On March 16th, the small country of Cyprus closed its banks causing panic around the world. The banks have finally re-opened today, once again giving people access to their money. Of course, there are restrictions on the amount that can be taken out so there is not a mass exodus causing the banks to become insolvent. This is the first time there has been a restriction on withdrawals in the fourteen year lifespan of the Euro.
The banks remained closed for 12 days to give the country time to develop a 10 billion euro bailout package. Not a lot is known about the package yet, but accounts with greater than 100,000 euros are going to be hit hard in order to assist with the bailout.
The maximum cash that an individual can take out is 300 Euros (~$383) per day. Luckily, businesses have higher limits as they’re able to withdraw up to 5000 euros per day with no limit on payroll. After all, people need to get paid and to limit such would only further hurt the country.
How can they just take money from accounts?
That’s a good question. One that any reasonable individual would ask.
I was shocked when I heard that people would be taxed on money sitting in bank accounts. This money has already been taxed and doing so again is excessive taxation. The percentages are not know yet, but last week officials in the country mentioned that they might impose a 6.75% tax on deposits under 100,000 euros and 9.9% on deposits greater than 100,000.
In the US, an announcement like this would cause riots in the streets. There’s no doubt that there would be a run on banks. Personally, all of my money would be sitting under my mattress in a matter of hours.
Cyprus banks are different
There are a couple of things I was not aware of when it comes to banking in Cyprus. Apparently, it’s widely accepted that most deposits of over 100,000 euros come from the Russian mafia. The country’s banking system is known as a safe-haven where they pride themselves on their secrecy and a “no questions asked” policy adopted by its institutions. In the politicians’ minds, there’s a good chance the this money was never taxed in the first place, so why not tax it now?
According to CNBC, the Cyprus banking system is so large relative to their total GDP, that the US would have to have 40 more JP Morgan size banks to equal the same ratio. That’s drastically out of proportion.
That changes things in a little bit in my eyes, but I’m still against any tax on existing accounts. The government cannot be certain that all of this money is a result of laundering and there is certainly some that is not. Also, what about the deposits under 100,000?
Market performance since March 12th
Compared to the financial collapse of Greece in 2010, that market has hardly noticed Cyprus. In fact, the S&P has risen since March 12th, while it dropped over 100 points during the Greece financial crisis. Comparing the two S&P charts makes this pretty apparent.
READERS: What would you do in this case? Would you panic and withdraw as much as possible from the banks? If not, what kind of event would cause you to take your money out of our financial institutions?8779M6J227AX