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Cyprus the canary in the banking mine

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Saturday, March 30, 2013, 9:00 p.m.
 

Facing a near-collapse of its financial system, Cyprus was ordered by the so-called “troika” of the International Monetary Fund, European Central Bank and European Union to impose a tax on all private accounts in its banks.

The tax demand was made during an unusually frank exchange intended to help the small Mediterranean island nation raise 5.8 billion euros ($7.4 billion U.S.) needed to secure a multibillion-euro bank bailout package from the troika. The demand was rejected by the Cypriot parliament as too harsh on small depositors.

But the terms were then diluted, applying only to accounts above $130,000, general taxation and privatizations — all cunningly designed to bypass parliament and reopen the nation's banks on Thursday under controlled conditions for the first time since March 16. Even then there were serious restrictions on how much could be withdrawn.

Under the bailout plan, accounts in Laiki Bank could lose up to 80 percent of their value as the struggling operation is “wound down” and its insured deposits transfer to the Bank of Cyprus. Cypriot finance minister Michael Sarris created a small uproar when he indicated depositors in the Bank of Cyprus might lose around 40 percent of their uninsured savings. Late Friday, however, Reuters reported those depositors may get even less: 37.5 percent of savings over $100,000, with the rest potentially lost unless the bank does well.

About 18 percent of foreign depositors had withdrawn their cash from popular offshore accounts in Cyprus banks in February before the crisis. Many Americans and others caught off guard were shocked at what appeared to be government-sanctioned theft. Basically, the bailout transfers bank risk from Cypriot taxpayers to private depositors.

Most Americans may see Cyprus as a far-away place that matters little. But in today's world of highly interdependent banks, geographical distance is insignificant. What Americans really should see in Cyprus is a “canary” in the mine of global banking that could forewarn of even U.S. bank depositors falling into the shaft.

Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurozone finance ministers, warned that senior bank bondholders might replace taxpayers in taking the brunt of future bank rescue packages. These open threats to depositors and senior bondholders could increasingly spook them from involvement with imprudent banks loaded with the burden of their deeply indebted governments.

Over the past 10 years, the Fed has engineered a 26 percent debasement of the U.S. dollar or a hidden annual tax of some 2.6 percent. Assuming just 5 percent inflation, a bank deposit rate of 0.5 percent amounts to a covert tax of 4.5 percent. Therefore, Americans have paid some 7.1 percent average hidden tax on their bank deposits in each of the past 10 years.

According to Bloomberg, U.S. corporations and individuals have a total of nearly $10 trillion in bank deposits. But the Federal Deposit Insurance Corp. has only $25 billion, or 0.25 percent cover!

Prudent Americans should keep their eyes on the Cypriot canary.

John Browne, a former member of British Parliament, is a financial and economics columnist for Trib Total Media. Email him at johnbrowne70@gmail.com.

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