Protests against the bailout of bond holders, such as this
one in Dublin on March 16, happen regularly in Ireland.
The raid by the Cypriot government on bank accounts in Cyprus has sent shudders of fear through ordinary people across Europe. And that includes Ireland.
Time and again EU leaders have told us that no matter what happens in the ongoing financial difficulties in Europe, bank deposits are safe. Now it seems they're not as safe as we thought!
Of course the EU leaders are insisting that this is a one off, that it won't happen again, that Cyprus is a special case. And Irish government
ministers have been reassuring us that it could never happen here. Never. Bank deposits here are completely safe, they say.
One has to admire their sense of humor ... and their brass neck. Because, as we all know, there's more than one way of skinning a cat ... or someone with a bank account, which is pretty much everyone these days.
It was hilarious listening to a couple of our government ministers here in the past few days being all holier than thou. There but for the Grace of God and the more responsible way we handled our bailout we could have gone as well, they implied.
We could have been like Cyprus except for our careful handling of the banking crisis here. And that would have been unthinkable! A government going straight into bank accounts and taking money! How shocking!
They have short memories. Okay, so the government here did not raid bank accounts directly. Instead, they found other ways of taking the money from us to make up for the huge losses our banks had racked up, losses that were so enormous Ireland was faced with a banking collapse. Just like Cyprus.
And just like the people of Cyprus will pay, it is the general population in Ireland who are paying the cost of the "solution." If anything, it's worse in Ireland.
Under the revised bailout in Cyprus, depositors with up to €100,000 in the bank are protected. This is the same cut-off point that applied to the government guarantee in Ireland, and it's the same level that applies in general to the EU-wide deposit guarantee.
But saving the Irish banks (in other words, paying their debts) came at a high price for everyone in Ireland, including those with much less than €100,000 in the bank. The government did not put its hand straight into our bank accounts to take the money. Instead they are hitting us with extra taxation, and also forcing us to pay extra for services.
The net effect is the same. And it's simply not true to say that the Irish government did not take money directly.
The government did not put its hand directly into our bank accounts. But it did put its hand straight into our pension funds by applying the pension fund levy that is costing people here hundreds of euros a year each.
Bear in mind that these are people who were doing the right thing, who had worked hard and saved to build up their own little pension fund.
Two years ago the government just jumped right in and hit these funds with an annual levy. It's raking in hundreds of millions every year as a result.
Then there's the Universal Social Charge, a fancy name for what is in reality just another income tax. We already had an extra income tax called Pay Related Social Insurance (PRSI) which was already providing for the social welfare part of government spending. But at the start of last year a second extra "social" charge (or tax) was imposed on the population to squeeze more money out of them.
This USC charge is a colossal seven percent of everything you earn over €16,000. PRSI is another four percent.
And keep in mind that these "charges" are on top of the 41 percent income tax that all middle income people here pay.
By law, like income tax and PRSI, the new seven percent USC charge introduced in January last year is also deducted at source from your paycheck. So the government puts its hand straight into your pay packet and takes it. Just like the government in Cyprus is going to take money straight out of bank accounts.
Can someone please tell me what's the difference? Of course, ordinary people in Cyprus with less than €100,000 in the bank will end up paying for the bailout as well. They will just pay in a different way, even if they don't realize it yet.
The bailout plan for Cyprus includes budget cuts, privatization of services and various economic reforms. These are all designed to cut state spending in Cyprus and make ordinary citizens pay more for things that were either cheap or free up to now (health care, schooling, public transport, etc).
So ordinary citizens in Cyprus will find that they have to dig into their savings anyway, even if the government has not taken a chunk of their money out of the bank. The overall bailout in Cyprus is around €16 billion, with 10 of it coming from the EU/IMF on condition that the other six comes from Cyprus itself. That's what all the argument has been about.
And remember that, in spite of all the propaganda that it was the Germans who were behind it, it was the Cypriot politicians themselves who said that they would raise the €6 billion mainly by imposing a levy on bank deposits.
Initially, they wanted to impose it on all bank accounts, including small depositors, to lessen the amount they would have to take from the big depositors, many of them Russians and other foreigners putting "hot" money in Cypriot banks.
Banking had grown to an unbelievable eight times the size of GDP (national income) in Cyprus and has been a huge part of the economy
. A lot of this was funny money, money that was avoiding tax in other countries or money that was the proceeds of activities that were questionable. Around €
20 billion (one half of ALL the money deposited in Cyprus banks) is Russian, and a lot of that is hot money or funny money of various kinds.
There is lots of anecdotal evidence from bank workers in Cyprus of Russians arriving with suitcases stuffed with dollars. Even if this money is clean, it probably avoided Russia's exchange controls and taxes.
But it's also true that a lot of the Russian money is in Cyprus legitimately, at least from the Cypriot point of view. Company tax in Cyprus is half the rate in Russia, and lots of Russians have set up shell companies in Cyprus through which they funnel billions in business. They don't actually do much in Cyprus apart from some paperwork, but it allows them to avoid huge amounts in tax.
All of which means there is very little sympathy in Europe generally for the mess the Cypriots have got themselves into, mainly because the Cypriot banks invested too much in Greece. And we all know what has happened to investments in Greece.
There won't be much sympathy for those who will be losing 20 to 40 percent of their deposits over €100,000, since a lot of them are foreigners. There is, however, some sympathy in Ireland for the ordinary Cypriots and what they face. We've been there and we know what lies ahead of them.
One other interesting fact emerges from the Cyprus bailout situation. Here in Ireland we were told by the EU that the reason we had to pay back all depositors and bondholders was because failure to do so would destroy confidence in European banks. So our billions in bank debt was transformed into sovereign debt, and the ordinary Irish taxpayer will be carrying that burden for the next 40 or 50 years.
When people here suggested that some of the senior bondholders who had gambled on the Irish boom should be singed a bit, if not completely burned, we were told no, we could not do that because senior bonds have the same status as deposits. They have to be protected.
So they gave Ireland the bailout so we could pay back all these bondholders, and now Irish taxpayers have to pay back the bailout.
But what's happened in Cyprus shows that as part of a bailout, the EU and the IMF now think that burning depositors and bondholders by as much as 30 or 40 percent is OK. So if that's the case, why did we have to pay back every last cent to all those German and French banks who pumped money into Irish banks and bonds to get a taste of the action here during the boom? Am I missing something?
We'd all love some of that Cypriot sunshine here at the moment since we're freezing in the coldest March in decades. We can't have that.
But maybe we can learn some lessons from Cyprus instead.