For those with bank accounts in Cyprus, this past week was problematic. In an unprecedented move within the Eurozone, Cyprus announced plans to impose a levy on all bank accounts as part of an agreement to be bailed out by the European Union. In essence it was a “bail in” in that the unfortunate deposit holders would be forced to accept shares in the insolvent banks in return for the theft of their money. At the time of writing a form of agreement is in place but whether the theft of depositor money is included is still to be agreed. They did agree to nationalise state pensions, and impose capital controls (restricting the flow of money out of the country) which until now has been illegal in European law (another significant factor for beleaguered Europe).
The proposal was for those with less than 100,000 euros in their accounts to be “taxed” 6.75%, while those above 100,000 will be hit for 9.9%. Not surprisingly the response in Cyprus has been one of outrage. The arbitrary loss of savings due to government and banking failure is scandalous. They could have fully written down bank bond values, they could even have written down government bonds to meet the required 7.5 Billion Euros that Europe (principally Germany) is demanding, but no, all bank account holders large or small were to be punished. Why?
Cyprus is an offshore tax haven with tens of billions of currency washing around its banking system. A large portion of this is Russian money, fair or foul. The Russians are also inflamed. Putin condemned the tax as unfair. Reuters reported that Vladimir Chizhov, Russia’s envoy to the European Union, said that the levy was: “similar to forceful expropriation” and warned that “the whole banking system can collapse”.
Russia is also very interested in securing rights to Cyprus’s gas reserves which could amount to 60 Trillion Cubic metres. Gazprom, Russia’s largest gas producer has offered to take on the full value of the bailout in return for control of these potential reserves, this was rejected.
Is the Troika (European Commission, European Union and the International Monetary Fund) warning Russia off from these resources, and striking a blow against offshore banking in general at the same time?
Of potential greater significance is the impact upon the banking system generally not only throughout the Eurozone but also worldwide. Paul Krugman writing in the NY Times had this to say:
“The big problem, however, is that it’s not just large foreign deposits that are taking a haircut; the haircut on small domestic deposits is a bit smaller, but still substantial. It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!”
One cannot think of a more explosive way of undermining the very basis of the Western banking system. Since the last great depression of the 1930’s governments have provided deposit insurance for the public to encourage them to have trust in their bank deposits. If a bank failed, the government would protect public deposits, usually to 100,000 (Euros, Pounds or Dollars). In sideswiping this provision for a member of the European Union, authorities are in contravention of agreements implemented in 2008 to maintain confidence in the tottering banking system via deposit insurance. The promise to protect deposits now looks very hollow. The likely consequence is that no one will have confidence in the banks, and with good reason. Why should depositors keep money in a bank which is not safe, in a bank which will happily through leverage gamble or lend 25 to 33 times the value of deposits in the interests of generating wealth for the bank? The risks are enormous, but this rough plan is effectively returning the risk to the general public rather than the Directors and managers of these banks! Or the regulators who allow them to gamble with this money to such an extent!
The first great banking bailout took many trillions of dollars onto the public accounts in Europe, the UK and the US. The economies are still struggling to recover from this largesse. It appears now that the governments have bluntly noticed that they are destroying their credibility for fiscal prudence so have taken matters one step further by attempting to put direct responsibility for future bailouts more directly onto the public via their bank balances. Why should anyone keep money in a bank under these circumstances in future?
Lastly although some could unfairly point to Islam’s emphasis upon wealth levies (zakat, kharaj and ushr) on under-utilised wealth or the productive capacity of the land. It must be stressed that this is the core basis for raising revenue for the poor and for the governments main spending needs and does not come via arbitrary confiscation of bank balances and is not for bailing out failing companies. In Islam these levies are instead of, and NOT additional to the plethora of income, spending, consumption, business, council, fuel, bank bailout and a myriad of other taxes the public suffer from in Western economies.
Jamal Harwood, Economics Editor