The Mouse That Roared

By now, most everyone is familiar with the weekend bail-in of the Cyprus banks.  Cyprus…  that little mouse of an island with about 1 million citizens.

From Goldman Sachs, here is a bullet-point summary of the action:

  • Over the weekend, Cyprus and Troika agreed on a rescue package with the following key points:
  • €10 billion total rescue package.
  • A tax on deposits, expected to yield €5.8 billion, which has the following characteristics:
    • 6.7% tax on deposit amounts < €100, 000.
    • 9.9% tax on deposit amounts > €100, 000.
    • Deposit amounts are recorded as of Friday close (March 15) and apply to all deposits in Cypriot Banks in Cyprus (across currencies, type of customer account). They do not apply to customer deposits of Cypriot banks held outside of Cyprus (the two large Cypriot banks both have a presence in the UK, for example).
    • Cypriot bank operations in Greece will be taken over by Greek banks, at no cost to the Greek tax payer. This is important as the large Cypriot banks operate a substantial portion of group assets in Greece.
    • In exchange for the tax, the impacted depositors will be granted shares in the Cypriot banks.
  • Tax changes, where (1) the corporate tax rises to 12.5% from 10% and the income from deposits to be taxed at 20-25%.
  • Bail-in of junior debt is expected to take place, however overall impact is limited by a low balance of outstanding securities.
  • Commitment to downsize local banking sector towards EU average size (in relation to GDP) by 2018.
  • A privatization program which is expected to contribute €1.4 billion.
  • Russia will participate, but to a small extent (exact amount / type unclear).

As a result of these actions, even deposits falling below the deposit insurance maximum will be taking a haircut.  ATM’s in Cyprus are empty and the banks are on holiday until Thursday at the earliest.

General reaction in the media has run the gamut from moral indignation to righteous rage.

  • How can government force savers to disgorge a large chunk of their savings?
  • What do you have left when the rule of law can be overturned by edict?
  • What are the implications for property rights of the individual?
  • How can we accept this financial repression of middle and lower class savers?

Feel sorry for the Cypriots.

Except the above questions were not intended to apply only to Cyprus.  They should have been asked years ago when the US Federal Reserve decided to hold interest rates at zero.

Zero nominal rates means negative real rates; forcing savers to disgorge their savings to inflation.  Artificially forcing interest rates to zero is an edict by an unelected central bank.  Hardly the rule of law.  And what are the implications for property rights when inflation backhandedly chips away at your property’s value? Finally, here, in the good-ol’ US it is the lower and middle class saver that is being financially repressed by being paid nothing on their savings.  Think of the retiree trying to make his savings last for the rest of his life.

I somehow missed the moral indignation and righteous rage when these policies were implemented on our shores.

I guess if you implement financial repression quietly and over time, few people notice or care.  Yet, if you overtly and immediately bring about the repression, you make global headlines and become the target of global derision.

So Cyprus is the mouse that roared.

Pay no attention to the whispering gorilla.