Gold rose on the news from Europe. Stock markets plunged around the world. So did the price of oil.
Over the weekend, Eurozone bureaucrats at a closed meeting came up with a plan. The committee demanded that the government of Cyprus impose a tax of 6.7% on all bank accounts under $130,000, and close to 10% on all accounts over $130,000. If the government refuses, the Eurozone will not provide a $13 billion bailout for the banks of Cyprus.
The story is all over the European press, for good reason. The Eurocrats had always said that bank accounts would be sacrosanct. This announcement says, “We lied.” But they also assured depositors that this will never happen again. “Trust us.”
The president of Cyprus on Sunday begged the parliament to impose the tax. He admitted that he had promised depositors that he would never, ever tax their accounts. He had said this at his inauguration speech: “absolutely no reference to a haircut on public debt or deposits will be tolerated.” To make himself perfectly clear, he added: “such an issue isn’t even up for discussion.”
Let me translate this in three words: You dumb clucks.
For a month, rumors of this plan had floated around the corridors of the European Union’s headquarters. Depositors could have sent their euros to Germany. They could have withdrawn currency. But the president said he would never do this. So, the masses sat tight.
Dumb, dumb, dumb.
The Cypriot parliament was supposed to ram through the tax yesterday, but it postponed the decision until Monday afternoon (their time). The president did not get the votes. If the parliament refuses, then he is the dumb cluck.
The government has closed the banks. The press still refers to this as a “holiday.”
It is clear what any rational Cypriot should do if the government delays. He should call his bank and transfer his money (euros) to a German bank as soon as the bank “holiday” ends.
The government can open the banks but not pass the tax. Wham! The run begins. Or it can keep the banks closed. A depression begins: a frozen economy. Or it can pass the tax bill. Then it can open the banks. There will still be a bank run. “Fool me once, shame on you. Fool me twice, shame on me.”
The Eurocrats who came up with this plan over the weekend must have known this would trigger bank runs in Cypress. If they did not foresee this, they are economic idiots. Did they think that the sheep will sit still a second time and be sheared? This seems hard to believe.
They also did not expect the government to postpone the tax for a day.
I think this policy is deliberate. I think they knew this would happen. They are sending a message to the PIIGS politicians: “Bail out your own banks, or else get ready for a bank run like Cyprus got.” Their goal is to cause a bank run in Cyprus. They want to send a message to any large government that thinks it can sit on the sidelines on the assumption that the Eurozone will bail them out or bail out their banks. It won’t. It can’t. It does not have the money. Its voters will not allow it.
They chose Cyprus, which is a tiny island nation. If its banks go under, so what? If its politicians pull out of the Eurozone, so what? Its crisis is just what the bankers in northern Europe need: an announcement of a “no tolerance” rule. It will scare Club Med politicians.
But it’s a risky policy. It may scare depositors even more than it scares politicians. This may trigger banks runs in Spain, Portugal, and Italy. If I had my money in any of these nations’ banks, I would transfer the money to a German bank.
Mohammed El-Erian, CEO of Pimco, the world’s largest bond fund, said this: “In Europe, it could well undermine the recent tranquil behaviour of depositors and creditors in other vulnerable European economies – in particular Greece, Italy, Portugal and Spain. Despite assurances from European officials that Cyprus is ‘exceptional’ and the measures are ‘unique’, this weekend’s actions have increased the risk premium.”
This is a desperation move by Eurozone bureaucrats. They risk fomenting a bank run out of Italian and Spanish banks. Depositors who want to avoid becoming like Cypriot depositors have a way out: transfer money to German banks.
This is a high-risk crap-shoot. Eurozone bureaucrats have to be really desperate to announce a bank account tax policy that cannot be enforced by the Eurozone, only by national governments. If a government looks as if it will comply, the bank runs will begin. If it says it will not comply, bank runs still may begin. The depositors will know that the government may abandon the euro. To make money on this, they must get their euros into German banks.
This indicates just how desperate the Eurozone leaders are. They pretend that there is calm. They pretend the system is not coming apart. Then they make an announcement that is rational only on the assumption that the euro experiment is coming apart.