Bank runs are generally discouraged by governments. The idea of long lines of people lining up outside financial institutions to suddenly withdraw money tends to destabilize banks, economies and sometimes even entire nations.
So the decision by the Republic of Cyprus this past weekend to take a sizeable portion of bank depositors’ money to help recapitalize the nation’s banks seems shortsighted at best.
Cypriots will have to hand over up to 9.9 percent of their deposits, part of a deal worked out with the EU and International Monetary Fund that would see the latter two organizations pump more than 4 billion euros into the nation.
Fearing bank runs, the Greek Cypriot cabinet is seeking to extend Monday’s state-mandated bank holiday through Tuesday, even though the European Central Bank has said it will offer unlimited liquidity to banks that experience deposit flight, according to the Wall Street Journal.
Under terms of the plan, the Cyprus government would impose 9.9 percent “stability levy” on deposits larger than 100,000 Euros and a 6.75 percent levy on deposits smaller than that, the publication added.
The rather stunning move comes as a result of the exposure of Cypriot banks to the Greek government debt crisis, the downgrading of the Greek Cypriot economy to junk status by international rating agencies and the inability of the government to cut state expenses.
Without a bailout, Cyprus would default and threaten to unravel investor confidence in the eurozone, a renewed confidence fostered by the European Central Bank’s promise last year to do whatever it takes to support the euro, according to The Guardian.
Not surprisingly, many on Cyprus expressed anger over the move.
“They call Sicily the island of the mafia. It’s not Sicily, it’s Cyprus,” a pensioner told The Guardian. “This is theft, pure and simple.”
According to the plan, the Cypriot government will garner 5.8 billion euros from depositors, while the IMF will pitch in another billion euros and the European Stability Mechanism about 3.2 billion.
In return for emergency loans, Cyprus agreed to increase its corporate tax rate by 2.5 percentage points to 12.5 percent.
The move is expected to boost Cypriot revenues, limiting the size of the loan needed from the eurozone and keep down public debt.
No word on what it will take to restore Cypriot citizens’ faith in their financial sector and government, however.
(Above: Depositors seek to withdraw money from ATMs in Nicosia, Cyprus. Photo credit: Agence France-Press.)