Cyprus imposes 9.9% tax on bank deposits

[d.o.g.]

wow this is so unfair
never thought garmens can tax deposits... imagine if PAP did this to us, lol

---

http://www.businessinsider.com/cyprus-ba...uns-2013-3

I followed the link and got to the full text of the Cypriot President's speech:

http://www.businessinsider.com/cyprus-ba...des-2013-3

There is some important information lost in this "tax on deposits" brouhaha: it is not a straight tax per se but a forced conversion of the deposits into bank shares.

The operative quote is:

"Total rescuing of deposits, with just the exchange of a small percentage of savings with shares of the two banks."

That's right - the Cypriot government is converting a portion of the deposits (which are bank liabilities) into bank equity (which are bank assets). The president admits that:

"Currently, these shares do not have their full value, but with the economic recovery they will repay most it not all of the amount that will be cut."

In other words, it's essentially a debt-to-equity conversion program often used in the capital markets when creditors exchange some or all of their debt for equity in the distressed borrower. Sometimes it's a voluntary exchange when the creditors think it's a good deal. Sometimes it's an involuntary exchange because if the creditors hold out they are worse off.

In the case of Cyprus, the president's message is that Cyprus is in the second situation, because the depositors will lose 40% of their deposits if the bailout does not go through. So losing 7-10% is the lesser of two evils.