Home—Blog—The Cypriot wealth grab is nothing new
Mar 18, 2013, 08:53
Posted byMerryn Somerset Webb
Comments (36)
Nasty news from Cyprus over the weekend. The details are still unconfirmed and the rates may change, but it looks like savers are about to have anything from up to 10% (limits are still being discussed) of their savings removed from their bank accounts to help with the bail-out of those same banks.
The plan was thought up by the IMF and the EU and is to be applied to all funds – there is no protection for very small depositors. You might think this odd given that the EU is also supposed to guarantee deposits of up to €100,000. But as this is a tax (or perhaps an enforced purchase of worthless bank shares) rather than a loss, that rule doesn’t seem to apply.
This won’t come as much of a surprise to those who have been following our writings about repression and capital controls over the last few years – see in particular the end of this interview with Russell Napier. But it doesn’t make it any less shocking – or for that matter, crazy.
We will find out today just how depositors in the rest of the peripheral eurozone countries react, but it is hard to imagine anything except for further capital flight (to the extent capital controls allow this). But an acceleration in funds fleeing the likes of Portugal might not be the end of it.
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Napier also notes that the move in Cyprus might have some impact on whether Greece decides to stay in the euro or not – “If arbitrary appropriations of wealth imposed from Brussels are part of being in the euro, then supporters of the euro will think twice.”
That’s particularly the case given that all Europeans are clearly not considered equal – other banks have been bailed out without depositors paying the price. More on this here.
You probably think this kind of arbitrary and unfair wealth tax can't be implemented without warning in the UK. If so, you might want to remember that anyone saving in the UK has lost at least 10% of the real value of their capital over the last few years – with inflation running at 3% plus and interest rates at their lowest since 1694, it has long been impossible for any of us to maintain our purchasing power after inflation and tax.
The cost of living has risen four times faster than earnings (let alone interest payments) over the last five years. We looked at this kind of old fashioned financial repression in the UK a few months ago and also noted at the time that, while simply nicking money from savers via a mix of high inflation and low interest rates might well work for the UK, the risk of much more explicit repression here and elsewhere was high.
It is about to happen more explicitly in Cyprus than here, but the key points to remember are that it is happening one way or another all over the West and that it is going to continue to. Why? Because someone has to pay off the debts that the banks and governments have built up over the last few years.
Ignore book-keeping tricks, says Liam Halligan, and the UK government borrowed £99bn in the current fiscal year to the end of January alone – and governments see ongoing repression as the easiest way to make this happen.
• Just for interest, here is a letter (found on Twitter) to the US Fed in 1941 asking about the wisdom of taxing bank deposits – and the Fed’s reply.
• There is one relatively obvious beneficiary of all this – the US dollar. Say what you like about America, but in general, we all think of it as being a place where property rights are respected. That’s clearly no longer the case in Europe. That has to be bad for the euro and good for the dollar.
Published in Blog More articles by Merryn Somerset Webb
May 16, 2013
By Matthew Partridge, May 13, 2013
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(18 March 2013, 10:03AM) Complain about this comment
Financial repression is a rotten way of getting people who live within their means to pay for those who don't but we have a chance to decide where we put our money. Seizing deposits at the bank changes the nature of the financial system and, now, we cannot trust our governments or the IMF and World Bank to look after the interests of the citizen. I think it's a real game changer.Where are the bondholders? Do they lose anything? And what is the point in saving a banking system that dips into deposit accounts when it, or its government, is short of cash. I think we are near the time where we have to let the whole rotten thing go, when the survival of the financial system takes priority over the people it was put there to serve. If the banks are going to default on the little guy, the taxpayer should stop bankrolling them to honour debts to the big guy and default sooner, rather than later.
(18 March 2013, 10:24AM) Complain about this comment
I have always lived within my means and saved money every month into the bank. This money grab seems to reward those that have leveraged themselves up with debt, punishing those that have not.Perhaps I should draw my money out and leverage up and buy a second and third property.
(18 March 2013, 10:41AM) Complain about this comment
Living in Europe and seeing this, makes me think, any money that one has DOES NOT GO INTO THE BANKS, it stays away from the banks, if the ECB, IMF etc can cheat by the small print on the contract to small savers, then the whole confidence in EU banks melts away. I can not believe that supposedly competent individuals, have made such a collosal error, and undermined the systems credibility.Big people, big money, take risks, but for the small people, who take most of the brunt of unemployment, lower social provisions, it is the straw that breaks the back of the EU. Since 2007, the EU has rolled from crises to crises. NO LEADERSHIP FROM GERMANY, it is bodged its way through. And now this. Countries would be better off to retreat and run their own countries again competently outside the EU. The EU was a great idea, ruined by POLITICIANS AND BANKERS.
