Cyprus – depositors have got off lightly

When a big news story breaks, it is interesting to look at what newspapers and columnists were saying about the same subject years or even months earlier. Here, for example, is what the Telegraph advised its readers two years ago:

Pensioners who are fed up with Britain’s high taxes and miserable weather can escape both without leaving the European Union by moving to an English-speaking country with a flat rate of income tax at 5 per cent or annual allowances of more than £14,600 tax-free. Better still, savers who have retired can receive interest from bank deposits and sharholdings entirely free of income tax – and inheritance tax has been abolished on this Mediterranean island.

Whooppie do! Go to Cyprus and dodge your taxes.

The trouble is, small islands with large banking sectors can have problems when their banks fail, especially if their low taxes have left the state coffers empty.

I don’t know if this is a peculiarly British thing, possibly it’s a legacy of the Empire, but Brits abroad seem to expect the same legal standards to apply wherever they are. They buy houses in countries with completely different concepts of property law from the UK and are then shocked when they find they don’t actually own what they thought they had bought. They expect to take their yachts to the Indian Ocean and be as safe as they would be if they were pootling around the Isle of Wight. And they take their money to a tax haven pumped up with shady Russian money then express outrage when the state can’t cover their deposits in the insolvent banks.

As Phillip Inman points out, Cyprus has one of the highest per capita GDP ratios in the Mediterranean, yet its banks and government are completely bust. Should tax-avoiders be bailed out with tax money by the very countries from which they had fled? Worse still, should EU taxpayers cover the losses of Russian ‘byeeznessmen’?

Many are blaming the horrid EU for stealing people’s savings but if Cyprus were not a member of the EU, things might have been even worse. It was the IMF that pushed the EU for stricter bailout conditions. Left to their tender mercies, who knows what might have happened?

As it is, instead of their banks and their country going bankrupt and them losing everything, Cypriot bank account holders are only being asked to lose 10 percent, which, under the circumstances, sounds like a pretty good deal. (Actually, as Frances explains, the depositors’ money hasn’t simply been taken. They have been given shares in the banks in return. However, as the banks are basket-cases, this probably amounts to the same thing.) It’s tough luck on the locals of modest means who had nowhere else to bank but isn’t that always the case when things like this happen? Hopefully, the small depositors may yet be saved.

Still, depositors will moan about being ‘robbed’ by the EU. The richer they are, the louder they will moan. British expats will probably be among some of the loudest moaners. It’s a pity for them that they can’t sue the Daily Telegraph for encouraging them to take their gold to Cyprus in the first place.

More on this:

Washington Post – Everything you need to know about the Cyprus bailout

The Economist – Bank shareholders and large depositors should be forced to lose money – but, given the risk of spreading panic, not yet!

Chris Dillow – It’s all about power – and those with the least power lose out.

Pawel Morski – The hedge funds win again!

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4 Responses to Cyprus – depositors have got off lightly

  1. john b says:

    I’m reminded of the people who took the advice of newspaper idiots and shifted their savings to Icelandic banks not covered under the UK protection scheme mid-GFC, because Icelandic banks were paying an extra half-a-percent interest to UK retail consumers compared to banks that were (covered by the UK protection scheme / not bust).

  2. Pingback: Cyprus – depositors have got off lightly - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  3. The significance of this event is that it lifts the veil and makes clear what should be an obvious truth: your money cannot be safe in a bank unless it operates on a full reserve basis.

    How is it possible for banks to make their service free (i.e. no charges unless overdrawn), and even pay a little interest on savings accounts? The answer is that the bank puts your money at risk by using it to fund loans or proprietary trading. The government provides a depositors guarantee (up to a limit), which simply means that, should your bank go bust as a result of bad loans of trading losses, they will organise a non-voluntary whip-round among all taxpayers (de facto equivalent to what Cyprus is doing, but spread more widely).

    Unfortunately, full reserve banking would severely constrain funds for investment and leave us all the poorer. It is therefore necessary for banking to give the impression that it is safe, for government to endorse this, and for us to willingly believe it. Steve Randy Waldman published a good piece on the necessary opacity of finance:

    In expecting small depositors to take a haircut, the Cyprus authorities are treating them as small capitalists (hence the detail of the levy being made as an exchange of bank shares). Of course, the small depositors have shown that they do not see themselves in this way. This is ironic because many of the British expats in Cyprus will have achieved their lifestyle by this very means, i.e. property capital gains and fund investment. We are a nation of rentiers, not capitalists.

    • Hi Arse to Elbow,

      I agree with most of your comment. But I have reservations about your claim that “Unfortunately, full reserve banking would severely constrain funds for investment and leave us all the poorer.”

      Full reserve would have no effect on investment done via the stock exchange. Nor would it affect investment funded purely out of equity, e.g. a family investing in a small business out of the family’s savings.

      Removing bank subsidies would of course reduce investment done via banks, but what’s the big merit in subsidising banks or investment done via banks? Far from making us, as you claim “all the poorer”, removing a subsidy which is there for no good reason makes us richer, not poorer.

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