Cyprus, a tiny Euro Zone nation of 1.1 million people, to receive a bailout just confiscated as a special tax, part of all savings accounts above 100,000 Euros ($128,000). Yesterday,the Cyprus government estimated that special tax would eventually take 40 to 80% of those funds.
A week ago the plan was to seize at least 10% of all savings but when the people took to the streets in protest the government withdrew its seizure of their funds. Rumors are circulating that many big savers, including the president's family, had already transferred their money out of Cyprus before it could be seized, a wise action.
What Cyprus is doing is blatantly unfair. It is seizing people's savings to pay for horrifically bad bank decisions. By doing so, Cyprus is destroying its credibility and vast sums of money will flee the nation.
To prevent that capital flight, the government is allowing people to access just a small amount of their money at a time. But people will avoid depositing their money where the government can access it and international money that used to be deposited in Cyprus as a safe haven will go instead to Switzerland, Luxembourg and the Cayman Islands.
This will hurt Cyprus because it desperately needs capital for its business to operate, as credit to sell goods (credit cards, checks, letters of credit between businesses, etc.) and to create jobs. Instead, there will be a credit and a cash crunch.
And it warns people all over the world that when their government or their major banks go bust, all options are on the table, including confiscation of their money.