Tags: Cyprus | Elliott | bank | deposits

Brookings’ Elliott: Cyprus Plan to Have Huge Impact on Future Crises

By Michael Kling   |   Tuesday, 19 Mar 2013 12:06 PM

The plan to tax Cyprus bank deposits may have a huge impact on future banking crisis, says Douglas Elliott, a former investment banker and a fellow at the Brookings Institution, warning that possible contagion risks are enormous.

Cyprus said it planned a 9.9 percent tax on bank deposits over 100,000 euros and a 6.75 percent tax on deposits under 100,000 euros ($129,442) as part of an international bailout.

By seeking to a levy on bank deposits as part of the country’s bailout plan, European leaders create huge risk of a spreading contagion, Elliott says.

Economist Predicts 'Unthinkable' for 2013

“They have chosen to call into question the security of bank deposits in the eurozone, including insured deposits, rather than take a more politically difficult, but safer, step,” he writes in an editorial for CNNMoney.

Depositors in troubled countries can easily withdraw their funds or move their money to banks in other countries.

“There is a grave risk that this action will eventually lead to serious bank runs in other parts of the eurozone,” Elliott states.

In order to minimize the damage, European leaders hope to convince savers in other troubled eurozone countries that it won’t happen to them, he says. That probably won’t work.

No matter how much eurozone leaders assert that the Cypriot situation is unique, savers in other countries will realize that eurozone leaders can get their hands on their insured deposits.

Eurozone leaders, Elliott notes, believed they had no alternative, at least not one that’s politically feasible.

A bailout with relatively lenient terms would have increased the area’s stability, but eurozone leaders worried that the Cypriot rescue would be seen as a bailout of Russian oligarchs. Cypriot banks are perceived as a haven for Russian mobsters who use the island for tax evasion and money laundering.

Elliott is not the only one criticizing the plan, which caused a bank run in Cyprus and roiled financial markets.

“Of all the many steps that the euro area has taken to contain its debt crisis, the decision to force ordinary savers in Cyprus to contribute to their country’s bailout is the worst,” state Bloomberg editors, calling the idea unjust, politically obtuse and economically destructive.

Even if bank runs don’t spread to other countries, they say, “Europe’s governments have knocked a supporting wall from beneath their financial system.”

Video: Economist Predicts 'Unthinkable' for 2013

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