Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

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Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby LaserGuy » Mon Mar 18, 2013 5:12 am UTC

The government of the small island nation of Cyprus will be debating a one-time bank deposit tax of 6.75% on all national accounts with balances under 100,000 euros and 10% on accounts of over 100,000 euros. This would be in exchange for a 13 billion euro bailout by the European central bank. Depositors were frantically trying to withdraw as much of their saving as they could on Saturday, and the government is worried about a full-fledged bank run on Tuesday when the banks reopen (Monday is a holiday). The government insists lost deposits will be eventually repaid in government bonds.

From Huffington Post.

Spoiler:
NICOSIA, Cyprus -- Cyprus' president said Sunday that he is trying to amend a key provision of an unpopular eurozone bailout plan that would tax deposits in the country's banks to reduce its effect on small savers.

But in a nationally televised speech, President Nicos Anastasiades also urged lawmakers to approve the tax in a vote Monday, saying it is essential to save the country from bankruptcy.

About 25 lawmakers from the communist-rooted AKEL party, the socialist EDEK and the Greens said they won't vote for the tax in the 56-seat Cypriot parliament amid deep resentment over a move some called disastrous. If Parliament rejects the tax, that would put the entire aid package in jeopardy.

The vote was initially set for Sunday but was postponed until Monday – a national holiday in Cyprus. On Saturday frightened savers rushed to automated teller machines to withdraw as much of their cash as they could. Cypriot officials have expressed fears of a fully-fledged bank run once lenders reopen their doors on Tuesday.

The announcement of the vote postponement set off an immediate scramble among top European financial officials. One lawmaker told The Associated Press that European Central Bank was pressuring Cypriot authorities to hold the vote without delay.

"I completely share the unpleasant sentiment that this difficult and onerous decision has caused," Anastasiades said. "That's why I continue to give battle so that the decisions of the eurozone are amended in the next hours to limit the effect on small depositors."

In exchange for (EURO)10 billion ($13 billion) in rescue money, creditors would impose a one-time tax of 6.75 percent on all bank deposits under (EURO)100,000 ($131,000) and 9.9 percent over that amount.

A senior government official said it wants to reduce the tax on bank deposits under (EURO)100,000, with a corresponding increase in the tax on deposits over that amount. The official spoke on condition of anonymity because of the sensitivity of the talks.

The deposit tax is part of a bailout agreement reached early Saturday after talks by finance ministers from euro countries and representatives of the International Monetary Fund and the European Central Bank.

The Cypriot bailout follows those for Greece, Portugal, Ireland and the Spanish banking sector, and it is the first one that dips into people's savings to finance a bailout. Analysts worry the move could roil international markets and jeopardize Europe's fragile economies.

Officials in Spain and Italy tried over the weekend to reassure their citizens by saying the situation in Cyprus is unique, and that bank deposits in their countries will remain safe.

In Cyprus, the levy – which also would hit wealthy Russian depositors who have put vast sums into Cyprus's banks in recent years – is expected to raise (EURO)5.8 billion to recapitalize the nation's banks and service the country's debt.

Cypriot banks got into trouble after losing some (EURO)4.5 billion on their Greek government bond holdings after eurozone leaders decided to write down Greece's debt last year.

Anastasiades didn't provide any specifics on what he would do to try to limit the pain on small depositors, but he explained why he decided to consent to the taxes. Anastasiades, who only assumed the Cypriot presidency on March 1st, had vehemently rejected any idea of going after deposits to help pay for a bailout during the campaign and after his election.

"The solution that we have reached is certainly not the one we wanted, but it is the least painful under the circumstances because above all it leaves the management of our economy in our own hands," Anastasiades said Sunday.

He said the tax would only be as much as the interest collected on deposits over two years and stressed that it would only happen once because it would ensure the bailout wouldn't push the country's debt to unsustainable levels.

Anastasiades said savers would be compensated with bank shares. Moreover, all those depositors who opt to keep their money in Cypriot banks for at least two years would receive government bonds with a value equal to their losses. The bonds will be backed up by future revenue generated from the country's newfound offshore gas deposits.

He said pension and provident funds will remain untouched, and there won't be any need for further salary and pension cuts, or an earlier demand by creditors for a financial transaction tax, which would have damaged Cyprus' financial services-driven economy.

Cypriot lawmakers have already approved a raft of cuts to government worker salaries and pensions as well as tax increases under a preliminary bailout deal.

The Cypriot president said if he hadn't accepted the tax on bank deposits, the European Central Bank would have stopped providing emergency funds to the country's top two lenders which would have led to the collapse of the banking system, the bankruptcy of thousands of small businesses, massive job losses, and ultimately the country's exit from the euro.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Ormurinn » Mon Mar 18, 2013 10:04 am UTC

I'm not one of those libertarians who believe all tax is necessarily theft.

That said, a "one time bank deposit tax"... is basically theft. The "taxes are user fees for civillisation" argument doesn't hold up when you're also taking from the deposits of people who aren't even resident in the country.

