Monday, March 18, 2013

Look at the Security Camera…Smile and Say ‘Feta’: Cypriot Bank Robbers?

Someone on Cyprus had a brilliant idea to bail out their banking system: to impose a tax on bank accounts. If you have less than €100,000, they want to tax the account 6.75%. If you have over €100,000, the tax would be 9.9%. So, in effect, you now have the Cypriot government proposing to rob bank accounts. It is impressive: no scrawled notes, no guns, no panic. Just good old-fashioned theft.

How well will this work? Well, if I had a Cyprus bank account (I don’t), I’d take all of my money out of the bank. The Russian depositors, as well as the Cypriots, will probably do the same. I’d also imagine if I had a Greek, Italian, or Spanish bank account, I’d do the same. It seems pretty illogical to me to try to solve a banking crisis by creating one. But heck, who am I to question the wisdom of the Euro Zone Finance Ministers?

Now, to be sure, Cyprus is a small country. I’ll bet a lot of you don’t know where it is, or what the capital is (Nicosia). According to the CIA Fact Book (the name of which seems like an oxymoron), the GDP of Cyprus is $25B USD. In the Forbes list of the world’s billionaires (otherwise known as Paris Hilton’s date prospect list), there are a lot of Russian billionaires (I counted 101). The top 10 have a net worth of around $160B. So these guys could buy Cyprus, and then rob their own banks of their own money.

Kidding aside, the notion of a tax on bank deposits is a bad idea. It encourages a run on banks, and further encourages a flee to safety. Watch Cyprus, for that domino may indicate what is to come. By the way, what got Cyprus into this trouble is the normal Mediterranean custom of borrowing and spending too much money. Cyprus is not a poor country: it has a very high GDP per capita ($30,571 in 2011). But Cyprus has a load of debt: public debt is 84% of GDP, and it had a deficit of €1.132 B, or 6.3% of GDP. Those profligate Cypriots should look to the US, the paragon of financial virtue. The US has debt of 107% of GDP and a deficit of 6.8% of GDP. Wait…that doesn’t sound so good. But don’t worry, Washington will fix it…

Smile for the camera, and say 'Tupí!'