The tax on deposits in Cyprus – especially the tax on “insured” deposits -sends very bad messages.
1. It telegraphs how tone deaf Merkel-Asmussen really are. Does it make any sense to to spook bank depositors-assurances to the contrary notwithwithstanding-in a Eurozone full of shakey banks, especially in Greece, Spain and Italy? It is easy to start a bank run. It is hard to stop one.
2.Including “insured deposits” in a 10b euro Cyprus bank bailout funded and enforced by the Eurozone/Germany (9b.) and the IMF (1b.) reveals either a serious lapse of judgement or downright stupidity among Eurozone finance ministers and central bankers. Cyprus joined the Eurozone in 2008-bad enough timing to take on a country , however small, not remotely qualified to join a German-dominated currency union- and it’s banks attracted substantial deposits from small savers and Russians who like the convenience of a place to park cash.
The outrage among Cypriot bank depositors is understandable. After having been enticed to move funds into banks- distrusted by many in Cyprus- they now are taxed , via a pre emptive electronic transfer of funds out of their accounts equal to 6.75 percent of their deposits. The size of the tax, endorsed by Eurozone officials and the IMF, could have been 100 percent. So much for generating trust in modern financial institutions in the ”new” Europe.
Any tax on deposits, including large Russian depositors, is a bad idea as it risks triggering a run on more shakey banks, including some large ones in Italy , Spain and Portugal. And runs there would trigger runs on sounder banks , even in Germany. That in turn would trigger runs on US banks.
3. A spread of the Cyprus bank run to Europe and beyond, will very probably be pre emptied by reassurances and plenty of liquidity from the ECB , the Fed and any other concerned central banks. But why, we must ask the Eurozone-IMF Bailout- Meisters, scare depositors at the very time when they should be reassured that there is some safe place to store assets in a very risky world? If you want depositors to take on the risks borne by supposedly more sophisticated investors in bank bonds and equities, why mislead unsophisticated depositors with deposit insurance. That is fraud, plain and simple.