Financial markets in Asia and Europe fell sharply today thanks to the unusual terms of the EU bailout of Cyprus. A tax of up to 10 percent on bank deposits in Cyprus was proposed to defray some of the cost of the bailout. The plan is likely to be softened before the Cypriot parliament votes on the package tomorrow. But, has damage already been done?
Though the levy on deposits is unusual method, there’s no mystery why it is being imposed on bank accounts in Cyprus. The Germans in particular insisted on it. They believe that large amounts of cash in the Cypriot banking system belong to Russian money launderers, and that it’s only right that they too should bear some of the cost of the bailout.
But the levy also hits ordinary law abiding depositors. And that’s dangerous says fund manager Henry Dixon, who believes it could undermine confidence in the banks in other troubled eurozone countries:
"I think this is a scary measure," says Dixon. "It would be absurd to think that people are not thinking about depositors in Ireland, Portugal, Italy, Spain and thinking maybe -- you know -- my money’s better out of the bank and under a mattress."
There are even doubts about the legality of the savings tax since most European bank accounts of $130,000 are insured.
And while much of the effort expended on the eurozone debt crisis has focused on re-building trust in the banks, there are some fears that this latest proposal could trigger a bank run.