Sure, this time it was not the banks itself but rather the government that did this, but they could only do this because banks and government has stopped seeing money in the bank as belonging to the person who put it there. They would have never gone to a farmer and taken 10% of their grain. They would have never gone and taken physical property in peoples home. That would had been an complete impossibility. I even strongly doubt that any safety deposit boxes will be effect by this.

I understand the idea that this is a blow against companies that are using Cyprus as an tax haven. Its fully understandable. But I really dislike this current system of treating money in the bank as belonging to the bank. This story is just a clear example of this behavior expanding further.

- penalizes savers who lived within their means and didn't overextend themselves, saving up for a rainy day. Debtors who took out excessive mortgages etc. aren't affected.

- penalizes foreign investors like the Russians, who will be paying about 40% of the money to be raised from this measure if you do the math. Never a good idea to scare foreign investment away.

- might create a bank run in other weak economies in the EU, like Italy, Spain, and Portugal. That could create a problem on a huge scale.

Just because the money is from foreigners doesn't make it right. EU banking will have not credibility after this.

This will discourage people to put money in the banks and encourage them to keep them at home.

This is not some sort of illegal seizure - and wouldn't even be in the United States. While we normally tax income or consumption, governments can and do tax wealth. In the United States, property taxes are quite normal. What is the difference between charging someone x% of their house value in taxes and charging someone x% of their bank account balance in taxes? It's mostly normative: we're used to taxes on physical property like houses, but not used to taxes on cash that we carry in banks. If the government decided tomorrow to switch from property taxes to bank account taxes, would you care? Mostly, it would depend on where the bulk of your wealth is. If it were in your home, you would welcome the change.

I think the reason that they chose to go after the bank balances is that a lot of it is foreign-owned. In many ways, this is much better for the Cypriot people. They may not like seeing their bank accounts go down by 6-10%, but this method spreads the burden to a lot of foreigners. If they went the route of imposing a high property tax, they would have to shoulder a much higher burden.

It's also easier to implement, in a certain light. If you impose a new tax of, say, 2% on the value of real property holdings, people are going to lose their houses when they can't come up with the money for the tax. You don't want that: it would just be chaos. Taxing the bank accounts is taxing a liquid asset. You know they have the cash to cover 10% of their bank account balance because, well, it's their bank account balance.

Since they're going to impose the levy before the banks open on tuesday (monday being a banking holiday) and banks putting a withdrawal limit of 400 Euros on customers, it looks like it can be implemented.

In many ways, it's the easiest, quickest successful tax that they could impose. And, while it will cause a lot of uproar from Cypriots, it's probably better than any other measure for them. If the government were to try and raise the money from other means (whether a real property tax, higher consumption taxes, higher income taxes, etc.), the burden would fall on residents more than this tax will. Similarly, this tax will hit the rich harder than the poor. If they raised VAT, income tax, or real property tax, the rich could move elsewhere and be spared a lot of it.

EDIT: I'm going to respond to some replies here.

First, I never said this was a good plan. I said that it would be easy and quick from an administrative standpoint. The ECB doesn't seem to want something long and drawn out or get into a situation where legislative processes and elections throw everything into chaos. Since Cyprus wants the bailout, the ECB holds a lot of the cards. We've seen how governmental changes can throw a wrench into the bailout agreements. Because this levy can be implemented "overnight", it's easy and doesn't rely on a legislature agreeing on austerity measures for many years.

This solution will be a betrayal of people's trust, it will hurt people. It will make people think twice about putting their money in banks. In fact, this is something that parts of Latin America face. However, are there alternatives for coming up with 5.8 billion Euro that would be better?

Frankly, in order to criticize well, you have to bring up other solutions against the chosen solution. This move is bad. No one thinks this is a happy move. It has cons. People will lose savings (including money they were counting on having). People will distrust banks for the foreseeable future. It will create resentment and anger. It will be bad. So, what would be better?

Now, one can argue that defaulting on the debt would be better - that's certainly a position to take. However, assuming that Cyprus doesn't want to default, how else should they have secured the ECB bailout (assuming that one needs to raise 5.8 billion Euro to do so)?

Anyway: this is just the beginning and it's not going to stop anytime soon. The Eurozone is in big trouble: it simply cannot work when you have people who only want to work 32 hours / week and stop working at 60 years old (France) while on the other side you have hard-working germans.

