Draining Bank Accounts in Cyprus

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The EU’s bailout of Cyprus took a chilling turn over the weekend when it required (more or less) the Cyprian government to confiscate a minimum of 6.75% of deposits in Cyprian banks as part of the deal. The confiscation rate is 9.9% of balances above 100,000 Euros, resulting in a total seizure of $5.8 billion Euros (7.6 billion US dollars). Put another way, the government is taxing wealth to pay its debts. Considering that Cyprus is an EU nation and not a despot-run third world country, this move should send chills down the spine of every American that doesn’t believe a similar measure could actually happen here at some point.

To be fair, there is some context worth noting. In short, several EU countries like Germany are tired to footing the bailout bill for less responsible countries. They are pressuring countries receiving the aid to experience more of the immediate pain. This is understandable–to a point.

But the larger lesson here is simple. Sooner or later, a nation that cannot pay its debt must seize the wealth of its citizens directly through taxes or indirectly through currency devaluation, or go bankrupt. What makes the Cyprian wealth tax so scary is that the government is simply taking the money. At least tax increases and government budgets can be widely debated before being passed into law. What’s happening in Cyprus is a confiscation of wealth in the dark of night. They’re calling it a “one time” tax, but only fools believe it can’t happen again, or in other nations.

Could a similar move occur in the U.S.? Consider the fact that individual 401(k) plans contain about $4 trillion in balances. A “one time” 9.9% tax could generate about $400 billion in revenues right away. The left might see this as “fair” because it steals only from the “rich” who could “afford” to put away money for retirement in the first place.

To be clear, the U.S. and Cyprus are not in the same financial situation. But while Cyprus is further down the road, we are traveling along the same highway. Given ongoing $1 trillion deficits and a burgeoning national debt, a spike of inflation would put the U.S. treasury into a serious quandary. The available options will be limited when this happens, including some many Americans never expected to be on the table.

As for Cyprus, stay tuned…Some are proposing alternative bank deposit levies with lower rates for balances under 100,000 Euros and higher rates for balances above 100,000 Euros. In the end, most of the pain will be felt by those who are most productive.

6 Comments

6 Comments

  1. Daryl  •  Mar 18, 2013 @1:08 PM

    this is insane!

  2. Ty  •  Mar 18, 2013 @3:32 PM

    John – this may sound silly, but it’s a serious question. Who is ever going to make us pay our national debt? Gov spending is completely out of control and our money is wasted daily on non-essential and poorly run programs, but our 16T debt…how is anyone ever going to collect? If we don’t pay, what are they going to do about it?

  3. John Parnell  •  Mar 18, 2013 @4:16 PM

    There’s a very long answer and a short answer to your question. I’m posting the latter…If you’re okay with a totalitarian form of government, then we’ll never have to pay anyone. The problem is that our economic system thrives on voluntary investment. If we are ever called on our debt and refuse to pay–and this will happen eventually if we don’t change course–then the value of our currency will plummet and investors will pull out. Our entire economy runs on the trust and confidence that money has predictable value and a legal system will require others (including government) to meet their financial obligations. When this erodes, rational people will hesitate to put capital at risk, and there goes the economy. Consider Cyprus as an example. If you lived there (or in Portugal, Greece, Spain, or Ireland), you’d be wise to withdraw most of your money from the bank, lest the government repeat the “one time” confiscation. This depletes capital from the economy that is sorely needed for a recovery. If there is a real threat that the government can steal from the citizenry at any time, then the economy will grind to a halt.

  4. John Parnell  •  Mar 19, 2013 @9:46 AM

    UPDATE: There was a great line in Monday’s Wall Street Journal piece on the Cyprus situation. Speaking about the bank balance confiscation proposal, one of the EU officials said, “We found the plan tough, but clean and quick.” This statement tells us everything we need to know. The original proposal was all about expediency, not morality. Let’s take the money and run as fast as we can before anyone notices what we did.

    However, Parliament didn’t act quickly enough and opposition has mounted. The government must now extend bank closures while it figures out what to do next.

    By the way, this is NOT a tax. In civil societies, revenues required to fund government activities are legislatively approved in advance so that everyone can plan their activities accordingly. If a levy is to be applied to bank balances–right or wrong–citizens should have an opportunity to adjust their finances BEFORE the funds are confiscated. This is a money grab and a clear violation of personal property rights, which is why there is a lot riding on the outcome. If a government is permitted to confiscate bank deposits in Cyprus, then why not in other developed nations as well?

  5. Aliza  •  Mar 19, 2013 @9:59 AM

    property rights are protected in the constitution. So perhaps we should not worry that such a thing will happen here?

  6. Barry  •  Mar 19, 2013 @10:48 AM

    how naive you are Aliza. I wish it were that simple. The Constitution must be defended everyday! It doesn’t defend itself!