In an announcement this weekend, the EU and the IMF have come to the rescue of Cyprus, at the request of the government, by offering Euro 10 billion in aid, in exchange for which the Cyprus government will impose a “one-off tax” on all private deposits in Cyprus banks. Depositors with Euro 100,000 or less in a bank account will be assessed a 6.75% tax, and deposits over this amount will be taxed at a rate of 9.9%
However politely this is described in press releases, this is nothing more than a confiscation of private property from people who did no wrong. The Cyprus banks prior to the 2008 financial collapse played a game similar to the Icelandic banks – offering lavish interest rates on deposits to attract hot money, and investing the money in a real estate bubble that has now collapsed and crippled the banks. Most of the money in Cyprus came from Russian business interests.
Iceland chose a different tack in dealing with its crisis. It essentially stiffed the IMF and the governments of the UK and The Netherlands, which were the source of hot money for Icelandic banks and which governments fully expected the Icelandic government to cover the losses. The Icelandic government refused, it allowed the banks to go under, it placed the losses on the the bank shareholders and bondholders, and it jailed the top bankers involved in the debacle. Iceland’s economy took a severe hit, but the pain was relatively short term and the economy has recovered nicely.