Shitty move Cyprus - and Germany, who are the muscle behind the decision. On the upside there's been talk of this move violating the ECHR, so for once it's doing something useful.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby firechicago » Mon Mar 18, 2013 11:52 am UTC

Ormurinn wrote:The "taxes are user fees for civillisation" argument doesn't hold up when you're also taking from the deposits of people who aren't even resident in the country.


If you have an account at a Cypriot bank, you are benefiting from the Cypriot government and institutions, particularly their managing of their financial system. You don't need to live on Cyprus to benefit from your bank not failing and taking all of your money with it.

Which is not to defend this particular tax, which is idiotic because it destroys the very confidence in the Cypriot financial system that it's supposed to save.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby elasto » Mon Mar 18, 2013 1:38 pm UTC

Note sure I buy it, but this is the explanation according to the BBC's Robert Peston:

A well-placed official rings to tell me why investors should not be panicking that the punishment of Cypriot depositors is a precedent, or that lenders to Spanish and Italian banks will be spanked as well before too long. He says the structure of the Cypriot bailout has been determined by German politics. (Aren't all eurozone bailouts fixed in that way?)

Here is the logic behind imposing a hefty levy on Cyprus deposits, according to this official:

1) Regulators and politicians are convinced that a vast amount of cash in Cypriot banks belongs to Russian money launderers.
2) Few German politicians of any persuasion would have voted for a Cyprus rescue that simultaneously rescued these launderers.
3) So the only way to get the bailout through the Bundestag is for the launderers to be taxed to the tune of almost 10% of their allegedly ill-gotten cash. And if innocent savers are hurt too, that is the way this particular "Keks" will crumble.

On that analysis, private sector lenders either to Spanish banks or to the Italian government - as two topical and relevant examples - need not fear that it is their turn next to take a write-off.

That may be seen as comforting by investors, up to a point. Except that if we are to see the Cypriot rescue as a very public statement that "hot money", which might be deemed to be laundered, has no place in the eurozone, then this money may well be withdrawn from wherever it sits in the currency union.

And although that might be a great thing from the point of view of the ethical standing of the banking system, it is never nice or easy for any bank to see a vast amount of cash walking out the door - especially since, as I mentioned earlier, that can increase its dependence on emergency replacement finance from the European Central Bank.

Cash does not know where it comes from. But it is a toss-up for any bank whether it is preferable to be kept alive by laundered cash or cash lent by the state via a central bank. Being dependent on either source is not a sign of health.


link

Also, this 'tax' happens relatively often, just disguised. I've lost almost 10% of the value of my UK savings through currency movements since the beginning of the year - about the same as these guys. Savers are the ones bearing the brunt of this bailout because they are the only ones with any money*! Whether the money is taken from savers directly or by stealth it makes very little difference in practice. It just feels worse is all.


(*Obviously the rich and super-rich have money too - but they can hide it better than the ordinary saver can...)

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby HungryHobo » Mon Mar 18, 2013 2:09 pm UTC

"The government insists lost deposits will be eventually repaid in government bonds."

??? I haven't heard this bit before. are people actually getting government bonds in exchange?

opposite of a compulsory purchase? a compulsory sale, of bonds?
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby kiklion » Mon Mar 18, 2013 3:32 pm UTC

elasto wrote:Note sure I buy it, but this is the explanation according to the BBC's Robert Peston:

A well-placed official rings to tell me why investors should not be panicking that the punishment of Cypriot depositors is a precedent, or that lenders to Spanish and Italian banks will be spanked as well before too long. He says the structure of the Cypriot bailout has been determined by German politics. (Aren't all eurozone bailouts fixed in that way?)

Here is the logic behind imposing a hefty levy on Cyprus deposits, according to this official:

1) Regulators and politicians are convinced that a vast amount of cash in Cypriot banks belongs to Russian money launderers.
2) Few German politicians of any persuasion would have voted for a Cyprus rescue that simultaneously rescued these launderers.
3) So the only way to get the bailout through the Bundestag is for the launderers to be taxed to the tune of almost 10% of their allegedly ill-gotten cash. And if innocent savers are hurt too, that is the way this particular "Keks" will crumble.

On that analysis, private sector lenders either to Spanish banks or to the Italian government - as two topical and relevant examples - need not fear that it is their turn next to take a write-off.

That may be seen as comforting by investors, up to a point. Except that if we are to see the Cypriot rescue as a very public statement that "hot money", which might be deemed to be laundered, has no place in the eurozone, then this money may well be withdrawn from wherever it sits in the currency union.

And although that might be a great thing from the point of view of the ethical standing of the banking system, it is never nice or easy for any bank to see a vast amount of cash walking out the door - especially since, as I mentioned earlier, that can increase its dependence on emergency replacement finance from the European Central Bank.

Cash does not know where it comes from. But it is a toss-up for any bank whether it is preferable to be kept alive by laundered cash or cash lent by the state via a central bank. Being dependent on either source is not a sign of health.


link

Also, this 'tax' happens relatively often, just disguised. I've lost almost 10% of the value of my UK savings through currency movements since the beginning of the year - about the same as these guys. Savers are the ones bearing the brunt of this bailout because they are the only ones with any money*! Whether the money is taken from savers directly or by stealth it makes very little difference in practice. It just feels worse is all.