(18 March 2013, 10:48AM) Complain about this comment
If the banks in Cyprus are bust as well as the government, then without an EU/German bailout they would be worthless and everybody would lose everything, so a 10% tax, and you keep the rest, seems like a bargain in the circumstances, especially as there are questions about where so much money came from, and why, in the first place.Perhaps the Turkish side of Cyprus could take over and run things!
(18 March 2013, 10:58AM) Complain about this comment
StephenMight "seem like a bargain" to the bulk of the taxpayers who don't keep money in the bank, not so much of a bargain for the savers.Did savers somehow cause this problem, or were they more responsible for the failure than - say - borrowers who took out a speculative massive loan to build blocks of flats (lots of those on Cyprus) ? Do those who are cash rich deserve to contribute more than those who are asset rich/cash poor ?Anyway I look at this, it's simply a money grab of those in plain site, rather than any pretence at making those who are "to blame" or most able to pay contribute the most.Expect to see cash exiting banks in most dodgy EU countries (and that's a growing list)
(18 March 2013, 11:06AM) Complain about this comment
Hi Clive,What this illustrates is how in control of everyone the Germans are, super plan they have, but the real question here is - no bank, no money at all, accept the German plan and keep 90%, they have it sewn up.
(18 March 2013, 11:42AM) Complain about this comment
In the UK we had a chance to vote for the Referendum Party in 1997 to leave Europe. This was rejected by the voters. Now all we are left with is UKIP . Everyone knows that there will never be a UK referendum on EU membership again (see previous broken political promises).Well who feels sorry for themselves now then? Everyone bleating about the possibility of the financial theft happening elsewhere. My Bradford & Bingley shares were stolen by the Government when it was nationalised in 2008 and then given to Santander. There was no compensation thereby setting another precedent. Expect more of the same. Germany oppressed the Jews in the 1930s by stealing their money and the rest of the population was hood winked into investing in the Volkswagen….In recent history the Government of Zimbabwe has stolen the assets of the farmers and bankrupted the country…
(18 March 2013, 11:55AM) Complain about this comment
The way the banks were bailed out was completely wrong in the first place. The correct system is a simple one, When a bank becomes insolvent however briefly, that bank is then nationalised without compensation to the shareholders or bondholders. The government can then sort out quickly the bank's problems and refloat it to the benefit of taxpayers who took on the liability in the first place. With such a system overtight regulation becomes unneccessary because the sharehaolders and bondholders will be watching the bank's management like a hawk as they stand to lose everything if the bank becomes financially stretched. Simples.
(18 March 2013, 12:00PM) Complain about this comment
So, a couple of questions that are puzzling me:If Cyprus is not defaulting on it's bonds, then all those savers should be piling into bonds. Yes? After all, a sawn-off raid on savings accounts seems to be acceptable, but plain default is out of the question!If the UK were to do the same thing, should I be reaching for NS&I savings? After all, these plainly claim to be backed by HMG etc etc.
(18 March 2013, 12:05PM) Complain about this comment
The key issue is confidence. Eurozone citizens can no longer trust their governments or their Banks to keep their money safe from theft.Those outside the Eurozone will take note.My prediction is that this will give UKIP a massive boost in support, letting in Labour and Ed Balls as Chancellor. The fox let loose in the henhouse.It's a lose, lose situation for savers, together with a terminal loss of trust in paper money, banks and Governments.
(18 March 2013, 12:09PM) Complain about this comment
Hi StephenCan't disagree with you about the Germans. This "tax" will probably get through as the Germans have essentially put a gun to the head of the Cypriot goverment and most voters probably aren't big savers. Germans/Cypriot government can always claim those most affected are Russian gangsters laundering money (another issue entirely, why didn't that get spotted, if it's indeed true)Not going to help trust in governments/banks. If I had money in a Cypriot bank in the UK, I'd still withdraw it all on the basis they might change their minds !
(18 March 2013, 12:22PM) Complain about this comment
I totally disagree with the negative comments about Germany, you should be ashamed of yourselves and borders on racism. I am not German and have never been to Germany but this fiasco is not the fault of German citizens who work and save hard and pay high rates of taxes and retire relatively late in life, why on earth should they have to pay for other Countries mistakes? Its a pity the rest of Europe has not followed its example and we would now not be in the mess we are in. I also look forward to a referendum on membership of the EU, I am very pro Europe but am now struggling to understand what real benefits we get from membership.
