Nasty news from Cyprus over the weekend. The details are still unconfirmed and the rates may change, but it looks like savers are about to have anything from up to 10% (limits are still being discussed) of their savings removed from their bank accounts to help with the bail-out of those same banks.
The plan was thought up by the IMF and the EU and is to be applied to all funds – there is no protection for very small depositors. You might think this odd given that the EU is also supposed to guarantee deposits of up to €100,000. But as this is a tax (or perhaps an enforced purchase of worthless bank shares) rather than a loss, that rule doesn’t seem to apply.
This won’t come as much of a surprise to those who have been following our writings about repression and capital controls over the last few years – see in particular the end of this interview with Russell Napier. But it doesn’t make it any less shocking – or for that matter, crazy.
We will find out today just how depositors in the rest of the peripheral eurozone countries react, but it is hard to imagine anything except for further capital flight (to the extent capital controls allow this). But an acceleration in funds fleeing the likes of Portugal might not be the end of it.
Napier also notes that the move in Cyprus might have some impact on whether Greece decides to stay in the euro or not – “If arbitrary appropriations of wealth imposed from Brussels are part of being in the euro, then supporters of the euro will think twice.”
That’s particularly the case given that all Europeans are clearly not considered equal – other banks have been bailed out without depositors paying the price. More on this here.
You probably think this kind of arbitrary and unfair wealth tax can’t be implemented without warning in the UK. If so, you might want to remember that anyone saving in the UK has lost at least 10% of the real value of their capital over the last few years – with inflation running at 3% plus and interest rates at their lowest since 1694, it has long been impossible for any of us to maintain our purchasing power after inflation and tax.
The cost of living has risen four times faster than earnings (let alone interest payments) over the last five years. We looked at this kind of old fashioned financial repression in the UK a few months ago and also noted at the time that, while simply nicking money from savers via a mix of high inflation and low interest rates might well work for the UK, the risk of much more explicit repression here and elsewhere was high.
It is about to happen more explicitly in Cyprus than here, but the key points to remember are that it is happening one way or another all over the West and that it is going to continue to. Why? Because someone has to pay off the debts that the banks and governments have built up over the last few years.
Ignore book-keeping tricks, says Liam Halligan, and the UK government borrowed £99bn in the current fiscal year to the end of January alone – and governments see ongoing repression as the easiest way to make this happen.
• Just for interest, here is a letter (found on Twitter) to the US Fed in 1941 asking about the wisdom of taxing bank deposits – and the Fed’s reply.
• There is one relatively obvious beneficiary of all this – the US dollar. Say what you like about America, but in general, we all think of it as being a place where property rights are respected. That’s clearly no longer the case in Europe. That has to be bad for the euro and good for the dollar.