(*Obviously the rich and super-rich have money too - but they can hide it better than the ordinary saver can...)


Are you talking about inflation? That is slightly different as it affects everyone, not just those with money in a bank, and it rewards those with debt. If you keep your money under a mattress or in a bank, inflation has the same effect on it.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby firechicago » Mon Mar 18, 2013 5:16 pm UTC

elasto wrote:Also, this 'tax' happens relatively often, just disguised. I've lost almost 10% of the value of my UK savings through currency movements since the beginning of the year - about the same as these guys. Savers are the ones bearing the brunt of this bailout because they are the only ones with any money*! Whether the money is taken from savers directly or by stealth it makes very little difference in practice. It just feels worse is all.

But a currency shift against you doesn't necessarily make you less able to buy goods and services in your own country. Sure your savings are worth 10% less compared to the world market, but the prices of all the GBP denominated goods that you buy also just got 10% cheaper by that yardstick, so unless you're spending most of your money outside of the UK, you're not much worse off.

Now the currency move could also cause inflation, but as others have pointed out, inflation isn't really the same thing, because it doesn't directly destroy the credibility of the banks. And the mechanism driving the inflation would be some combination of increased prices for imported goods (making domestic goods more competitive) and foreigners rushing in to buy your newly cheap goods, both of which are relatively good problems to have.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby ertdfg » Mon Mar 18, 2013 6:25 pm UTC

So let me see if I get this.

1) Cyprus run deposit insurance by their government, like the FDIC here. In their case to 100,000 Euros.

2) Cyprus decides rather than meeting their agreed legal obligation; they'll violate their own insurance and steal 7% from every account they claimed they would insure (holding less than 100,000 Euros).

3) This leads to a lack of confidence in both banks and any government claims or promises; even legally written ones like their bank deposit insurance.

So a Government has decided that violating their legal obligations in favor of robbing people and destroying any faith or credibility in their their banking system or their government will be a net benefit?

How close do you have to be to disaster that you'd rush it along and guarantee you get the blame when it crashes for a quick payout now?

They must think they're days maybe weeks from collapse so they might as well grab what they can before it fails. That's the only way this looks even remotely rational.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Diadem » Mon Mar 18, 2013 7:01 pm UTC

ertdfg wrote:2) Cyprus decides rather than meeting their agreed legal obligation; they'll violate their own insurance and steal 7% from every account they claimed they would insure (holding less than 100,000 Euros).
(...)
So a Government has decided that violating their legal obligations in favor of robbing people and destroying any faith or credibility in their their banking system or their government will be a net benefit?

Yes, a special one-time tax as a desperate measure to save your crashing economy is exactly like robbery.

They should have done the right thing and let their entire economy collapse! Then instead of keeping 92.5% of their savings, everybody would have kept 0% of their savings. That would have been a far better solution!
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby beojan » Mon Mar 18, 2013 7:18 pm UTC

Well, they could, if it's not so already, legislate to give savers primary priority when a bank becomes bankrupt, then let the banks that fail fail, and use an ECB bailout to pay out deposit insurance claims, and run the government.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby LaserGuy » Mon Mar 18, 2013 7:20 pm UTC

Diadem wrote:
ertdfg wrote:2) Cyprus decides rather than meeting their agreed legal obligation; they'll violate their own insurance and steal 7% from every account they claimed they would insure (holding less than 100,000 Euros).
(...)
So a Government has decided that violating their legal obligations in favor of robbing people and destroying any faith or credibility in their their banking system or their government will be a net benefit?

Yes, a special one-time tax as a desperate measure to save your crashing economy is exactly like robbery.

They should have done the right thing and let their entire economy collapse! Then instead of keeping 92.5% of their savings, everybody would have kept 0% of their savings. That would have been a far better solution!


I would think that undermining depositor insurance everywhere in the Eurozone will probably do a lot more damage than economic collapse of a country with an economy of some 20 billion dollars. If the EU wanted to insist on this somewhat insane option, you would think that they would have insisted that the tax only apply to uninsured deposits.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Tyndmyr » Mon Mar 18, 2013 8:44 pm UTC

Ormurinn wrote:I'm not one of those libertarians who believe all tax is necessarily theft.

That said, a "one time bank deposit tax"... is basically theft. The "taxes are user fees for civillisation" argument doesn't hold up when you're also taking from the deposits of people who aren't even resident in the country.

Shitty move Cyprus - and Germany, who are the muscle behind the decision. On the upside there's been talk of this move violating the ECHR, so for once it's doing something useful.


Well, yes. Also, it's very obviously a dumb move. People withdrawing money once you compromise the banking system is a very forseeable result. Causing runs on your banking system is not normally considered fiscally wise.

Diadem wrote:
ertdfg wrote:2) Cyprus decides rather than meeting their agreed legal obligation; they'll violate their own insurance and steal 7% from every account they claimed they would insure (holding less than 100,000 Euros).
(...)
So a Government has decided that violating their legal obligations in favor of robbing people and destroying any faith or credibility in their their banking system or their government will be a net benefit?

