I wrote yesterday that the decision by the ECB to seize assets from depositors could have significant ramifications (see here). The NY Times today has an article discussing the outrage of Cypriot citizens and the potential for contagion. Apparently, Cypriot citizens have not focused on the view that most of the money seized is from foreigners to the ultimate benefit of Cyprus overall. Rather, Cypriots seem focused on the hit that they will take personally.
Their thinking is understandable. These were savers, not investors who perceived themselves as seeking returns and taking risks. Such depositors placed their savings in the trust of their financial institutions. That trust is now gone. The ramifications are greatest for the saver who is not currently getting any income. He would not be subject to any future taxes that might be imposed. Instead, he finds that his savings have been pilfered – a risk he was not aware even existed. The media is also specifically highlighting school children who had savings accounts; they will take a hit like everyone else. This latter group is not meaningful economically, but it does provide for emotional incendiary headlines.
Alas, the damage has been done. If Cyprus’ Parliament votes to reject the ‘wealth tax’ and not seize assets, do you think anyone who has a Cyprus bank account is going to feel secure and voluntarily stick around? I don’t. I would expect a flood of withdrawals (limited only by capital controls) equating to a devastating run on the banks. Further, the ECB has said that it will support Cypriot banks only if Parliament passes this wealth tax. If not, the Cypriot banks are on their own.
My post yesterday discussed my thinking about what might come from this banking experiment. There is no turning back. The “Cyprus experiment” is underway.
source: Cypriot Bailout Sends Shivers Throughout the Euro Zone (NY Times)