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What Impact Will The Cyprus Deal Have?

The government of Cyprus had initially voted against a bailout from the European Central Bank, European Commission and the International Monetary Fund (1) due to public outcry against a depositor tax. The decision was then reversed and the tax was reinstated with deposits higher than 100,000 Euros. (1)(2) What could have generated such a quick reversal in the decision? One can speculate that the possible bankruptcy of the Cyprus banks would have caused a greater catastrophe. There is speculation that the Russians could have bailed out Cyprus but decided not to. (1)(3)(4)(5) Does it matter? It likely does not matter - but the fallout of this decision is very important. Bank withdrawals are being severely limited to 100 Euros per day in spite of the deal being passed.(2) Banks have also been closed for over a week due to threat of bank runs. (2)(7)

This is the first time that taxes are being made on existing bank deposits. Aside from the fact that these deposits have already been taxed, there is the notion that these depositors are partly to blame for not keeping the banks afloat. (7) The depositors are being labeled as money launderers and tax evaders.(7) Even if this is partially true, shouldn't such money be targeted at the source rather than trying to tax everyone? Deposits are supposed to be stewarded by the banks, and profits made over and above these amounts are subject to creditor seizure. The banks don't "own" your money, they are using it and are obligated to return all of it to you on demand. How banks invest your money is where the profit comes from. This seizure is treating deposits like assets, and they are not.

Will this happen in the future? The odds are that it will, and it was even alluded to in a recent comment which was then retracted. (6) If there is a possibility of taking people's deposits, it will be done in spite of what is stated, not stated or modified in a statement. It is actions and past history of trust that will allow you to determine if trust has been violated or not.

Sources:

1) http://www.bloomberg.com/news/2013-03-25/cyprus-to-chop-banking-system-to-win-aid-avoid-default.html

2) http://www.reuters.com/article/2013/03/24/us-eurozone-cyprus-withdrawals-idUSBRE92N0E320130324

3) http://www.reuters.com/article/2013/03/22/us-cyprus-parliament-idUSBRE92G03I20130322

4) http://www.dailymail.co.uk/news/article-2298337/Cyprus-Russia-savages-EU-island-gets-8-5billion-bailout-deal-richest-investors-losing-40-savings.html

5) http://www.reuters.com/article/2013/03/22/us-cyprus-russia-money-idUSBRE92L0PI20130322

6) http://www.reuters.com/article/2013/03/25/us-markets-stocks-idUSBRE92A07T20130325

7) http://www.spiegel.de/international/germany/cyprus-bailout-highlights-deep-mistrust-in-europe-and-euro-zone-a-890745-2.html

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.