Cyrpus Bank Bail-In

A blog about business and economics.
March 16 2013 12:35 PM

Cyprus Bank "Bail-In"—Deposits Will Be Taxed, But Don't Call It A Haircut

163196794
Greek Foreign Minister Dimitris Avramopoulos (R) listens during a press conference as Cyprus' Foreign minister Ioannis Kasoulides speaks in Athens on March 6, 2013.

Photo by ARIS MESSINIS/AFP/Getty Images

Ever since the collapse of Lehman Brothers, the inviolability of financial institution debts has been the watch-word of financial crisis management in the West but Cyprus and the European Union are about to try another path.

What happened, essentially, is that the Cypriot banking system needs a bailout. But the Cypriot banking system is large relative to the (small) size of the Cypriot economy. So a big government bailout would just create a public sector debt crisis. Consequently, Cyprus needs to tap the larger European Union (i.e., mostly German) bailout fund. And with an election coming up in Germany, Angela Merkel was feeling in a less generous mood. The most straightforward way to reduce the cost of a bank bailout is to simply not give people 100% of what they're owed. In other words, make creditors take a "haircut."

Advertisement

But formal haircutting of bank creditors is still considered too hot and too likely to provoke panics and runs. So what they've come up with is a de facto haircut.

The bailout will be paid for, in part, through new higher taxes in Cyprus—austerity, in other words. But the specific tax in question will be a one-off wealth tax. And not just any wealth tax, but a wealth tax specifically levvied on bank deposits. A tax of 9.9% on deposits over €100,000 and 6.75% on deposits below that level. This will raise €5.8b to help defray the costs. Is this in any real way different than depositors taking a haircut? No. But for whatever reason the relevant officials seem to prefer to phrase it this way. And now the question is how many Spanish and Italian people are going to look at this precedent and try to shift money out of local banks.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Politics

Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Two Damn Good, Very Different Movies About Soldiers Returning From War

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

Students Aren’t Going to College Football Games as Much Anymore, and Schools Are Getting Worried

The Good Wife Is Cynical, Thrilling, and Grown-Up. It’s Also TV’s Best Drama.

  News & Politics
Weigel
Sept. 19 2014 9:15 PM Chris Christie, Better Than Ever
  Business
Moneybox
Sept. 19 2014 6:35 PM Pabst Blue Ribbon is Being Sold to the Russians, Was So Over Anyway
  Life
Inside Higher Ed
Sept. 19 2014 1:34 PM Empty Seats, Fewer Donors? College football isn’t attracting the audience it used to.
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
  Arts
Brow Beat
Sept. 19 2014 4:48 PM You Should Be Listening to Sbtrkt
  Technology
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Medical Examiner
Sept. 19 2014 5:09 PM Did America Get Fat by Drinking Diet Soda?   A high-profile study points the finger at artificial sweeteners.
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.