Eurozone Hit By Onerous Cyprus Bank Deposit Tax

SiHien Goh, Kapitall  Greek mythology once narrated the improbable love between the king of Cyprus and his mythical wife. King Pygmalion was said to have fallen in love with an ivory statue and prayed to the goddess Aphrodite that the statue be given life. Moved by the King’s gesture and his dedication, the goddess granted him his wish and Pygmalion came home one day after gathering flowers for the statue to find it alive and named her Galatea.

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Fast forward a few millennia, the people of Cyprus are similarly praying hard for a miracle. German-led creditors on Saturday night proposed a levy on all Cyprus-based bank deposits in order to raise €5.8 billion as part of a €17 billion bailout of the Cypriot banking system. The proposal hits depositors across all income spectrums – a 6.75% tax on all deposits under €100,000, and a 9.9% tax on all deposits above €100,000.

Imagine waking up one day as a Cypriot and you are told that whatever you have in your bank account will lose its value by 6.75%. What would you do? I would probably run to the nearest bank ATM and withdraw all my money in cash. Not surprisingly, this is exactly what happened. The bailout proposal led by the Germans and seconded by the Finns, the Slovaks and the Dutch effectively engineered a run on the bank in Cyprus, with long lines formed outside banks to withdraw money over the weekend.

While the Cyprus economy is a small and irrelevant fraction of the entire Eurozone economy, this new development has shocked the markets as it has huge ramifications for the rest of the European community. The danger now is that the same creditors will impose the same terms on Spain and Italy, the real juggernauts of the Eurozone economy, and engineer a similar run on those banks.

While the creditors have tried to make it clear that this is a ‘one-off’ levy, nobody else is going to believe them. Imagine again that you have a Spanish or a Italian bank account, wouldn’t you be afraid that your bank account might now be subjected to German-led creditors? Wouldn’t you think again about leaving your money in Spanish or Italian banks? Probably yes.

The idea of taxation has always been one of taxing wealth – either through income or consumption, but never savings. This new ‘levy’ is a de-facto tax on bank deposits that introduces a whole new element to taxation that is more punitive than fair. Do expect that the Eurozone will now be embroiled in another crisis as new austerity measures such as this deposit ‘levy’ will be invented by the more conservative bloc of creditors in the European Community. Headlines about the break-up of the Eurozone will now probably dominate financial news outlets worldwide and cause continued weakness in the global stock market, including the S&P 500.

As Cyprus attempts to renegotiate this onerous deal imposed by the creditors, the recently elected President of Cyprus might just need another miracle to save his countrymen from ruins – and pray to the gods that the creditors will lose its ivory façade and be imbued with some empathy and compassion.

Compare recent performance of the Market Vectors Russia Small-Cap ETF and FTSE Greece 20 ETF, both of which have significant exposure to Cyprus, to the S&P500 index. 

Written by Kapitall Contributor SiHien Goh