The Cyprus “deposit haircut”

In the ongoing debate over how to deal with our national debt there have been plenty of idea put forward, but not much action. Many plans focus on the idea of everybody pitching in together to combat the problem, but here’s one idea which likely never occurred to you. How about if the government just went around and confiscated up to 10% of everyone’s life savings to help cover the gap? What could possibly go wrong? We might be about to find out by studying the situation in Cyprus.

Cyprus’ savers bear brunt of unprecedented bailout

The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help during the region’s debt crisis.

In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country – euro zone finance ministers forced Cyprus’ savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.

Parliament was due to meet on Sunday to vote on the measure, and approval was far from assured.

People’s savings would be garnished at a rate of 9.9% for those having more than 100,000 Euros in the bank under the plan, with 6.7% being pilfered from those having less than that. Now, I’m no economist or anything, but if you suggest that the government might come around and start siphoning off a significant chunk of the life savings of workers, that sounds like a perfect formula for a bank run, doesn’t it?

The decision prompted a run on cashpoints, most of which were depleted by mid afternoon, and co-operative credit societies closed to prevent angry savers withdrawing deposits.

Almost half Cyprus’s bank depositors are believed to be non-resident Russians, but most queuing on Saturday at automatic teller machines appeared to be Cypriots.

But don’t you worry. It could never happen here, at least if you listen to Paul Krugman and company. Just keep on running up the debt and I’m sure everything will work out just fine.

When I was a child, one of the earliest stories I remember reading was The Ant and the Grasshopper. The ant works hard all summer to save up food for the winter while the lazy grasshopper sings and plays in the fields. When winter comes, the grasshopper is freezing and starving, so he goes to the ant to ask for shelter and food. The ant tells him he should have thought of that back when food was plentiful and turns him away, presumably to die of exposure and starvation in the fields.

Today the grasshopper can simply have the government take the ant’s food. So… progress.

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