Last night, the “bailout” deal coalesced in Cyprus, who’s troubled banking system is massive relative to its tiny economy. The bailout entails an immediate confiscation of 6% to 10% of depositors funds – and we mean “immediate”. Despite today being a bank holiday in the country, the banks have already sequestered those amounts inside deposit accounts to prevent bank customers from withdrawing all their funds. That means if you had $100,000 in a bank account, you now have only $90,000. Oh, your deposits were insured? Well, sorry!
This brilliant idea was concocted by the EU pols because residents in responsible countries are getting sick and tired of bailing out sunny, tiny, profligate nations. Of course, the tax is also politically attractive because banking rules are lax in Cyprus, and the country attracts money from Russian oligarchs and others wishing to fly under the radar. Taxing Russians the most and your less affluent citizens the least is less politically onerous than accepting austerity on your own acreage. Of course the Russians don’t like it, but hey, look at it as a tax for using no-rules banks to hide your cash. Cheap at twice the price!
The real importance of this event is not the indignity of Russians, or the potential sinking of a tiny economy – what’s important is that the data points around Euro zone opinion towards its debt crisis are starting to add up – and they point to a sea change. The election in Italy was a resounding rejection of austerity by the public. This deal, where Cypriots and others using its banks fund a big part of their own bailout, rather than obtaining 100% of the cash from outside governments and their taxpayers, reflect a worry by EU pols that they can’t stick it to their taxpayers any longer. That changing attitude could make things very interesting for the next bailout nation.