Sunday, March 17, 2013

Krugman and WB Agree

Sometimes the stars align:

Krugman

Wolfgang

Will the Eu's latest stunt blow up in it's face? TBD.

But don't miss Matt Yglesias's take.

The real issue here is that your typical middle class Cypriot seems to be getting royally screwed.

The European Union demanded that bank depositors take a haircut here for two reasons. One is simply that Germany would rather spend less money than more money. The second is that a lot of large depositors in Cyrpiot banks are thought to be Russian tax dodgers. That made the politics of a more generous bailout especially unlikely. It's also what specifically made taxing Cypriot bank deposits look attractive rather than some other form of tax. Makes the Russians pay!

So fair enough. That's why you have the 9.9 percent levy on deposits over €100,000. But why the 6.75 percent tax on deposits below €100,000? After all, those are the deposits that had received official FDIC-style insurance. Why break that promise? Most simply, you need the 6.75 percent tax to prevent the levy on large deposits from becoming more confiscatory. But, again, why? The official response seems to be that keeping the tax on large deposits low helps preserve Cyprus' viability as an offshore banking center. As Cypriot President Nicos Anastasiades put it in his official statement, this plan will save "8,000 jobs in the banking sector and thousands of others which would be lost as a corollary of not maintaining the operations of banks."

But will it? I'm not an expert in the psychology of Russian money-launderers, but the 9.9 percent tax seems like enough of a pinch to ruin the party. On the other hand, surely not every single large depositor in a Cypriot bank is Russian. Surely some of them are just wealthy Cypriots. Wealthy Cypriots whose interests the government is protecting at the expense of ordinary depositors.