Is American banking safe? Consider Cyprus

The US isn't Cyprus, but there's a warning there: The safety of your bank account is no greater than the solvency of your government. Photo: AP

WASHINGTON, March 18, 2013 — In 2008, after the collapse of Lehman Brothers, the eurozone acted to insure deposits in European banks. The point of the insurance, as with America’s FDIC, was to build confidence in the banking sector. 

The agreement on Saturday by eurozone finance ministers to impose a 9.9 percent tax on bank deposits in Cyprus was an effective repudiation of the 2008 policy. At the least they have shaken depositor confidence in European banks, and at the worst they may have launched a bank run. 

Eurozone officials have been quick to argue that their solution for Cyprus is not a precedent. This policy will never be imposed again on any other country, and depositors should be unafraid for the safety of their bank accounts. European banks are safe.

That’s pure sophistry. It may be true that they will never again impose this kind of tax on Cyprus, hence it will be unique and “not a precedent,” but this policy can be used in another country and another, each with its own unique, non-precedent-setting circumstances. What a government does once, it can do again and again and again. 

The argument for the tax on Cypriot accounts is that the banking sector is 700 percent of the Cypriot economy. More than half the deposits in Cypriot banks belong to foreign depositors, most of them Russians taking advantage of Cyprus’ status as a tax haven not too far from Moscow. A tax only on deposits greater than €100,000 (about $130,000, the limit covered by deposit insurance) might make a certain weird sense in that case. After all, people who use foreign banks as safe havens for their money have no right to expect that the practice will entail no risk. 

But the policy makes Cypriot banks suddenly much less appealing to foreign investors, and it doesn’t stop at €100,000. All deposits, however small, will be hit with the tax, though it will be “only” 6.75 percent for those under €100,000.

A full bailout for Cyprus would have cost €17 billion, a sum that eurozone finance ministers would not agree to. Why not require depositors to help fund the bailout? The finance ministers (and the IMF) agreed to a €10 billion bailout if depositors coughed up the rest, and the only way to make up the missing €7 billion was to impose the tax on all accounts, not just big Russian accounts.

Were most of us owners of bank accounts in Cyprus, we’d probably do the rational thing: Withdraw our money before this could happen again. I wouldn’t want to start a bank run, but if I believed a run were coming, I’d want to get my money out first. That logic almost guarantees a run. Unless Cyprus imposes a long bank holiday or limits bank withdrawals, that is the result they should expect. 

And it won’t stop there. Greeks and Spaniards are being assured that they need not fear a Cypriot solution to their countries’ financial problems. What guarantee do they have? None at all. Guarantees were issued in 2008. They were torn up and thrown in the trash. What kind of guarantee will convince anyone today who has money in a vulnerable bank? The only thing that will stop bank runs in much of Europe are legal impediments to large withdrawals, such as limits on the amount of money that can be withdrawn from the bank in a single day. 

Americans should look long and hard at what’s happening in Europe. Our own debt exceeds GDP, and it appears increasingly unlikely that we will ever be able to repay it. The only way to wipe it off the books would be for investors in our financial sector to co-fund the bailout, assuming we don’t simply inflate the debt away. The $15 trillion sitting in tax qualified retirement accounts would be a logical starting place to get those funds, and as with Cyprus, if the need is seen as great enough, seizures won’t be restricted to large accounts.

The situation in Cyprus sets no precedent for the United States, of course, for the trivial reason that the U.S. isn’t Cyprus. But it does tell us that the security of bank and retirement accounts is no greater than the solvency of our financial sector, which in turn is no greater than the solvency of our national government. Whether the government can’t afford to insure your deposits, or whether officials conclude that they government needs the money in your accounts more than you do, it’s all the same; you lose.

The news from Cyprus should serve as a cold, hard blast of reality to anyone who maintains bank and retirement accounts. 

READ MORE by Jim Picht at Stimulus That!

James Picht is the Senior Editor for Communities Politics and teaches economics at the Louisiana Scholars’ College in Natchitoches, La., where he went to take a break from working in Moscow and Washington. But he fell in love with the town and with the professor of Romance languages, so there he stayed. Now he teaches, annoys his children, and makes jalapeno lemonade. When he lived in Russia, his Russian colleagues kept their money in Cypriot bank accounts. He kept his in Russia. He tweets, hangs out on Facebook, and has a blog he totally neglects at 



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Jim Picht

James Picht is the Senior Editor for Communities Politics and teaches economics and Russian at the Louisiana Scholars' College in Natchitoches, La. After earning his doctorate in economics, he spent several years working in Moscow and the new independent states of the former Soviet Union for the U.S. government, the Asian Development Bank, and as a private contractor. He returned to Ukraine recently to teach principles of constitutional law and criminal procedure at several Ukrainian law schools for a USAID legal development project. He has been writing at the Communities since 2009.

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