This weekend brought news of the shocking bail out tax on savers in Cyprus. This panic scheme is surely bound to lead to a 'run' on the banks. Announcing that all Cyprus savers with less than 100,000 euros in the bank (yes that's most normal people with a rainy day fund) will be charged 6.75% one off tax on their savings in return for 'shares' in the bank if they leave their money in for the next 2 years. Those lucky enough to have over 100k euros will pay 9.9% (probably lots of Russian & Chinese money launderers according to speculative reports).
Not surprisingly there are queues at cash machines as people try to withdraw their money to avoid the tax. There has been action taken by the banks apparently for electronic transfers (probably just putting the systems offline - well it is Cyprus). Confusion now reigns over whether non-resident cypriots with bank accounts will have to pay the tax including UK government workers and military personnel (3000 are based on Cyprus - my brother having been one of them previously).
Cyprus is well known as a destination for British Expats and second home owners - this tax may affect them too. I feel sorry for those which have just sold up and have all their euros sat in their bank account ready to move into sterling...the exchange rate improvement won't offset this ridiculous tax.
According to President Nicos Anastasiades two Cypriot banks could run out of money within days and the island may be forced into a default and out of the euro currency. He has said he is in talks to try and limit the bailout’s effect on smaller savers, but has repeatedly stressed there was little other choice to save Cyprus after its banks took huge losses from the debt writedown in Greece.
“We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” he said in a statement.
How on earth did someone advise that taxing ordinary savers would do anything but cause panic and people to withdraw their money in droves. The 2 year guaranteed share idea will do nothing to appease the fact that people will now not trust the Cyprus Government or for that matter other EU governments. If a country can propose something as serious as this affecting ordinary people - many of those farm workers and retirees with low income and sensible enough to maintain some savings then how can one be certain one's money is safe in the bank? But what choice do we have?
I also fear that there will now be an increase in speculative break-ins to people's homes if undesirables think that cash may be being stored 'under the bed' like in the old days.
What choice does Cyprus have though? If it defaults on the debt then it is either bankrupt and leaves the Euro or looks for other sources of finance - probably Russia. As we have an interest in Cyprus (our parents have their dream holiday home there!) I think I'd better get out the Russian language books again!