Yes, a special one-time tax as a desperate measure to save your crashing economy is exactly like robbery.

They should have done the right thing and let their entire economy collapse! Then instead of keeping 92.5% of their savings, everybody would have kept 0% of their savings. That would have been a far better solution!


Neither "let it collpase" or "announce a tax to cause the collapse" is the proper option. The proper option is to not let your banking system get into such a crappy state that those are the only two options.

I doubt very much that this bodes well for their economy, and this "fix" will likely do a great deal of harm to their economy.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby elasto » Tue Mar 19, 2013 2:06 am UTC

I agree that currency devaluation isn't exactly the same as this, but functionally it has a lot in common: In the UK, inflation is running at 4-5% per year and interest rates are about 0.5%, so anyone with money in a UK bank is losing it at about the same rate as these guys every eighteen months or so. If Cyprus could devalue, it'd be a better option all round (albeit still a crappy one), but it can't of course.

HungryHobo wrote:"The government insists lost deposits will be eventually repaid in government bonds."

??? I haven't heard this bit before. are people actually getting government bonds in exchange?

opposite of a compulsory purchase? a compulsory sale, of bonds?


Yes. The plan was for everyone to receive bonds in the bank as compensation for the levy - bonds which could be sold for cash once the economy recovered in however many years. Again, not unprecedented. It's rather like how many governments (ie. taxpayers - you and me) around the world have bailed out banks in exchange for shares in those banks, shares which they can sell once the economy has recovered. This is really just cutting out the middleman.

Anyhow, politically the plan seems dead in the water, in its current form at least. They are talking of only a 3% cash-for-shares levy for ordinary savers now, and it'll probably end up that only those with 100k+ in the bank are hit at all.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby folkhero » Tue Mar 19, 2013 6:54 am UTC

elasto wrote:I agree that currency devaluation isn't exactly the same as this, but functionally it has a lot in common: In the UK, inflation is running at 4-5% per year and interest rates are about 0.5%, so anyone with money in a UK bank is losing it at about the same rate as these guys every eighteen months or so. If Cyprus could devalue, it'd be a better option all round (albeit still a crappy one), but it can't of course.

The difference being that people in the UK are still .5% better off with their money in the bank than hidden in their mattress. You would be better off having money under your mattress than in a Cyprus bank, which undermines their banking system heavily, or so I would think.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby firechicago » Tue Mar 19, 2013 8:37 pm UTC


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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby EMTP » Tue Mar 19, 2013 9:06 pm UTC

Total assets of US banks are about $13 trillion, so a 10% tax on their assets would raise about $1.3 trillion. Might be attractive to deficit hawks, if there really is such a breed and not merely social-service-gutting chickens in borrowed plumage.

Ten percent at one go is quite a bit, but a small annual capital tax might be a good idea. We mostly have such taxes for property, but not for other assets. Since assets are concentrated even more heavily at the top of the pyramid than income, such a tax could be quite progressive. It might encourage investment be making it relatively less attractive to let wealth sit.

Of course, you would need to be mindful of not setting such a tax at a level that encourages the wealthy to seek citizenship elsewhere. It would help if the EU and the US agreed on a common rate -- the number of people willing to forgo citizenship in the US or Europe to avoid an asset tax would hopefully be small.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Iulus Cofield » Tue Mar 19, 2013 11:11 pm UTC

I remember reading in middle school about a medieval tax system that worked by periodically minting new coins and requiring people to exchange the old coins at a rate of 9 new coins for 10 old ones. I've occasionally wondered what kind of chaos that would wreak if applied to today's economy. I imagine there would be a lot of spending in the 24 hours leading up to the invalidation of the old currency and the mandatory exchange with the new.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Tyndmyr » Wed Mar 20, 2013 12:41 am UTC

EMTP wrote:Total assets of US banks are about $13 trillion, so a 10% tax on their assets would raise about $1.3 trillion. Might be attractive to deficit hawks, if there really is such a breed and not merely social-service-gutting chickens in borrowed plumage.


Uh, the point of the deficit hawks is to manage our long term fiscal future responsibly. Gutting our banking systems is the exact opposite of that.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby sardia » Wed Mar 20, 2013 12:51 am UTC

Tyndmyr wrote:
EMTP wrote:Total assets of US banks are about $13 trillion, so a 10% tax on their assets would raise about $1.3 trillion. Might be attractive to deficit hawks, if there really is such a breed and not merely social-service-gutting chickens in borrowed plumage.


Uh, the point of the deficit hawks is to manage our long term fiscal future responsibly. Gutting our banking systems is the exact opposite of that.

I like to add that deficit hawks don't exists, not the kind you're thinking of.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby EMTP » Wed Mar 20, 2013 1:21 am UTC

Tyndmyr wrote:
EMTP wrote:Total assets of US banks are about $13 trillion, so a 10% tax on their assets would raise about $1.3 trillion. Might be attractive to deficit hawks, if there really is such a breed and not merely social-service-gutting chickens in borrowed plumage.


