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Cyprus: Is the Precedent Worth $7.25B?

posted by Adam Levitin

Stepping back from the Cyprus bail-in, I'm wondering if it is penny-wise, pound-foolish. The depositor tax is only supposed to raise about $7.25 billion (5.8 billion Euros).  Given the risks created by a bailout being rejected and the risk of runs created in other countries, does it really make sense to demand the depositor tax?  $7.25 billion seems like a really cheap price for avoiding the problems that the Cyprus depositor tax is making. Indeed, in the big picture, the whole Cyprus bailout package is only around $23 billion.  It makes me wonder why the EU doesn't just lump the whole thing.  (Easy for me to say when I'm not paying...)

There is, of course, a strong equity argument for parallel treatment of all bailed-out countries, and that suggests that Cyprus should have to pay like any other country. But that argument cuts both ways:  it means no freebies, but it also means just austerity measures, rather than a bail-in. 

Comments

I don't understand how it works at all. If you take 10% of depositors' money to bail out the bank and then >10% of your depositors flee your bank then how did you help the bank? Do they really believe that anyone will want to use their banks next week?

The establishment of tax havens and monetary pirate coves such as Cyprus and Cayman Islands, Hong Kong etc cannot be encouraged by extra-territorial subsidies. It is irrational for the governments and taxpayers whose taxes and legal limitations/regulations are being evaded to be asked to contribute to a fund to prop up the criminal haven.

Lets not forget that there must be an incremental benefit to remain in a civilized society with rules and regulation and the cost of administration and the stability it offers must be borne by those benefitted. In the case of Cyprus the foreign depositors want the benefits without the cost--dont we all. Free riders cannot be supported--the cost must be borne somehow. If not by taxes in real time--then by increased risk of loss later.

There is no way that civilization can be maintained if all people with savings move them into pirate havens and evaded taxes. Leave it to average wage earners to foot the bills at home and then if there is a problem --expect the little guys to bail out the big ones. That may work fot NYC financiers but it is irrational and must stop. The best way to decouple the bailout of pirates from govt support is to let those banks fail completely and let the govt pay the deposit insurance and ask the EU partners to bail out only the Cyprus insured amounts. Its the only result that properly allocates economic costs.

Except all you're doing here is parroting back things that are not entirely true... "dirty Russian money," "tax evaders," blah blah blah

Germany scored lower than Cyprus did in an audit of financial institution compliance with anti money-laundering practices.

There is more involved in the Cyprus situation than meets the eye, from German domestic politics to German-Russian geopolitical sharp elbows.

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