Views on improving the integrity of global capital markets
22 March 2013

Cyprus and Ohio: Mirror Images in Grab for Savers’ Money

Sunny Cyprus and snowy Ohio — at least at this time of year — have seemingly little in common. Ohio has 12.5 times the area, 10 times the population, and 29 times the GDP of the island nation. Cyprus, on the other hand, is surrounded by the Mediterranean rather than Lake Erie and the Ohio River. It has 10% more government debt than Ohio, and has become, in recent years, an offshore banking center for hot Russian money. Ohio, by contrast, is a traditional deposit gathering and lending destination in Middle America.

Where the two locales intersect, however, is at the nexus of sovereign finance and private investment. Cyprus is ponderously pondering how to fill a gaping financial hole, including whether and how much to appropriate from its depositors, domestic or otherwise. Ohio, having solved its budget crisis, is considering a regular tax on savers and investors to broaden its tax base and prevent a recurrence of the $8.8 billion budget deficit it had eliminated over the past two years. Regardless of the method used, the goal of both governments is the same: tap into private savings to deal with their fiscal problems.

Given the fiscal crises many sovereigns — federal as well as provincial — are facing, it was only a matter of time before politicians turned their pecuniary focus on private savings (there is no such thing as public savings these days, at least in the West). Argentina and Hungary have already moved to nationalize private pensions, and there have been rumblings about a mixing of private and public pension funds in the United States. That political leaders in Cyprus and Ohio have savers’ funds in their crosshairs, therefore, is right on schedule.

Nevertheless, it appears the politicians are getting an earful and may be reconsidering their deposit grabs.

Cyprus: Which Deposits to Take

In his Breaking Views article at Thomson Reuters earlier this week, Hugo Dixon laid out the difficulty Cyprus is facing with its current banking crisis. Specifically, it has a perceived €17 billion funding hole, for which the European Central Bank is willing to provide a €10 billion liquidity facility. It won’t help with the remainder to avoid being seen as supporting dubious Russian depositors. The Russian government supplied €2.5 billion last year to keep the system operating.

In Dixon’s view:

The problem was where to find the extra 7 billion euros. Given that Germany and other northern European countries weren’t prepared to give a handout, there were two options: haircut the government’s own bondholders or hit bank creditors. The option of haircutting government debt — as Greece did last year — was rejected. Many bonds are held by Cypriot banks, so a haircut would just have increased the size of the hole in their balance sheets, meaning they would have needed an even bigger bailout. The Cypriot government’s credit would have been destroyed for little benefit.

So, by default, the banks’ creditors had to be tapped. Ideally, bank bondholders would have taken the strain. But Cypriot banks have hardly any bonds. So there wasn’t much money that could be grabbed there.

This, incidentally, rams home the importance of requiring all banks to have fat capital cushions — consisting either of equity or bonds that can be bailed in during a crisis. The sooner international regulators come up with a minimum standard for so-called “bail-in” debt, the better. Given that Cypriot banks didn’t have such a cushion, the remaining option was to hit depositors — for 5.8 billion euros.

Dixon points out that the banking sector in Cyprus had swollen to about four times GDP with about half of its €68 billion of deposits of dubious Russian or Ukrainian black-market origin. To help attract these deposits, the banks have been paying interest up to 7% on these deposits, which should have been a sure sign of trouble — Texas S&Ls in the ’80s that were on their death beds always paid a premium over their relatively healthier competitors. What had they to lose, after all?

“[U]nless Cyprus’ insured deposits are totally exempted from this raid,” Dixon points out, “citizens in the rest of the euro zone now know that, if push comes to shove, their savings could be grabbed too.” An ugly thought.

Instead, Cypriot leaders continue to consider what to do, after rejecting a proposal to confiscate more than 6% of small savers’ deposits, and as much as 15% of deposits above €100,000. Dixon suggests taking that amount solely from uninsured deposits — a reasonable target, one might imagine, considering the unsympathetic nature of some of the biggest depositors. That, however, might spell the end of Cyprus’ status as an offshore financial center. Taking any from the insured depositors could set off alarms with depositors in Spain, Italy, and Portugal, among others. The latest reports suggest accounts below €100,000 will be protected.

In the meantime, Cyprus banks will remain closed at least through Tuesday of next week.

Ohio: Taxing Retirement

Ohio’s plan is less pernicious and less audacious in scale, but broader and longer lasting in scope. As part of a plan to cut income taxes and sales taxes on goods, the state’s leaders want to broaden the sales tax base to include services. The new 5% sales tax would apply to all professional services, including those related to investment management, advisory, custody, tax, financial analysis, brokerage, and retirement investment services.

Ohio would be the seventh state in the United States to adopt such a tax — Hawaii, Iowa, South Dakota, Washington, Delaware, and New Mexico are the others — so it’s hardly unique. The problem is that the tax is not paid by bankers or investment managers. CFA Institute polled its members in Europe last year about the EU’s proposed transactions tax. Most said the tax would get passed along to the ultimate client. That will certainly be the case in Ohio, where state law will require that the customer pays the tax, thus cutting directly into savings. In a worst-case scenario, the tax will become a pro-cyclical reduction in savings, similar to what Cyprus is currently considering for its savers.

Regardless of locale, savers and investors provide an inviting target for political leaders needing to finance the payoff of massive debts. What is more troubling, however, is that at the same time investors and savers are under siege, many bankers continue to operate under a taxpayer-funded, too-big-to-fail structure. Is it any wonder normal investors and savers have lost trust in the system?

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Photo credit: ©

About the Author(s)
Jim Allen, CFA

Jim Allen, CFA, is head of Americas capital markets policy at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

1 thought on “Cyprus and Ohio: Mirror Images in Grab for Savers’ Money”

  1. La nouvelle resistance says:

    We, the citizens, refuse to allocate our own funds in any form to bailout the gambling debts incurred through the financial speculation of investment banks.

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