Uh, the point of the deficit hawks is to manage our long term fiscal future responsibly. Gutting our banking systems is the exact opposite of that.


The point of being a deficit hawk is that you want to cut the deficit. Raising new revenue is one of two ways you can do that. The pathological hatred of taxation and outlandish fantasies of the economic horrors that follow therefrom ("Gutting our banking systems") is one way to identify the the SSG chickens from the rarer deficit-hawk breed.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Kulantan » Wed Mar 20, 2013 2:56 am UTC

I'm pretty sure that a deposit tax would cause major harm to confidence in the banking system. I wouldn't be surprised to see a large bank run with the money going to Switzerland and Mattressland depending on socioeconomic class. In fact I'm willing to bet that upwards of 20% of deposits in Cyprus will vanish when the bank holiday ends (I won't say instantly because there are most likely going to be restrictions on money movement). If a major bank run isn't "gutting the banking system" I not 100% on what would be.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby jareds » Wed Mar 20, 2013 3:03 am UTC

EMTP wrote:The point of being a deficit hawk is that you want to cut the deficit. Raising new revenue is one of two ways you can do that. The pathological hatred of taxation and outlandish fantasies of the economic horrors that follow therefrom ("Gutting our banking systems") is one way to identify the the SSG chickens from the rarer deficit-hawk breed.

If you think that idea that imposing a 10% wealth tax on the assets of US banks would gut our banking system is an outlandish fantasy, do you also think that anyone who opposes a 99% income tax on the grounds that it would reduce economic activity is also not a true Scotsmandeficit hawk? Your argument boils down to requiring anyone who complains about the deficit to accept every harebrained tax scheme ever.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby EMTP » Wed Mar 20, 2013 3:35 am UTC

Kulantan wrote:I'm pretty sure that a deposit tax would cause major harm to confidence in the banking system. I wouldn't be surprised to see a large bank run with the money going to Switzerland and Mattressland depending on socioeconomic class. In fact I'm willing to bet that upwards of 20% of deposits in Cyprus will vanish when the bank holiday ends (I won't say instantly because there are most likely going to be restrictions on money movement). If a major bank run isn't "gutting the banking system" I not 100% on what would be.


Well, if you're "pretty sure," case closed.

It makes sense. After all, taxing people's property always results in a mad sell-off of all the homes and businesses affected.

And of course, when you place a tax on sales, sales stop.

Joking aside, a smaller, predictable recurring tax on all forms of capital (not just bank deposits) would probably work better. On the other hand, if you think the federal budget deficit represents an economy-destroying crisis (I don't) then instant budget balance ought to at least pique your interest.

But as I and others have noted, real deficit hawks are a rare breed indeed. Passion about the deficit is often sublimated class warfare, rich on poor, and by that principle of course taxing assets appears monstrous.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby KnightExemplar » Wed Mar 20, 2013 4:53 am UTC

EMTP wrote:
Kulantan wrote:I'm pretty sure that a deposit tax would cause major harm to confidence in the banking system. I wouldn't be surprised to see a large bank run with the money going to Switzerland and Mattressland depending on socioeconomic class. In fact I'm willing to bet that upwards of 20% of deposits in Cyprus will vanish when the bank holiday ends (I won't say instantly because there are most likely going to be restrictions on money movement). If a major bank run isn't "gutting the banking system" I not 100% on what would be.


Well, if you're "pretty sure," case closed.

It makes sense. After all, taxing people's property always results in a mad sell-off of all the homes and businesses affected.


Because property and businesses are so easy to liquidate, am i rite?

Kulantan is right frankly. The reason people put money in bank accounts is because its safer in there than stocks, bonds, funds, and other investment vehicles. If bank accounts were taxed, not only is it very very easy to liquidate your position (ie: just withdraw your money / electronically transfer it somewhere else), we have centuries of proof that when you encourage massive amounts of people to withdraw their money at the same time, the economy collapses.

I'm for raising taxes frankly, but taxing bank deposits is the dumbest thing I've ever heard.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby jareds » Wed Mar 20, 2013 5:11 am UTC

EMTP wrote:It makes sense. After all, taxing people's property always results in a mad sell-off of all the homes and businesses affected.

And of course, when you place a tax on sales, sales stop.

There are several important differenes here.

1. The other taxes you bring up are very broad, so there is not much room for substitutions, while your tax is very narrow. The alternative to owning or renting real property is living in your car or on the street. There are many alternatives to storing money other than depositing it with a US bank. You can hold some other financial assets, like equities or bonds, you can deposit your money at a bank outside the US, you can store physical cash somewhere, you can store physical precious metals somewhere... Generally, people prefer saving money in a bank when they want to be very unlikely to lose money and very unlikely to make much money. Surprise wealth taxes on bank deposits destroys that advantage.

2. There is demand for homes and commercial buildings and consumer goods (sales tax) as ends to themselves. The tax is supported by this intrinsic demand. For banks, sure there is some demand for checking accounts to conduct transactions, but the only real reason anyone wants excess money on deposit at a bank is so that the money will be available in the future, not that the existence of a savings account at a bank in and of itself gives them enjoyment.

