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Taxing Deposit Accounts? It’s Happening in Cyprus

The European Union came up with a very risky way to help pay for bailing out Cyprus banks. They are going to place a tax on money in deposit accounts.   The tax on deposits in Cyprus banks is 6.75% on deposits up to €100,000, and 9.9% above that level.  This is a very dangerous move that will certainly erode confidence in banks, not only in Cyprus but across the European Union. Depositors in the next country that needs a bailout would certainly have to pay the tax as well. To be fair to the euro zone finance ministers, they did have their backs against the wall when they came up with this decision. Germany, which has the largest economy in the zone, and the International Monetary Fund insisted that financial aid to Cyprus should be limited to €10 billion.

Taxing Deposit Accounts Its Happening in CyprusThis decision will cause depositors to remove cash from all banks in the euro zone and at the worst time possible time. When confidence in the financial system in many euro zone countries is already low, with the economies growing slowly or contracting, taking money away from depositors will cause more harm than good.

Perhaps I would feel differently if I lived in a euro zone country that doesn't need a bailout due to government borrowing and spending run amok. It will be interesting to see how this plays out since there is going to be a big backlash in Cyprus. I wouldn't be surprised if the EU reversed their decision.

Can you imagine something like that happening to depositors in the United States? I can't and I honestly believe that would never happen here.  It’s like thinking your certificate of deposit or savings account is FDIC insured up to $250,000 and then finding out when the bank fails,  you’re not insured for $250k.

Speaking of certificate of deposit accounts, CD rates are stable this week. The best CD rates this week on 1 year CDs are still at 1.04 percent with an APY of 1.05 percent.

This decision is so risky it might be designed to have Germany and the IMF change their minds about limiting the dollar amount of the bailout. The temporary loss in equity prices across the euro zone probably will be higher than the €5.8 billion ($7.6 billion) the tax is supposed to raise
Author: Brian McKay
March 18th, 2013