For those who thought that the Eurozone debt crisis had simply gone away, they received a rude reminder that this destructive fiscal disaster is not only still with us, but that its contagion continues to metastasize. The private banks in Cyprus were among many privately-owned financial institutions in the Eurozone that lost heavily on their investments in Greek debt-both public and private. Proportionate to the size of its assets and the GDP of Cyprus, the banks in that Island nation were especially exposed to the ravaging collateral affects of the Greek sovereign debt crisis.
As with other Eurozone economies whose private banks faced insolvency, the Eurozone rescue specialists in Brussels offered a bailout package to save the banks, with strings attached. In the specific case of Cyprus, the terms were especially onerous. The price of a rescue package by the Eurozone for Cypriote banks was the requirement that the individual depositors in those banks bear most of the cost of the bailout. All savers with deposits of up to 100,000 euros would pay a levy of 6.75 percent of the amount they had deposited with the financial institution -- a deposit of over 100,000 euros would be required to sustain a staggering levy of 9.9 percent.
Was it hubris, or simply rank stupidity (or perhaps a combination of both) that led the politicians in Brussels and Nicosia to believe that the Cypriote public that was about to be legally robbed, after being lied to by their own government with sublime assurances that their deposits were safe, would simply take such an outrageous policy prescription lying down? When the understandably angry people of Cyprus engaged in mass protests, the spin that came out of both Brussels and Nicosia simply defied all logic. The political decision-makers claimed that they thought since half of the depositors of Cypriote banks are Russian citizens living offshore, they could never imagine the remaining Cypriote citizens who were about to be fleeced to pay for bad investment decisions they had nothing to do with would feel so upset.
Now that reality has intervened in the bizarre punitive bailout scheme hatched by the politicians, there is frantic back-peddling in Nicosia. When the bank levy came before the Cypriote parliament, not a single legislator voted in favor of it, for to do so would clearly be political suicide. The policymakers are now scrambling for a "plan B," but meanwhile the damage has been done. The legalized theft of depositors' assets that politicians in the Eurozone attempted to enact is a precedent. Despite assurances from Brussels that this was a one-time scenario only designed for Cyprus, every citizen residing in the Eurozone, and in other advanced economies afflicted by the sovereign debt crisis, now knows that a desperate government can, at any time, seize their life savings, and employ them to bail out private investors and bond holders. Again we see robust application of the economic maxim of our age: "privatize all profits, but socialize all losses -- with a vengeance."