-zone members that you deem deviant, you are punching holes in the Euro boat? Your demands have caused a depression in Greece the likes of which Greeks had never experienced in their lifetime. And now it's the turn of Italy because your friend Mario Monti dutifully followed your recipes to the applause of European politicians that understand nothing about economics. Italy is under water, unemployment hasn't been this high in a decade, businesses are failing, even the real estate market that had escaped a Spanish style inflationary bubble is collapsing, with sales volume down by 30%, the lowest level since 1985.
And we are not speaking of Cyprus here, but of the third larges economy in the Euro-zone, after Germany and France.
Mr. Weidmann, the Euro boat is sinking but remember you're on it too. You may be at the helm, but the boat is sinking, is that what you really want? This morning, as I write, the markets are set to react and I don't think anyone will like what they see.
BREAKING NEWS: The Cyprus parliament just voted against the Bank Deposit tax (March 19). Click here for the New York Times article on the subject.