Cyprus – Bank Deposit Tax – Will It Pass? 18.3.13 10.34GMT

Let me take any mystery away immediately and say the bill will definitely pass. Let me also say what will happen to the tax rate of the deposits.

As I am writing this Bloomberg has just broken that the vote will be delayed until tomorrow (Tuesday)

Cyprus – Bank deposit tax, what will happen and why

Bloomberg’s reporter, Ryan Chilcote in Cyprus has also stated that he has heard that banks in Cyprus will not open until the bill is passed so from this I think we can safely say that banks in Cyprus will not open tomorrow.

So what will happen with the Cyprus bank deposit tax and what am I basing my predictions on?

The following predictions are based on what has been happening in Greece for the past 4 years.

The first step is to ramp up the drama and with the delay of the vote and the banks not opening mission accomplished.

It puts the issue front and centre of international news for another 24 hours and instills fear in the Cypriot and Greek populations in order for them to get on board with the vote.

At the time of writing the proposal is for a tax/seizure/confiscation of 3% on deposits under 100,000 Euro and 10% on deposits over 100,000 Euros.

These will not be the final figures.

The Greek government’s method of raising taxes is to come in with a crazy figure that causes uproar and controversy and then to declare that they need to bow to public pressure and come in with a lower tax. Classic psychological conditioning and this is what we will see in Cyprus.

I predict the tax on savings less than 100,000 Euro will be around 0.9% and the tax on deposits over 100,000 Euro will be around 1.9-2.9%.

My thinking behind this is that the precedent of imposing a tax on deposits is such a large one that there needs to be a big difference between the threatened number and the actual number. People have to feel relived that the tax will be so “low” and given that any tax on savings is unacceptable to most people the proposed number and the actual number need to have a large chasm between them in order to give the psychological effect of “relief”.

So in short, the bill will pass and it will pass with a tax rate that is much less than the figure currently being given.

But the bigger question here is what exactly is point of this Cypriot bank bail outs?

The claim is to help the Cypriot banking system but this is obviously nonsense.

These taxes will destroy the Cypriot banking system and will force the Cypriot banking system to come under the control of the ECB. The Cypriot banks will become directly dependent on the ECB for their survival on an ongoing and permanent basis.

With this move to tax bank deposits, Cyprus has destroyed its reputation as a tax haven and I predict people will be pulling their money out no matter what, people will be taking their money out on principle and this will guarantee that the Cyprus banks will see their business shrink considerably.

Bloomberg is covering this issue in detail live here http://www.bloomberg.com/tv/europe/

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