Channeling Colbert to Rescue Cyprus
Cyprus is an island south of Turkey with a delightful climate, disastrous finances and wretched politics. Aphrodite, on the recommendation of her image-makers, allegedly chose it as the best place to emerge from the sea. Its desirable location has made it a coveted target for conquest and it has been owned by virtually every country, past and present, bordering the eastern Mediterranean. For shorter periods it was actually owned by itself, but now it is split about three to one between Greeks and Turks.
Cyprus is about to be owned by banks but they won’t be Cypriot because their banks are bust thanks to write offs of Greek loans. In fact, it is the Cypriot banks that caused their country to rocket up the Google search rankings from nowhere to financial pariah.
Cyprus has a government including a President, Nicos Anastasiades, and sort of a partial Parliament in which the Turkish minority (known for its ability to add) chooses not to participate. These elected officials are the people who have been maneuvered into taking the blame for the hardship to come. Thus far it has not gone well.
Bailouts are today’s accepted form of conquest. You barely need to leave your Brussels, Frankfort or London conference room let alone sweat it out on the bench of a trireme being lashed and drummed at. A few wire transfers and some fountain pen signatures on the heavy vellum of a treaty and you are done. That’s what happens when countries get into excessive debt or let their banks do so for them.
The conquerors are set to be the European Finance Ministers, the European Central Bank, the International Monetary Fund and the European Commission, which will stump up multiple billion Euros if the locals can come up with €5.8 billion.
Where will this pipsqueak country that is but 0.2% of the European economy come up with €5.8 billion — €5275 per person including the politically abstinent Turks? It won’t. Cyprus has already been conquered by bankers so it can’t very well be conquered again.
At present, there are two meaningful chunks of the Cyprus economy: tourism and banking. It is a nice destination for Euro-biggies when they need to get some sun after a hard week of conquering. (See why you heard about Aphrodite and the delightful climate up there at the top?) Get ready for another seemingly useless fact that isn’t. Cyprus is not the only sunny island in the Mediterranean.
Banking, now 45% of the economy with deposits equal to eight times the gross domestic product, is the only other significant economic contributor. Wow, where did the deposits come from? Well, Cyprus is not known for heavy-handed bank regulation and, given its E.U. membership and convenient location; it has turned into a felicitous money-laundering destination.
€30 billion worth of questionable Russian rubles followed Aphrodite out of the sea and they were turned into bright, shiny, fully-cleansed Euros available to be redeployed into polite society outside the grasp of Russian taxing authorities. There are not nearly as many “financially sunny” islands as there are “sunny sunny” islands so the Russian money launderers have fewer choices, making them a much better target for bailout fund-raising than the vacationers. Besides, it takes far too many hotel and rental car taxes to get to the needed amount.
The plan to raise the €5.8 billion local share of the bailout is a 9.9% tax on all bank deposits in excess of €100,000 and a 5.8% tax on smaller deposits. Though this is not new news – Russia had already provided €3.3 billion in loans to try to make the problem go away – both Vladimir Putin and Dmitry Medvedev expressed outrage at the plan to snatch €3 billion from their countrymen (and maybe even themselves). Putin described the seizure as “unfair, unprofessional and dangerous,” while Medvedev invoked the image of “Soviet era property seizures.” Hypocrisy futures spiked on the news of the Russian leaders’ reactions, but early in the week, it appeared that world stock markets might swoon at further evidence of European financial distress and, for the first time, the prospect of using a wealth tax to solve it.
Cynical readers and rivals for search engine attention will think the word Colbert in the title refers to comedian Stephen Colbert of The Colbert Report on Comedy Central. They will be wrong. It refers to Jean Baptiste Colbert, the Minister of Finance under Louis XIV, who famously observed, “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest possible amount of hissing.”
Historical note: if your boss wants to consolidate power and end feudalism by housing all of the lords, barons, dukes and other nobles in Versailles, your taxation skills will come in handy and we should listen to your advice.
Wealth taxes are not unheard of. French actor Gérard Depardieu moved to either Russia or a few feet into Belgium to avoid one in France. We also know them as property taxes, the fraction of the value of American homes that is paid to local authorities each year usually in support of schools.
Otherwise taxes are generally related to things that change hands like salaries for work (income tax) or lattés from Starbucks (sales tax). There is not much goose hissing about these unless the rates get too high.
The proposed Cypriot levy seems an extension of a trend begun by the odious speed camera: tax the bad guys. Those who misbehave are tempted to reduce their hissing under threat of even greater penalties for their misdeeds.
The Russian money-launderers are little comforted at the idea that they will still be better off after the “unfair, unprofessional, dangerous Soviet era property seizure” than they would have been if they had not sent their dirty rubles to the cleansing shores of Cyprus.
The real hissing is coming from those who are not involved but fear that the conquering bankers might try to do the same thing to them when Italy or Spain goes bust.
Jean Baptiste Colbert would not be pleased.
On Tuesday, we heard from President Anastasiades and the partial Parliament. They rejected the tax. The waiting conquerors were unhappy.
Though spring is coming and with it warmer weather, further hissing might also come from Putin and Medvedev, whose fingers rest lightly on the valves controlling most of the natural gas that flows to Europe.
Now another potential conqueror has entered the picture. Gazprom, the Russian energy monopoly, covets the potential gas deposits near Cyprus or at least hopes to avoid letting anyone else have them. It might be willing to bail out the busted banks in exchange for exploration rights.
Jean Baptiste Colbert might be very pleased at that solution but the hissing would be heard elsewhere.