European leaders are essentially inviting their fellow countrymen to make a run on the banks, according to Paul Krugman.
The Nobel Prize-winning economist and New York Times columnist wrote in a blog post Sunday that the proposed bailout of the Cyprus banking system, which requires a tax on bank deposits, will push other Europeans to run to their banks in a panicked race to withdraw their money out of fear they'll face a similar tax.
The Cyprus bailout is the first time European leaders have required depositors share the burden of rescuing a crisis-plagued European nation, which could open the door to including the requirement for bailouts of bigger countries like Spain, Italy or Greece.
“It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying ‘time to stage a run on your banks!’” Krugman wrote in the blog post.
Talk of the bank deposit tax has already caused a run on the banks in Cyprus. Nervous account holders ran to the banks on Saturday to empty their accounts after Cyprus’ President Nicos Anastasiades said the country had little choice but to accept the $13 billion deal from the IMF and the country’s eurozone partners. Lawmakers in Cyprus postponed a vote on the proposal, which was scheduled to take place Sunday, until Monday.
If lawmakers reject the deal, it could send Cyprus into bankruptcy and perhaps push it off the Euro, according to Reuters. In addition, officials expect Cyprus bank account holders to make a run on the banks Tuesday (Monday is a national holiday) no matter which way the vote turns out.