The Cyprus Fiasco


Cyprus is a very small country with little population.

However, what is happening in Cyprus has huge ramifications.

Last week I thought that the Cyprus Parliament would act firmly and very strongly against taxing bank depositors – common and not so common folks who have deposited their monies in the local banking system.

There must surely be other ways to satisfy the demands by the European Union to find Euros 5.8B of own money so as to obtain Euros 10B as bail-out package ???!!!

Even people with little money invested in bank deposits are now going to get hit, and those richer folks with over Euros 100K are going to be taxed to an extent of 60%. Yes, it is not a typo, the figures that are rumoured about is in the range of 60%.

The worry is, if emerging economies find themselves in a similar situation, would they be forced into taxing their huge base of depositors, who have kept their hard-earned money in the local banks ? Unlike the politicians and richer folks who have spread their monies across the world in various tax-free countries, which do not ask many questions before opening bank accounts.

Things are not looking rosy for the world economy, surely not for the European economy. I am sure countries should now be rethinking the wisdom of staying on in the European Union.

Cyprus is virtually getting forced into acting in this manner, by taxing the savers. It is surely not a good sign. Is the government going to return the depositors’ money when the economy turns around ? Is there any guarantee at all ?

I hope the emerging economies do not get any “bad” ideas. Something like – “well my current account deficit should be at 4.3% but it is now at 6.7%, I am not able to bridge the gap, and even if I wish to bridge, I cannot as the elections are just about a year away, so I need to keep major subsidy programs alive. The only thing that I can think of is taxing the millions of depositors who have been foolish to keep their money in the bank deposits”.

Cheers,

Vijay Srinivasan
31st March 2013

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