Monday, 18 March 2013

Cyprus: Bank levy is act of war

Today in Cyprus the banks are closed, their websites are down, and the government is trying to push an Act through the national assembly which will confiscate 9.9% of almost all bank cash deposits above €100,000 and 6.7% of all bank deposits less than that. This "levy" is being referred to as a tax and so will not trigger statutory compensation although the losers will be given some bank equity of only notional value by way of mollification.

All bank accounts would be affected, except those belonging to Greek citizens. However the UK government has said it will compensate the 3,500 British soldiers on the island, and also the small number of diplomats. But the 25,000 ordinary Brits who live full time in Cyprus will get nothing.

The levy has been forced on the government by the EU and the IMF as a condition of receiving a €10bn loan so they can make their existing debt interest payments. (Borrowing to pay the interest on your existing debt is a terminal condition!) Making the ordinary Cypriot in the street feel some financial pain is mainly about appeasing German voters - there are major elections in Germany later this year and the Germans are fed up of subsidizing the Mediterranean members of the EU.

Exempting Greek citizens is simply to avoid the Greek army moving in and shooting everyone.

It is by no means certain that the measure will be passed. The government has 20 members in the 56 member Assembly. A lot of arm twisting must happen today.

There is an undercurrent of xenophobia in these proposals. The big deposits in Cypriot banks are owned by the Russian mafia. The second biggest chunk belongs to British ex-pats who have retired to the sun and have their pensions paid into a local bank for convenience. The German and the Cypriot governments are hoping to penalise these 'foreigners' - in fact the original German proposal was to exempt all accounts under €100,000 - which would pretty much exempt all Cypriots. However that would mean a much higher levy on the big accounts (the aim is to raise €5bn from the cash grab) and it looks like for some reason the members of the government were not keen on that.

Although this snatch is presented as a "tax", it clearly is not. The whole point of a tax regime is that you know what you are getting into upfront. You can see the rules and decide whether you want in or not. Closing the banks for a long weekend while you scalp bank accounts is not a lawful tax; it's a raid.

It is unlikely to be lawful under European law to dispossess people of their property in this way. Certainly treating citizens of one EU nation (Greece) more advantageously than citizens of the other EU nations is highly illegal. And when British citizens are dispossessed in this way it is effectively an Act of War. The UK already has a strong military presence on the island and a less spineless British government would already have made it abundantly clear to the Cypriot government that any attempt to seize the assets of British citizens would result in punitive military action. The Cypriots are not so stupid as to attempt to seize assets from Greeks - they know what would happen, but it seems the British government can be walked over with impunity.

It course it may not happen. The law may not pass. But one thing is now certain - there is going to be a run on the Cypriot banks. Money will be leaving as soon as they are open for business. A lot of it will be coming to London. The local politicians must be close to insane. As soon as the levy was mooted they made it certain there would be a bank run. No bank levy has ever been a good idea or solved any economic problem. Argentina did something similar two decades ago and still they have not recovered. They won't recover in living memory. No-one will ever trust them and after this no-one is ever going to trust Cyprus. The very best the local government can hope for is that it is more of a bank jog than a bank sprint and not too many of them are killed in the rioting.

Meanwhile Cameron and Osborne should grow a backbone fast.

BBC link

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