Garth Kant is WND Washington news editor. Previously, he spent five years writing, copy-editing and producing at "CNN Headline News," three years writing, copy-editing and training writers at MSNBC, and also served several local TV newsrooms as producer, executive producer and assistant news director. He is the author of the McGraw-Hill textbook, "How to Write Television News."More ↓Less ↑
With the Mediterranean island nation of Cyprus about to impose a confiscatory tax – up to 9.9 percent – on all bank accounts, resulting in a run on Cypriot banks, the rest of the world is watching anxiously and asking the obvious question: “Could it happen here?”
The government of Cyprus would have to raise $7.5 billion through a tax on Cypriot bank depositors.
Under the most recent terms discussed, depositors with more than 100,000 euros, or about $130,000, would get 9.9 percent immediately deducted from their accounts. Smaller deposits would suffer a deduction of 6.75 percent.
It’s being called a “onetime” deduction, or tax.
Even though some economists say Cyprus is a special case and the “contagion” of taxing bank accounts is unlikely to spread, until now bank accounts worldwide, no matter how dire the government’s financial woes, have been held sacrosanct.
Now the government in at least one nation is poised to simply take money out of depositors’ accounts. That’s a first.
Could it happen in the U.S.?
Some experts say probably not – at least not in the same way as in Cyprus.
Economist, speaker and author Jerry Robinson, who runs Follow the Money Daily and is a featured columnist at WND, assessed the crisis in Cyprus.
“It has a lot to do with politics, Angela Merkel’s reelection bid and also a few others trying to stay in power,” he said.
Robinson said it’s interesting to observe that such powers are playing tough with a tiny nation like Cyprus, while bigger nations with worse economies, such as Italy and Spain, have not been attacked in the same way.
But he said the plans are drastic.
“This is nuclear war on the banking [industry],” he said.
Robinson said while the “tax” has yet to occur, he’s concerned by such actions.
Some analysts point out that in the U.S., government is already “taxing” Americans’ bank accounts by other, less obvious and more long-term means than the naked cash-grab playing out in Cyprus.
For instance, interest rates in the U.S. are near zero, so depositors aren’t getting paid for the use of their funds, effectively “loaning” their hard-earned money to banks. Then, thanks to inflation, their deposits become worth progressively less and less.
The real-world inflation rate – as measured by the actual rise in prices of essentials, including food and fuel – is far higher in the U.S. than the official 2 percent. But even using the 2 percent figure, over the next few years the buying power of American depositors’ bank accounts will be just as diminished as that of Cyprus bank-account holders.
But this new and unsettling form of “tax” isn’t the only concern. The immediate concern for many is that the crisis in Cyprus will spread, causing bank runs in other troubled European Union countries such as Greece, Italy, Spain and Portugal. A European financial crisis of that magnitude would undoubtedly hurt the U.S. economy.
Most American depositors take comfort in the fact that their savings accounts in banks and credit unions are federally guaranteed up $250,000. However, those government funds are designed to bail out very infrequent bank failures. They in no way could cover all depositors’ accounts in the case of a widespread run on U.S. banks, as is occurring now in Cyprus.
“Bank insurance means nothing these days when bureaucrats and politicians are looking for wealth to grab,” Turk said.
“To me this proposed bailout is outright theft, and theft cannot be justified, but the central planners are trying to do that anyway,” he added.
“The events in Cyprus are obviously a scary message that the Greeks, Spaniards, Italians and others are taking seriously, because they see that their money in the bank is at risk, too. But the less obvious message is that all money in banks is at risk. Not only are bank assets impaired, but all the banks are interlinked because they lend to one another and own a lot of debt of insolvent countries,” concluded Turk.
Cyprus is particularly vulnerable to instability in the banking sector. The country’s banking assets are about eight times the size of the economy. And foreign investors hold almost half of the 70 billion Euros deposited in Cyprus. Moody’s estimates $19 billion of those deposits are owned by Russian corporations. Many suspect the Russian mafia uses banks in Cyprus to launder money.
Russian officials had been considering reducing the interest and extending the maturity of a 2.5 billion Euro loan to Cyprus. Now, the Russians say they are reconsidering because the EU did not include them in bailout talks.
The Eurogroup now recommends that depositors with less than 100,000 euros be protected.
The finance ministers also have decided to give Cyprus more flexibility over the bank tax, but the country would still need to raise 5.8 billion euros from the tax.
A vote on the plan by the Cyprus parliament has been delayed until tomorrow.
The U.S. Treasury Department issued a statement: “The Treasury Department is monitoring the situation in Cyprus closely, and Secretary Jacob Lew has been speaking with his European counterparts. It is important that Cyprus and its euro-area partners work to resolve the situation in a way that is responsible and fair and ensures financial stability.”
But the damage may be already done to confidence in the European banking system. This is the first time a national bailout has proposed to impose losses on bank depositors. Some call that a dangerous precedent.