Tags: Cyprus | bank | tax | eurozone

Paul Krugman: Cyprus Bank Tax Invites Eurozone Bank Run

Monday, 18 Mar 2013 03:30 PM

By Michael Kling

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Cyprus bailout terms calling for a tax on bank deposits is an invitation for a run on banks in the eurozone, warns Nobel-Prize winning economist Paul Krugman.

“It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying ‘time to stage a run on your banks!’” Krugman writes in his New York Times column.

Cyprus said it planned a 9.9 percent tax on bank deposits over 100,000 euros and 6.75 percent tax on deposits under 100,000 euros ($129,442) as part of an international bailout.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Cyprus is a money haven, especially for assets of Russian businessmen, Krugman points out. A bailout without the tax, or haircut, would be perceived as a bailout not only of Cyprus but also of Russian businessmen with “uncertain probity and moral character.”

However, the problem is that small domestic deposits are also taking a smaller but still substantial haircut, he notes.

“Tomorrow and the days immediately following should be very interesting.”

It was the first time savers are being required to share the burden in a eurozone bailout. Depositors began withdrawing their funds after learning of the deal on Saturday.

The bailout plan called for a 3 percent tax on bank deposits, a 10 percent tax on deposits over 100,000 euros, and 15 percent on amounts over 500,000 euros.

Since Krugman wrote his blog over the weekend, Cyprus has indicated it is considering a new plan that would allow smaller deposits to remain untaxed or have a lower tax rate. Under the plan being considered, deposits up to 20,000 euros might be tax exempt, deposits up to 100,000 euros would see a levy of 6.7 percent and deposits over 100,000 euros 9.9 percent, reported Reuters, which cited an anonymous government source.

The Cypriot parliament postponed a vote on the bailout agreement until Tuesday. Monday is a national holiday, but officials believe bank account holders will make a run on banks when they open again — no matter how parliament votes, according to Reuters.

If it rejects any deal, the country could go bankrupt and could be forced to leave the euro.

Russian President Vladimir Putin criticized the bank tax, saying it is unfair and sets a dangerous
precedent .

“While assessing the proposed additional levy on bank accounts in Cyprus, Putin said that such a decision, should it be made, would be unfair, unprofessional and dangerous,” said Kremlin spokesman Dmitry Peskov, reported Reuters.

Out of about 70 billion euros in Cypriot bank deposits, according to Reuters, almost half are held by non-residents, most thought to be Russians.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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