How Cypriots Could be Impacted by the Tax on Bank Deposits

Lawmakers in Cyprus are set to vote on a bailout plan that would tax all bank deposits by 6.25 percent.

Stavros Zenios is a professor of finance at the University of Cyprus in Nicosia.

He’s one of many people whose savings would be affected if the measure is adopted.

He says this mesure could cause a precedent for other European countries and encourage people to withdraw their money all at once.

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Marco Werman: For more on the impact of Cyprus’s banking problems now, let’s turn to Stavros Zenios. He’s a professor of finance at the University of Cyprus in Nicosia. I’d like to know what the impact on the Cypriot economy is gonna be from this announcement that, you know, you’re gonna get taxed on your deposits.

Stavros Zenios: Well, on the one hand, you have to understand that there was high indebtedness of the households, but at the same time, they had significant savings. So, and the net was positive, so this is good, and this gives some room for the country to maneuver. On the other hand, so from this point of view, the haircut bailing in the depositors is not catastrophic on the economy. On the other hand, the fact that they touched the secure deposits, it’s raising serious issues about the stability of the system. And there has been big talk here, both from the local depositors and the foreign depositors in Cyprus, but also, I follow the developments in Europe and many other countries, that can we really trust, now, the European Union banking system if they are touching the deposits that so far have been guaranteed.

Werman: Now, when you say haircut, we’re talking about a six-and-a-quarter percent tax on deposits. It’s a little trim, shall we say? But, I’m wondering if Cypriots see it as just a little trim, a little haircut? How much impact has this had on ordinary people in Cyprus?

Zenios: Well, we have to understand that it’s not a tax on an annual basis. It’s a one-time levy, so people wake up in the morning and they discover that they are six percent poorer. Now, on people that were counting on this money as their source of income, like retirees, or someone who has their children in college in the United States or in England or in Germany, this is a serious problem. You put a hundred thousand on the side, you discover one morning you have seven thousand less. This is a two or three month fee for the kids. Then there are those who have this for the long run, and there the interpretation is rather, “Well, fine, we lost some of the interest we had gained over the last few years.” But people here are very upset, and what is really upsetting is this sense of helplessness.

Werman: So, the New York Times’s Paul Krugman noted in his blog that all this business in Cyprus is like the Europeans holding up a neon sign, written in Greek and Italian, saying, “Time to stage a run on your banks.” So, the banks are closed, but when they open, will there be a run on banks, and do you think this is kind of a little test in Cyprus to see if this kind of thing might fly in other countries.

Zenios: Well, Paul Krugman, he gave a fair warning. I’m not sure if there will be a run of the bank in Cyprus, because where will people take their money? But this has raised an issue about the, as I said before, of the stability and the resilience of the banking system. And if Cypriots are contented, and they do not run on Tuesday or Wednesday, this does not mean that it will go the same way in Spain or in Italy. From Cypriots, there is a sense now that what has been done has been done. The rest of Europe, they will have, this evening, see what was done in Cyprus, they can read in Spain, or they can read in Italy.

Werman: And what about you, Professor Zenios, have you lost anything? Are you six-and-a-quarter percent poorer today?

Zenios: Well, I’m not [xx], I have more than a hundred thousand or less than a hundred thousand. Yes, I am poorer. I was working in the United States for many years. Actually, I spent some time in Boston. I brought savings back home, and I’m upset that the savings are lost, but I take a more calm perspective with my kids, because this is money I had for the long run. I feel okay until my children go to college, I need to save some more. But this is money I earned outside my country, I brought it back, so yes, I’m very upset, but I’m not going to run to the bank tomorrow.

Werman: Well, always good to hear a calm voice on the financial issues that typically cause panic. Stavros Zenios, professor of finance at the University of Cyprus in Nicosia, thank you.

Zenios: Thank you, have a good day.

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