In the early hours of this morning, the Eurogroup reached `political agreement’ on the `cornerstones’ of an agreement. So there is much more to come – perhaps once the evaluation of the anti-money laundering system in Cyprus is finalised.
The decision to tax bank depositors is the new landmark – especially as small depositors are included when an obvious boundary would have been the €100k limit of protection in deposit guarantee schemes. But they are only taxed at 6.7% versus 9.9% for larger depositors. However, the real 'barrel of worms’ is likely to be uncovered in the next five years as the Cypriot banking system is shrunk to the EU average. If ministers had chosen the eurozone average, the squeeze would have been even worse! How is this to be done?
Could this tax spread contagion to banking systems in other countries? The belief that there are huge differences between the quality of bank deposits in Cyprus and other states is so well known that this can easily be seen as a one-off decision. Moreover, the issues of taxing smaller depositors may turn out to hinge on the analysis of the distribution of 'laundered’ deposits that were attempting to benefit from the implicit EU guarantee. In any event, the tax paid will just bump the Cyprus citizens' tax/GDP ratio up from 40% of GDP towards the Greek level of 43% - still well short of the euro area average of 47% - depending on the exact mix of resident versus non-resident depositors.
Rolling Blog
© Graham Bishop
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