Another Dangerous EU Decision in Cyprus

United Nations General Assembly Universal Declaration of Human Rights, 10 December 1948. -- Article 17. (1) Everyone has the right to own property alone as well as in association with others. (2) No one shall be arbitrarily deprived of his property. ~~~~~ Dear readers, you should read the property rights section of your own nation's constitution as well. Almost every governing political document in the world contains a provision protectong the individual right to own property and the right is protected by the corresponding right to due process of law before another individual or entity can take it away. And if the state takes real property, it must pay just compensation. All of these protections were brushed aside this weekend when the European Union, the European Central Bank and the International Monetary Fund muscled Cyprus into accepting a deal that literally confiscates billions of Euros in individual accounts in two Cypriot banks. Under the deal reached during the night of Sunday-Monday in Brussels, Cyprus agreed to slash its oversized (because it has 710% of GDP in bank deposits...more on this later) banking sector and inflict big losses on large depositors in troubled banks to secure the 10 billion Euro ($13 billion) bailout. Discussions in Brussels suggest that because many bank depositors in Cyprus banks are Russian and not EU citizens, and because they may have been hiding money from Russian tax authorities, although this has not been proved, confiscation of their deposits was acceptable. Laiki and Bank of Cyprus depositors will pay based on the following formula, with the remainder coming from tax increases and privatizations : people and businesses with more than 100,000 Euros in their accounts at Laiki face significant losses because the bank will be dissolved immediately into a bad bank containing its uninsured deposits (those over the 100,000 Euro guaranty amount) and toxic assets, with the guaranteed deposits (amounts up to 100,000 Euros in each account) being transferred to the nation's biggest lender, Bank of Cyprus. Deposits at Bank of Cyprus above 100,000 Euros will be frozen until it becomes clear whether or to what extent they will also be forced to take losses. Those funds will eventually be converted into bank shares. Euro finance ministers noted the restructure is expected to yield 4.2 billion Euros ($5.4 billion) overall. Analysts have estimated investors might lose up to 40% of their money. After the negotiations in Brussels that resulted in the deal, Cyprus President Nicos Anastasiades said that "the hours were difficult, at some moments dramatic. Cyprus found itself a breath away from economic collapse." Under the circumstances, he said it was the best Cyprus could have done. "The danger of Cyprus' bankruptcy is definitively overcome and the tragic consequences for the economy and society are averted." What are the ripple results of this weekend's EU work? They are many and not good. (1). The argument about Cyprus having an unusually high bank-deposit-to-GDP ratio is false. Luxembourg has 2100%, Malta has 700%, and mainstream France has 400%. So the fallout may be that rich non-EU citizens will take their money to Singapore, Malaysia, Hong Kong, Switzerland or even Britain and the US. This will mean that EU funds available for EU economic development, including car loans and house mortgages, will shrink. Not a good idea in an already struggling economic region. (2). Bank depositors in shaky EU countries - think Italy, Spain, Portugal, Ireland, and France - may start withdrawing funds in excess of the 100,000 Euro guaranteed level, causing mini- or maxi-runs on banks in those countries, again reducing funds available in the EU and putting downward pressure on the Euro. (3). Russia may choose to retaliate by reducing oil and gas exports to a very dependent EU. Russia may also consider re-evaluating its EU loan policy. (4). The Euro as a freely traded currency has been irremediably damaged. Never again will holding an EU account feel as secure as it once did because the EU has now made clear that money in EU banks may be seized without due process of law to pay for bailouts of failed Eurozone countries. Be careful, dear readers, because today EU leaders said the Cyprus solution may be a model for future bailouts.