(18 March 2013, 12:23PM) Complain about this comment
@9 ratty. I've been reading that the bondholders will be protected - a good deal of which are some fairly racy hedge funds. And sure, there seems to be some dirty Russian money in some of these accounts. But nobody is distinguishing them from the person saving for a deposit on a house etc.The IMF, apparently, wanted to take a great deal more than 6.75%/ 9.9%. Frankly, the IMF and the World Bank seem to have an unwholesome agenda that spells servitude to the majority of us. They have morphed into vultures in recent years.We really need to bring this whole 'too big to fail' mentality to an end and shut the doors on these insolvent institutions for good but we don't elect people with the courage to really represent their electorate.
(18 March 2013, 12:26PM) Complain about this comment
Buy bitcoins
(18 March 2013, 12:33PM) Complain about this comment
ritaI don't accept the charge of (near) racism re the comments about Germany. Imo, racism involves equating behaviour/attributes/actions to people based simply on their race.Be interested if you could show that Germany isn't the main driver of most of the EU actions with regard to defaults. If they are, and I believe that to be the case, that's not racism, that's a matter of record (those who have the money call the shots).As to why should Germany pay ? Indeed, but why should Cyprus be treated differently than any other country ?
(18 March 2013, 12:40PM) Complain about this comment
Don't forget that one of the biggest problems facing the Greeks was that nobody paid their taxes. So is the money in Cypriot bank accounts untaxed and so 'stolen' anyway, and the tax imposed simply fair recovery
(18 March 2013, 12:46PM) Complain about this comment
Bitcoins ultra volatile.Just buy (physical,not ETF or rubbish paper) gold and silver.As Merryn and the team have repeatedly pointed out, ALL fiat currencies have been devalued against precious metals since 9/11 and with QE to infinity,this trend likely to continue
(18 March 2013, 12:49PM) Complain about this comment
WHGPIf the Cypriot goverment suspected the money was untaxed in Greece, Russia, wherever, they should have sent details of the investments to the relevant home tax authorities rather than use it as an excuse to take money off ALL savers.
(18 March 2013, 01:37PM) Complain about this comment
@17 goldbug44. With the latest move from the ECB and the IMF, all bets are off. It doesn't matter where you are invested or how sound your fundamentals are. You, me, any of us can have any of our assets confiscated to bail out these gambling institutions - whose survival is being treated as the primary purposes of all governments and people. If Christine Lagarde wants your gold, she will have it. That is the message that is coming out of Cyprus.
(18 March 2013, 04:10PM) Complain about this comment
19 Ellen wrote :- "You, me, any of us can have any of our assets confiscated to bail out these gambling institutions"Not if my assets consist of Gold buried in my garden they can't. If governments continue to shaft citizens in this way, the only solution is to circumvent them by the only means available and more and more that begins to look like owning the yellow metal...
(18 March 2013, 04:12PM) Complain about this comment
Rewarding risk without punishment of failure is a long way from what the definition of capitalism is supposed to be.They've tried everything else, why don't they just let the bankrupt institutions fail?Or is that too simple?For sure there would be repercussions, but even the unforseen ones should be a far cry from the travesty they're proposing for Cyprus. It's one thing losing one's shirt to a backstreet card sharp, quite another having it shorn from within the supposedly safe confines of a bank.The game has taken an unexpected turn, a turn where our trust has been sacrificed at the altar of stupidity and one for whose benefit is unclear. Better no bail out than a price such as this.
(18 March 2013, 06:28PM) Complain about this comment
Cyprus sowed and now so she reaps. Cyprus has prostituted itself as the destination of choice for the Russian mafia. It has over 100,000 wealthy Russians hiding out there at any one time. The Germans are totally correct not to bail out these tax dodgers and villains. Dipping into their bank accounts is a brilliant idea. It proves my point. Die in debt and you make a profit out of life. Try to save and the disingenuous toffs will rip it from you at the first hint of a problem. Uncle Boris Johnson only last weekend suggested a 30% flat tax to save the toffs millions and put the burden on the little folk. Cyprus is corrupt, and bankrupt it scans nicely. The EU may wish to consider selling it to Turkey to clear the debt.
(18 March 2013, 09:09PM) Complain about this comment
As a commentator elsewhere has observed, if one had £100,000 in a UK bank in January 2007 it would have been worth 150,000 euros. Today, thanks to the Coalition Government's toxic mix of high inflation, financial repression, near zero-interest rates, and ballooning debt, that same sum is worth closer to 112,000 Euros. By contrast, the man with 150,000 euros in his Cypriot bank in 2007 would find that today, even with this tax, he still has 135,000 euros.Who has suffered more, the euroland saver, or the British saver?Before having to endure all the usual tedious bleating about the EU or the Germans, we need to take a long, hard look in our own back yard at our own rotten government and economy.
