While the Cyprus government may sequester this money (it’s not a tax), the consequences of doing this will be profound and may damage the very foundations this deal was aimed at creating.
In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit up to 9.9 percent of their deposits in return for a 10 billion euro ($13 billion) bailout to the island, which has been financially crippled by its exposure to neighboring Greece.
1. Who would leave their deposits in Cyprus, knowing that the greedy eurocrats could easily turn around and say ‘sorry, that didn’t work!’ we need more?
2. Capital outflows will massively erode the foundations of these banks themselves. It’s hard to believe new capital would enter Cyprus when the govt. has shown its eagerness to levy this. If I were an oligarch, euro-expat, or whatever, I would certainly cross Cyprus off my list of favored tax havens.
3. If the locals withdraw their cash, the foreigners remit their cash away, and new deposits dry up, it’s hard to see how those banks will survive anyway. How can they not breach their capital ratios? How can they not be insolvent?
Lastly, the threat of contagion may be minimized for the moment by the hints that this is not going to be repeated. But who can’t forget the admonitions of the prime ministers of Ireland, Portugal, Spain & Greece that they didn’t need bailouts. Really they didn’t. Honest, guv. Let’s count how many times this is denied as well.