EMTP wrote:Joking aside, a smaller, predictable recurring tax on all forms of capital (not just bank deposits) would probably work better. On the other hand, if you think the federal budget deficit represents an economy-destroying crisis (I don't) then instant budget balance ought to at least pique your interest.

But as I and others have noted, real deficit hawks are a rare breed indeed. Passion about the deficit is often sublimated class warfare, rich on poor, and by that principle of course taxing assets appears monstrous.

1. Instant budget balance for how long? How long do you think bank assets would stay at $13 trillion with a 10% tax?

2. Sure, I guess if "deficit hawk" means a crazy person who thinks that the deficit places the US on the verge of hyperinflation or whatever, then your bank deposit tax may look good by comparison. But then your argument has absolutely no relevance to someone who thinks that the US deficit problem matters primarily in the medium-to-long run and in general doesn't make lunatic predictions about it, yes?

EDIT: I brought up an old argument between myself and EMTP from another thread. I don't think that helps the discussion, so I removed it.
Last edited by jareds on Wed Mar 20, 2013 7:49 pm UTC, edited 1 time in total.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Zamfir » Wed Mar 20, 2013 6:20 am UTC

Comparisons to the US are highly misleading in this case. Bank deposits in Cyprus amount to 90 billion euro, while their GDP is 18 billion/year.

For one thing, that means Cyprus cannot guarantee its bank deposits, no matter what kind of taxes it raises in the rest of its economy. And it never could. Both its banks, its government and its depositors were relying on the implicit support from the rest of the eurozone in case something went wrong. In the other side of this coin is that the rest of the Eurozone loathes the Cypriotic offshore banking sector, and is in no particular hurry to keep its long term health assured.

Second, this proposal was not a tax in the same sense that a 10% tax right now on US bank accounts would be. Such a tax in the US would raise money from depositors to the government, this 'tax' only reduces the amount of money that will be given to the depositors by governments.

Note that if it was only the Cypriotic government bailing out the banks , the deposit holders would lose far more. This proposal was part of a deal where deposit holders would see 5.8 billion of their deposits gone, and in return the banks would essentially receive 10 billion in loans from other countries. That's more than 50 percent of Cyprus's yearly GDP.

The Cypriotic parliament has now refused this deal, we'll have to see what happens next. For all I know, this proposal could have been expected to be turned down, to make a next proposal look more palatable. For example, a deal where only uninsured deposit holders get a haircut would still be a big break with the past, but it would look better after this proposal.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Kulantan » Wed Mar 20, 2013 6:29 am UTC

KnightExemplar wrote:I'm for raising taxes frankly, but taxing bank deposits is the dumbest thing I've ever heard.

Yep same. But there is a coherent reason to do it in the case of Cyprus. The reason they need to bailout the banks is because they lack the liquidity required to run properly. A big part of that is that they lack the liquidity to deal with even a small "bank run". This means that by reducing the amount of deposits and raising money at the same time you double dip on the effectiveness of the tax. Other reasons from Naked Capitalism:
Spoiler:
Naked Capitalism wrote:Firstly, International Monetary Fund (“IMF”) participation requires the debt level to be sustainable. The write off of depositors reduces debt and also the size of the required bailout package to Cyprus to Euro 10 billion.

Secondly, Cypriot banks have limited amounts of subordinated or senior unsecured debt. This means that a write down of bondholders would only raise between Euro 1 and 2 billion, below the required amount.

Thirdly, the European Central Bank (“ECB”) has major exposures to Cypriot banks via its Emergency Lending Assistance (“ELA”) Program whereby it provides funding to Euro-Zone Central Banks. Based on the accounts of the Cypriot central bank, the ECB may have provided as much as Euro 10 billion, a very high levels relative to the size of the Cypriot economy. As in the case of the 2012 Greek debt restructuring, the ECB and other official lenders are unwilling to take losses on their exposure, requiring the depositors to take a haircut.

Fourthly, restructuring the sovereign debt of Cyprus is risky because many of the bonds are governed by English law. Any attempt to restructure these whilst insulating official creditors from losses would invite litigation. Cypriot domestic-law sovereign debt is held by local banks. So write downs would aggravate their problems, requiring the sovereign to intervene in any case.

Fifthly, Germany, Finland and Holland are increasingly concerned about losses on bailout loans. German Chancellor Angela Merkel does not want concern about actual cash losses to German taxpayers to affect her prospects in September 2013 elections. She also does not want the ECB to take losses which might trigger the need for Germany to inject additional capital.

Sixthly, Germany wants to prevent any bailout fund flowing to Russian depositors, such as oligarchs or organised criminals who have used Cypriot banks to launder money. Carsten Schneider, a SPD politician, spoke gleefully about burning “Russian black money”. However, as of January 2013 Euro 43 billion of the Euro 68 billion in Cypriot bank deposits were from domestic residents, while Euro 20 billion were from the rest of the world, believed to be primarily from Russia.

Still while there are reason for doing it and some of them are almost good, the idea is dumber than a bag of rocks.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby elasto » Wed Mar 20, 2013 2:37 pm UTC

Zamfir wrote:[Cyprus'] GDP is 18 billion/year.


