Cyprus' deposit tax meant to catch Russian hot money
In practice, it is relatively more punitive on the poorer parts of society, writes Philip Aldrick.
About a month ago, I received a letter from an anonymous Cypriot. Over two typewritten pages, "W" set out detailed allegations of money laundering, terrorist financing, drug dealing and corruption.
"Cyprus has become the money-laundering centre of Europe," W wrote, adding poignantly: "I am ashamed to say I am a member of one of the biggest families in Cyprus."
W was responding to a report I wrote in December that European politicians were demanding a crackdown on suspected Russian money laundering as the price of any eurozone rescue.
My piece had been partly informed by revelations in Germany's Der Spiegel news magazine a month earlier that the German foreign intelligence service (BND) had identified about $US26 billion of Russian money deposited in Cypriot banks - more than the entire national output of the tiny eurozone state.
With the eurozone considering a possible €17 billion bailout for the stricken nation, the BND warned politicians that the beneficiaries would ultimately be, as Der Spiegel put it, "Russian oligarchs, businessmen and mafiosi".
Cyprus has a chequered record. A year ago, for example, the country got into hot water for letting a Russian ship carrying 60 tonnes of ammunition bound for the Syrian regime dock, refuel and leave in violation of an EU arms embargo.
I mention all this because Cyprus' status as a tax haven and suspected money-laundering state is central to Brussels' apparently ruthless handling of the country. It is one thing to rescue a country in distress, another to prop up alleged criminal enterprises.
Europe drove a hard bargain in its negotiations with President Nicos Anastasiades. In return for a €10 billion eurozone rescue package, Cyprus was told to make those suspected money launderers and tax avoiders chip in as well. The government would have to find €5.8 billion to qualify for the bailout funds - about a third of its national output.
Clearly, Brussels insisted the money be grabbed from depositors. But the Cypriot government's solution was brutal. Instead of just targeting the well off, it hit all depositors - from the labourer to the granny. It seems highly unlikely that Brussels demanded ordinary Cypriots suffer. Germany is already seen as Europe's evil emperor, and ordering the country to make victims of innocent pensioners hardly seems sensible. Besides, Germany's truck was with those "oligarchs and mafiosi".
I assume the detail of the plan was left to the Cypriot government and, if so, it betrayed the people.
All deposits in Europe up to €100,000 are fully protected against loss if a bank goes bust. So any depositor with less than that amount must have felt absolutely safe. Instead, they will lose 6.75 per cent of their savings.
Those with more than €100,000 would have lost everything above the threshold. In other words, someone with €120,000 on deposit would have lost €20,000. Under the government's tax plan, though, they will lose 9.9 per cent - or just €12,000. The deposit tax has saved them €8000.
Extend that to depositors with €1 million, and it gets far worse. Instead of losing €900,000, that super-rich saver ends up €99,000 out of pocket. That's a direct transfer of €801,000 from Cyprus' ordinary people to just one of those "oligarchs and mafiosi".
In his statement at the weekend, President Anastasiades suggested he could have restricted the tax to just those with over €100,000 but they would have suffered "losses of over 60 per cent". In the doomsday scenario he painted, that would have pushed the "whole banking system into collapse with all the attendant consequences".
He may have had a point, and those with more than €100,000 on deposit would have also included honest local businesses. But a better balance could have been struck.
The deposit numbers also tell an intriguing story. Households have about €30 billion deposited with Cypriot banks, and with non-financial companies another €17 billion. Of that, €27 billion is foreign - including an estimated €18 billion from Russia. In other words, the deposit tax is an international bailout in another guise - with very particular and wealthy partners.
The one rule of the bailouts to date has been that creditors are not made to take a haircut to help stabilise the bond markets. Private-sector involvement in Greece's bailout has been "voluntary" and tortuously negotiated.
There will be collateral damage in Cyprus, unfortunately, and perhaps more than necessary due to the government's decisions. But, for once, a eurozone bailout was structured to ensure the private sector shared some of the taxpayers' pain. And that should be applauded.