Matt HealeyTuesday,19 March 2013

The Snap:

I was reading The New York Times this past weekend and came across this article: “Cypriot Bailout Sends Shivers Throughout the Euro Zone.” The basic point of the article is the European Union has levied a tax on bank deposits held by Cypriot banks effective Tuesday. This is the first time in the EU crisis that depositors will be forced to take losses to fund a bank bailout.

The Download:

Bailouts are always a difficult thing. Inevitably people who did nothing wrong will be hurt. In non-financial bailouts, like the U.S. auto industry bailout of 2008, the shareholders of GM were wiped out. It is likely that these shareholders did not directly contribute to the failure of GM. However they also knew, as any investor should know, that there is a chance the company you invest in could go bankrupt and you will lose your entire investment. If you question that premise, talk to the investors in The same thing happened to the investors in Lehman Brothers, Bear Sterns, AIG, Washington Mutual, and several others.

But this situation is different. The EU is not simply wiping out the investors. They are going after the customers by taxing depositors. Granted, one of the reasons the EU feels that this is justified is because the Cyprus banking system is generally considered one of the money laundering centers for Russian crime syndicates. However, they are not simply taxing high value deposits, they are taxing everyone — including the small customers that have a few thousand euros. This attacks one of the fundamental premises of the banking industry — your deposits are safe. This protection was put in place after the runs on the banks in the early 1930s. Consumers need to have confidence that money they put in the banks will be safe even if the bank goes bankrupt. By taking this action, the EU has signaled to all of Europe that they should not keep their money in European banks. The problem is that the banking system is not that strong and even a small flight of capital could have significant impacts. I am not sure this will happen, but personally, based on this decision, I would close any account I had in a European bank if I lived in Europe.

Hat Tips:

Cyprus Bank Bailout, Banks that failed, Cyprus Money Laundering, Cyprus Money Laundering 2, Image Credit: Flickr

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  1. […] week I was very critical of the proposed bailout plan for Cypriot banks. Turns out the rest if the world was also critical, and Cyprus ended up backing down and coming up […]

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