Kulantan wrote:Euro 43 billion of the Euro 68 billion in Cypriot bank deposits were from domestic residents


Can both of those facts be true? Is it normal for a country to have more than double its GDP in domestic cash deposits? Sound like a pretty rich bunch of residents if so. Let them pay! ;)

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Zamfir » Wed Mar 20, 2013 4:31 pm UTC

The GDP is fairly accurate. I see varying numbers for the total amount of deposits, might be a definition question. That number for domestic held deposits looks very high. Cyprus is a notorious post-box company destination, so some of that 'domestic' might be foreign as well. But that's just conjecture from me.

An article an Cypriotic negotiations with Russia mentioned 31 billions euros in Russian interests alone, with the assumption that the official number is too low given the shady nature of some of the business. But I don't know if that figure is Russian deposits, or total Russian investments in Cypress.

Edit: another article mentions an estimated 20 billion in Russian deposits.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Tyndmyr » Wed Mar 20, 2013 4:38 pm UTC

EMTP wrote:
Tyndmyr wrote:
EMTP wrote:Total assets of US banks are about $13 trillion, so a 10% tax on their assets would raise about $1.3 trillion. Might be attractive to deficit hawks, if there really is such a breed and not merely social-service-gutting chickens in borrowed plumage.


Uh, the point of the deficit hawks is to manage our long term fiscal future responsibly. Gutting our banking systems is the exact opposite of that.


The point of being a deficit hawk is that you want to cut the deficit. Raising new revenue is one of two ways you can do that. The pathological hatred of taxation and outlandish fantasies of the economic horrors that follow therefrom ("Gutting our banking systems") is one way to identify the the SSG chickens from the rarer deficit-hawk breed.


You're misunderstanding. They want to cut instead of raise revenue BECAUSE they believe that is fiscally sound. If they are correct or not is another issue, but the root motivation is a desire for long term fiscal stability, not merely to laugh as the world burns. So...copying this strategy would be a pretty terrible idea.

Class warfare doesn't exist for it's own sake, and it seems like your model of the people you disagree with is little more than a caricature. People on both sides of the budget struggle are doing what they think will be the best fiscal decision...but there's some really basic root disagreements over fiscal models.

And yes, bank runs resulting from bank deposits being unsafe is a known thing. It happens reliably. That would be why Cyprus shut it's banks down while debating this. If 10% of my balance is likely to just vanish, keeping your money in your mattress is suddenly rational.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby jules.LT » Wed Mar 20, 2013 4:46 pm UTC

EMTP wrote:Joking aside, a smaller, predictable recurring tax on all forms of capital (not just bank deposits) would probably work better. On the other hand, if you think the federal budget deficit represents an economy-destroying crisis (I don't) then instant budget balance ought to at least pique your interest.

But as I and others have noted, real deficit hawks are a rare breed indeed. Passion about the deficit is often sublimated class warfare, rich on poor, and by that principle of course taxing assets appears monstrous.

See the French Solidarity Tax on Wealth.

Zamfir wrote:The Cypriotic parliament has now refused this deal, we'll have to see what happens next. For all I know, this proposal could have been expected to be turned down, to make a next proposal look more palatable. For example, a deal where only uninsured deposit holders get a haircut would still be a big break with the past, but it would look better after this proposal.

It's all deposits below 100k€ that are insured, right? Then it fixes my main problem with this levy: it hurts poor and middle-class people as well as the money-launderers and fiscal-escapees.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Zamfir » Wed Mar 20, 2013 5:08 pm UTC

Keep in mind that someone with more than 100k still gets insurance on the first 100k. The insurance works for 1 account per bank, so you can get several times 100k insured. A lot of the insured value is therefore owned by pretty rich people. Before the crisis the typical max was 20k or so.

Poor to middle class people probably lose out on such a high insurance value, even if it saves them some money in the short run. In the long run, they will pay a share of the compensation through higher taxes and lower benefits and pensions, and their share of those things is presumably much higher than their share of the insured value in the deposits.That's especially true for a place like Cyprus, where a relatively large of the deposits are owned by people who will not contribute to the compensation.

So if the haircut on the fraction below 100k is lowered, it's not a guaranteed boon to poorer people. Only if that lowering is offset by an increased haircut on the high fractions, or if it is offset by loans from abroad if those are not going to be repaid.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby EMTP » Wed Mar 20, 2013 5:44 pm UTC

jareds wrote:
EMTP wrote:Well, if you're "pretty sure," case closed.

I seem to recall a situation where someone asserted that people with autism aren't particularly dangerous and you insisted strongly that the burden of proof was on them to provide evidence that people with autism are safe, since they asserted it.


If you want to rehash an old argument, send a PM or necro the thread. These discussions spiral downward fast enough without throwing in old grievances.

Now the worm has turned and you are asserting that a 10% wealth tax on US bank assets would be safe, and laughing at those who think it would be calamitous.