(18 March 2013, 09:25PM) Complain about this comment
I can understand the shock, I too was surprised, but surely this is a lot better and more honest than taking peoples savings through inflation and currency devaluation. Think about this ... Sterling has lost about 23% against the euro in the last 10 years or so, if a Cypriot takes a 7% haircut on his savings he or she is still miles ahead of someone living here.Not to mention all the assets that superior purchasing power could have bought (gold, foreign real estate, etc) in the interim. which will not be taxed!Long story short, if you don't' know the government, banks, IMF, ECB, etc can't be trusted, shame on you!
(19 March 2013, 10:50AM) Complain about this comment
100,000 Russians in Cyprus and twice that number in London. Makes one think!
(19 March 2013, 10:58AM) Complain about this comment
I agree that creating inflation (including supporting increases of prices by utilities or monopolies like train/subway) with near zero interest rates through QE is a vicious way to take a cut on people savings, not very far from levying a one-off tax from savers' deposits.Inflation has however other "practical" advantages: you are pushing real wages down (beware of the bread line), and ... if anyone buys assets such as euros to protect their wealth, they will still be taxed on the "capital gains" they will have made in sterling. How wicked.
(19 March 2013, 04:59PM) Complain about this comment
#25 Vicsilk. Last census had 300,000 Russians in Greater London and up to 400,000 in the UK. The CoLC is a tax haven just like Cyprus. A safe place to launder the ill gotten gains.
(19 March 2013, 07:19PM) Complain about this comment
Had my hair cut at the Turkish barbers today. We had a titter over the plight of the Kypriot. The Turk thinks he should get to keep Cyprus now. He wants to keep the Russkis out of the Med'.Johnny Russian wants Cyprus as an aircraft carrier near to Lebanaon ,T'Egypt and Syria. It is proper, old fashioned 19th C politics,with the hilarious frisson of several ex-pat Brits duped into buying off-plan in a third world hell, just because some of the locals do English.
(20 March 2013, 07:50AM) Complain about this comment
The proposed UK "mansion tax" is almost identical to the bank deposit tax Cypriots are facing. The only differnece being a mansion tax would be a tax on your property assets rather than your bank balance. You wont be safe if youre home is worth under the proposed £2m threshold as the tax will most likely evolve to caputure all homes regardless of value.
(21 March 2013, 10:53AM) Complain about this comment
Cyprus is a tax haven. It has no other significant industry. The rest of the EU are not keen on bailing out banks that are basically a storage system for untaxed money. I wonder how keen we would be to bail out the Jersey or the Cayman Islands banks if they started to crack.
(21 March 2013, 02:53PM) Complain about this comment
UK appropriated only 10%? Tullett Prebon compiled an 'essentials' index and found that 'real' inflation was 8% in 2011 alone ...http://www.tullettprebon.com/announcements/strategyinsights/notes/2010/SIN20130220.pdf
(22 March 2013, 11:28AM) Complain about this comment
I live in Berlin.For those interested, the people here are also unhappy about the Euro. They're tired of bankrolling other's largesse, which if you have a look at who's backing up the ECB is what they're doing now.There are anti-euro political parties springing up here too and the way the electoral system is set up here they can gain a voice very quickly indeed. The UK electoral system marginalises everyone but the main two parties, not so here.https://en.wikipedia.org/wiki/Alternative_for_GermanyUnlike 99.999% of Brits, who are asleep at the wheel, Germans are both monetarily aware and politically active. This is why Merkel is taking (belatedly (and mistakenly)) a hard line with Cyprus.
(23 March 2013, 10:40AM) Complain about this comment
The Cypriot banks steals from bank depositors to maintain solvency.The British goventment steal from al taxpayers to maintain bank solvency.Which has the moral highgound?
(23 March 2013, 04:15PM) Complain about this comment
Yes, but the Germans have also benefited from a Euro that was too weak, much weaker than the DM was. So they have had it good at everyone else's expense too ... Blaming Greeks, Spaniards, italians, Irish etc. etc. for not changing when we gave them a carrot with no stick is non-sensical. Blame the politicians and bankers who *do* owe us some duty of care, massacre them at the polls and re-inforce our hard-won democratic rights. Blame ourselves for being apathetic. But lets be honest here.
(23 March 2013, 05:10PM) Complain about this comment
#34 Beta. The money is nearly all in Luxembourg, the rest is in Switzerland.
(24 March 2013, 01:56PM) Complain about this comment
The idea, as Marryn Somerset Webb professes in her blog, that it has been impossible to get returns on savings above the 3% inflation figure suggests very poor choice of savings. A quick check of savings offers from all of the major banks and building sociaties in the UK over the last few years shows that there were a great many scheme offering 6, 7 even 8+%.
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