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Bid to tax depositors in Cyprus banks is chilling

| Thursday, March 21, 2013, 12:01 a.m.

Investors got shaken up — and they still should be — by what's going on in Cyprus.

The Mediterranean island seemed ready this week to slap a tax up to 10 percent on bank deposits, in order to bail out the country's foolish banks.

Let's repeat that: a tax on deposits of bank customers.

We're not talking here about a tax on income people and businesses are still earning. But on what they've saved and thought was their own.

This is a worry without borders. It could happen anywhere, although this is not a prediction it will happen here. Maybe Uncle Sam's credit card balance can keep adding bloat at $1 trillion-plus per year and still be paid off.

All over the modern world, politicians seem used to promising voters unaffordable welfare state benefits — entitlements, so-called.

National bankruptcies appear certain to result sooner or later. A deterioration in the personal character and work ethic of millions, too. And when the promises ultimately can't be kept, what a temptation for governments to try to patch the holes in safety nets by grabbing money that the most responsible citizens, the savers, allegedly “don't need.”

Cyprus shows the trouble that little banks can get into when big money comes in the door. From foreign places that gravitate to lax regulation locales. From Russia, for instance, where tycoons who made their billions dubiously in the first place are eager to get it out of the country, for freer investment or “laundering.”

Cyprus, with under a million citizens in a space smaller than Connecticut, needs banks “too big to fail” like it needs sharks off its beaches or tree blight in its lemon groves.

The island's largest banks, stuffed with deposits eight times bigger than the national economy, reached for high yields — in Greek bonds. Enough said. The bonds plunged as Greece reeled towards bankruptcy, and bank balance sheets in Cyprus went under water.

In modern Europe, however, no island is an island. Cyprus is part of the euro zone. Its citizens use that currency of 18 nations. And the euro must be saved, or there could be runs on all of Europe's banks and a crash that might cross the oceans. Which is why international markets got staggered.

So the continent's central bankers, dominated by Germany, plus the International Monetary Fund, devised a plan to pour billions of euros into Cyprus's banking system — with a catch. Every thrifty Cypriot would have to pony up too.

Small depositors would see 3 percent of their insured bank accounts taxed away. For accounts between 20,000 and 100,000 euros the whack would be 6.75 percent. And above 100,000 euros — ouch! — 9.9 percent.

The elephant accounts are not insured, so theoretically Russian bigshots could take a bath. Indeed, their prime minister Vladimir Putin darkly called the Cyprus rescue “unfair, unprofessional and dangerous.”

Cyprus depositors felt the same way. They ran, not walked, to their banking machines and cleaned them out. The banks promptly shut down for a few days. The country's parliament got the message; it unanimously refused to ratify the plan, never mind a solemn pledge by the finance minister that it would be a one-time fix — cross his heart.

But who banks on political promises anymore? Where Cyprus goes from here isn't clear. Savings have been publicly endangered, however. Markets everywhere were right to be rocked.

Email jmarkowitz@tribweb.com.

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