I don't think it would necessarily be "safe" in the sense of causing no harm. I do think it is silly to assert, without evidence, that the result would be "gutting [of] the banking system." Maybe, maybe not. I argued that it ought to be interesting to people whose drop priority is the budget deficit. That is, in this hypothetical situation, of a tax I don't support in that form, I speculate that those deeply troubled by the federal budget deficit, (a group that does not include me,) might be interested (not embrace/support) in such a tax.

This is an unprovable and unfalsifiable flash of rhetoric; feel free to disregard it.
----------------------------------------------

jules.LT wrote:See the French Solidarity Tax on Wealth.


I like that a lot! I wonder how much it would raise in the US. This article estimates US household assets at $58 trillion: http://www.nytimes.com/2012/11/19/opini ... gewanted=1. A 1.5% tax on all or even most of that wealth would eliminate the federal government's red ink entirely.
Last edited by EMTP on Wed Mar 20, 2013 9:19 pm UTC, edited 1 time in total.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby jules.LT » Wed Mar 20, 2013 5:59 pm UTC

Zamfir wrote:So if the haircut on the fraction below 100k is lowered, it's not a guaranteed boon to poorer people. Only if that lowering is offset by an increased haircut on the high fractions, or if it is offset by loans from abroad if those are not going to be repaid.

Yeah, make that zero on the first 20k, I guess. That should shift enough of the burden from the population.
I'm pretty sure that, as you said, this offer was only made to make the next look more palatable. So this might be what happens in the end.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby jules.LT » Sun Mar 24, 2013 10:38 am UTC

Apparently, the European proposition didn't include deposits below 100k. It was the Cypriot president who did that -_-
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Zamfir » Sun Mar 24, 2013 8:03 pm UTC

Yeah, other details are getting known. For example, the Cypriotic banks don't have much bond holders, but many deposits were large, fixed for long terms and at high interest rates. Effectively bonds in all but name. It shows how names matter: cutting "deposit holders" triggers different reactions than cutting "bond holders".

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Decker » Mon Mar 25, 2013 3:04 pm UTC

Kulantan wrote:
KnightExemplar wrote:I'm for raising taxes frankly, but taxing bank deposits is the dumbest thing I've ever heard.

Yep same. But there is a coherent reason to do it in the case of Cyprus. The reason they need to bailout the banks is because they lack the liquidity required to run properly. A big part of that is that they lack the liquidity to deal with even a small "bank run". This means that by reducing the amount of deposits and raising money at the same time you double dip on the effectiveness of the tax.

If they can't deal with even a small bank run, then it seems like they shot themselves in the foot by even mentioning the possibility of what they were talking about doing.
I can't speak for anyone else, but if my bank said that they were thinking about taking ten percent of my savings and then said "nevermind", I would still get my money out of that bank at the first opportunity.
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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby CorruptUser » Mon Mar 25, 2013 3:38 pm UTC

I fail to see why they are taking 40% instead of taking all of it; both result in no one ever even considering putting money in your bank again, while one of those options nets more money.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Zamfir » Mon Mar 25, 2013 4:36 pm UTC

CU, who is "they" in that question? The Laiki bank, all Cypriotic banks, the government of Cyprus, the Troika? Banks don't have a legal power to "take" anything. The government could, but they have every reason to limit the damage an explainable amount. After all, there's a long distance from "no longer an offshore paradise" to "no one dares to do business with you".

The Troika could perhaps convince the government to raise more money from depositors, but why would they? They're not in it to make money of off it, they're actually considering to give money to the banks and depositors to lessen the shock. If they want a better deal, they will just stay away at all.

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Re: Cyprus Bailout: Wealth Tax, Bank Runs on the Horizon

Postby Tyndmyr » Mon Mar 25, 2013 7:17 pm UTC

Decker wrote:
Kulantan wrote:
KnightExemplar wrote:I'm for raising taxes frankly, but taxing bank deposits is the dumbest thing I've ever heard.

Yep same. But there is a coherent reason to do it in the case of Cyprus. The reason they need to bailout the banks is because they lack the liquidity required to run properly. A big part of that is that they lack the liquidity to deal with even a small "bank run". This means that by reducing the amount of deposits and raising money at the same time you double dip on the effectiveness of the tax.

If they can't deal with even a small bank run, then it seems like they shot themselves in the foot by even mentioning the possibility of what they were talking about doing.
I can't speak for anyone else, but if my bank said that they were thinking about taking ten percent of my savings and then said "nevermind", I would still get my money out of that bank at the first opportunity.


Yup. If they're talking about an inability to handle a bank run, and a need to take my money...my faith in that bank has just decreased significantly. Either way, I'll ditch 'em and never look back.

Zamfir wrote:CU, who is "they" in that question? The Laiki bank, all Cypriotic banks, the government of Cyprus, the Troika? Banks don't have a legal power to "take" anything. The government could, but they have every reason to limit the damage an explainable amount. After all, there's a long distance from "no longer an offshore paradise" to "no one dares to do business with you".


His point is that 40% is sufficient to automatically qualify for the latter. Therefore, dialing it to any arbitrarily larger amount will have basically the same end effect. If you're gonna turn your banking system into a shambles, you might as well maximize the payoff.


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