Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 20 March 2013 at 11:54 GMT

Is Cyprus deposit levy the first sign of widespread wealth tax?

co-founder & CEO / Saxo Bank A/S

Confusion reigns supreme in the Cyprus bailout. So it is fairly risky to stick out your neck commenting on an unknown outcome that could leave you exposed to ridicule in hours if things change. And this blog is not intended to be a daily or even weekly commentary as I am not providing short-term trading advice, meaning that it is tempting to just wait and see what the outcome will be.

However, as this is so far the most important macroeconomic event of 2013 and it is continuously developing in new and perplexing ways, I feel it is necessary to try to make some sense out of what we are observing and hearing.

What we know now is that the Cypriot parliament has rejected the bailout package after a poker game with the Troika, trying to deal many different hands varying from zero percent deposit tax for the smaller depositors to 15 percent on the larger ones. None of the combinations have proved sufficiently appetising to secure a deal so far.

We also know that France has categorically ruled out that a plan B will be made available. This sounds plausible as we are already at least at plan D or plan E. We also know that the Russians are now heavily involved behind the scenes, despite being understandably ticked off about the whole process. We know that this is now turning into a geopolitical chess game, where important European oil and gas reserves may actually find their way into Russian control, in spite of all the ambitions of the past decades to achieve the exact opposite with regard to the European energy supply. We know that Merkel cares more about positioning for the upcoming domestic election than the future fate of Cyprus.

Furthermore, we know that Cyprus banks are closed until at least Thursday, but also that they will not open until some kind of deal is in place - or the issue of a deposit levy will be irrelevant, as there will not be a penny left in Cyprus, certainly not of foreign money.

We know that the Cyprus finance minister may unsuccesfully have tried to submit his resignation and that the British are flying in cash Euros to their 3,000 military personel.

We know that a consortium of banks has offered a private solution to the crisis, but apparently not been seriously considered.

On a lighter note, we now also know that the first name of the Cyprus central bank governor is Panicos, indicating that the old saying, "Your name is your destiny" may indeed hold some truth... sorry, excuse the pun, but I could not help myself. Actually, I feel for the man who may well hold one of the least desirable jobs in the world right now.

That is a lot to take in after just 72 hours of action. Where will it all end? What have we learned from this?

A number of things. We have seen again that the Eurozone is unable to deal rationally with its problems. This has got to be the most incompetent handling of a Euro crisis event so far, but underlines the hopeless situation the 17 countries that share the common currency are in. The panic is so great that no step is too extreme to preserve the doomed project and to defend the political capital invested in this monumental failure. That we have already come to a stage where politicians blatantly attempt to confiscate innocent and weak citizens' savings is a new low that was somewhat unexpected already at this point. It bodes ill for what can happen when the crisis deepens in the future - which it will.

The idea of a one-off wealth tax, however, is not new. Several research reports have pointed in recent years to the fact that the desperate need for funding in the public sector could - and probably will - eventually lead to confiscation of wealth in a monumental scale. Boston Consulting Group suggested in a recent report that about 29 percent of ALL private wealth, not just deposits, will eventually be likely to be confiscated to cover the debts already incurred. (Read the article on So we had better get used to seeing our money being appropriated by money-hungry politicians. This is just the beginning. The cat is out of the bag, no matter if this particular deal should fall apart.

What astonishes me is that such an important and extreme move is risked for such a modest prize. The slow realisation that confiscating our money will be the next move in the debt crisis has been made very acute by this blatant move. The most important game changer in years and the most frightening tool in the tool box has been pulled out in the open for a mere USD 5.8 billion. The impact could trigger massive asset capital flows and asset devaluations to the tune of hundreds of billions. The loss of trust will be detrimental to all weak economies. Why on earth did the Troika not save this shocker for a substantial occasion, say a bailout of Spain or Italy? Incompetence? Lack of market understanding? Or even more frighteningly - perhaps because of a wish to introduce this new tax tool to get the voter populations used to new ideas for milking the rich in the future?

This is intriguing and fascinating - it is just a great shame that the population of Cyprus needs to go through such heartache for problems they did largely not create themselves, and have no way to avoid.

Who will be next to find themselves in such a situation is the prudent question to ask?

Be safe out there.

PADusoulier PADusoulier
At least in France we are protected by something like this happening... Because we have it already!

It is called ISF which means literally solidarity tax on wealthy people! More than 600 000 french citizen are paying it every year. The rate of the taxes goes up to 1,5 % per year.
Knowing that those days you don’t get more than 2 % on a ‘risk free’ deposit and that in France you will pay now quickly 75 % tax on this; you will get only a net 0,5 % return on your cash. On this return if you subtract 2 % inflation and the wealth tax; you will lose every year 3 % of your wealth.

This is not acceptable for most of us and some of us (Depardieu) are using the same solution than Cyprus… They are becoming Russians!
jmeyer10 jmeyer10
How correct you are Mr. Christensen, but when the Scheiße hits the fan we all pay.
Thor Thor
We are always quick to shake our fist at Berlin or Brussels, and with good reason to do so, but I also fail to see any suggestion of a solution. Yes, taking a tax on the insured deposits is terrible, but you know as well as me that a deposit at a bank is a loan to that bank, and when that bank is run by morons (which seemingly many banks are) there is a risk that you don't get your money back. And a private solution? Please. There's no way that any private consortium will step in to save the Cypriot banks that won't leave any depositors (or indeed the taxpayers of Cyprus) worse off over time. The solution for any failed bank is as always taxpayers, because nobody else can guarantee the depositors, and absent of that guarantee depositors would loose much more (especially here given the small amounts of debt on the balance sheets). Governments Incompetent? Absolutely. But even those that hand out "Atlas Shrugged" are willingly dependent on them, whether they like it or not.
Yes, it seems the idea that the wealthy need to 'ante up' is gaining foothold in Europe which lacks the political cohesion to agree on more sophisticated measures. However, such decisions must ultimately be left to democratic governments as no other entity has the political legitimacy to enact such measures. For Cyprus, the time of reckoning has come. How this issue is settled will define the country for the next generation at least. Someone is going to take the brunt of the pain, and who that is ...the EU, Cyprus or Russia will make all the difference. Thus the choice is a political one for the long-term.
Kim Cramer Larsson Kim Cramer Larsson
"For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil." Jean-Claude Trichet, 18/01/2008


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