The move by the Cypriot government, imposed on it by the EU, to dip into its peoples’ bank accounts and remove up to ten percent of deposits is generally being labelled as a tax.
But in reality those affected are being forced to buy shares in the banks that their money is deposited in. It is not like they are just having the money taken from them, they will receive an equal amount in shares in the bank when the money is extracted. It is not really therefore a tax.
Presumably those shares could then be traded in the normal manner.
So maybe things aren’t as financially bad for Cyprus account holders as popularly portrayed. But a part of their money has been moved from the safety of cash into the more volatile and risky medium of shares.
The account holders are creditors of the banks who are being forced to take equity stakes, so this is an EU/IMF/ECB/Cyprus government enforced debt for equity swap.
What some may think is unforgivable is the way in which this was done. Without warning the IMF and EU imposed this financial solution on a small part of the Eurozone and the timing ensured that a bank holiday gave the politicians the leeway they needed to get this through whilst limiting peoples’ ability to get at their money. This straight after the people being assured that this would never happen in Cyprus; they were seriously misled. But this sort of deal has to be done quickly when people cannot interfere or it will be fatally flawed from the start.
It will also badly affect those who use all the money in their accounts to fund their daily lives, especially if they can’t shift the shares they get in return or can only do so at a loss.
Many people living in Cyprus are threatening to withdraw all their money but, according to reports over the weekend, the banks have already ring-fenced the money to prevent people evading it.
Now of course many people across the EU (especially within the Eurozone) with money in a bank will be twitching. What if this is successful? Could this then come to a bank near them? Is there an upcoming bank holiday? And the bond and share markets have reacted accordingly. But these markets will recover after the usual shuffling of money as people rearrange their affairs.
George Osborne has said that British servicemen and civil servants who lose out will be compensated. But how will that mechanism work if those people now own shares instead of the money? Will the chancellor offer to buy those shares at face value with taxpayers money? Or will they be given the money and keep the shares? What if the shares increase in value over time, which they should if this move gets Cyprus back on track?
But this still has to get through the Cypriot government and be enacted.