The crisis we're witnessing since a few years in the eurozone is really simple: the GDP growth number in most of the eurozone are fake in that they do not correspond to wealth created but to wealth created + state debt. Nearly every single country in the eurozone is running at deficit.

The crisis is due to one and only one thing: states that are so indebted that they cannot borrow anymore.

Economists warned about precisely that scenario before the first euro even circulated: Greece, Spain, France, Cyprus... 15 years ago people warned that it would happen just like that. It was just a matter of time.

I can tell you what's coming next: Greece is going to default a second time.

In 2014 France shall have its deficit skyrocketing and shall have issue re-financing itself on the market.

France is the 2nd biggest economy of the eurozone and the eurozone is f^cked. It's game over. France has taxed the private sector so much that it cannot tax it anymore and, anyway, it's too late: investors did flee the country and now individuals are engaging in a bank run (or leaving the country).

The obvious solution would be a massive devaluation of the euro but this cannot happen because if it happens Japan goes down (and probably the U.S.).

We're near the endgame: the house of cards may fall soon.

And I can tell you thing: I want less state. This entire euro-crisis is a debt of sovereign states having way too much public debt because they've constantly been running at deficit, for decades. And now they're running out of money.

It didn't help that they borrowed money to save banksters but don't be mistaken: nobody forced these states to run with crazy-high deficit for decades.

F^ck socialism. Really f^ck it.

Btw I don't care if Cyprus was supposed to be very liberal: Cyprus is 0.2% of the GDP of the eurozone and doesn't matter.

What matter is that socialist Spain, Greece, Portugal and France are close to state default.

They'll be watching closely how announcing money confiscation just before a long week-end plays out (monday is a legal day off in Cyprus) and they'll probably be desperately trying to do the same in these countries.

And it's not going to work.

People should really start realizing that Keynes was all wrong all along and that the Friedman school is the only correct one: they did predict all this. Keynesians didn't.

Btw if the eurozone goes down dont' think the U.S. is going to be fine: some economists are predicting a worldwide drop of the world GDP by as much as 30%.

It's just a matter of years, maybe less.

If I told you that every year your money would be worth 3% less, that's different than me saying that 10% of your savings are gone now.

It's more complex as well because inflation influences salaries and prices, plus the whole long-term vs immediate aspect.

One is intended as an encouragement to invest and, it works for the most part(401k, roth, 529, etc.. etc..) Most Americans know that that just sticking your money under a mattress is stupid, so we actively invest. Just about anyone in the US with disposable income invests in some way. This is something that benefits society as money that would normally be sitting idle is out in the market being used. And, how it gets used is determined by society and the markets, not a bureaucrat.

This, on the other hand, is simply confiscation. There's no plan, no incentive, nothing. It's a short sighted implementation that will hurt things in the long run. What's everyone who's had their money taken from them without warning now thinking? They certainly aren't considering options that allow them to stay active in this country's markets. Quite the opposite, I assume.

It's harder to plan for surprise 10% haircuts.

Greece, Italy, Spain, etc. will now be lucky if they don't themselves start having a problem with bank runs. Arguably it won't happen elsewhere, but who can say for sure?

The difference between a government switching what it taxes and this is that the former goes through intense oversight and debate by the elected officials of the country involved. People can influence the decision and it is an internal matter.

In this case, it was an external force that decided the seizure was necessary. More, it was a German-led decision. Germany imposing its will on the southern countries hasn't been well received in the past and I don't believe it will be now.

This. Cyprus isn't the most troubled southern EU country. That honor goes to Italy or Spain. It was a bad idea for Germany to have tipped its hand this early in the game. They should have reserved this for Italy or something. You're going to see a bunch of people moving their cash out the southern EU countries ASAP.

That said, I can understand why they went this route. It's basically a free down payment on an emergency loan mostly provided by wealthy Russians. Again, not illegal, but it isn't exactly just to have foreigners pay for your countries debts. I don't feel terribly sorry, since most of that Russian money likely came from less than reputable means. But as the saying goes, two wrongs don't make a right.

But the repercussions will be far reaching. First off, Cyrpus can expect a run on their banks from foreigners. Don't know if they have plans on stopping that, but I don't see why any foreigner would keep money there. Secondly, Smaller countries (and possibly large ones as well) in financially precarious situations will probably start seeing a run on their banks. This can set off contagion in a region without a strong central economic force to stave it off.

Though I expect some off-shore type country to pass a law soon stating they will never perform such a tax, and a lot of money will start flowing into their banks.

The first measure should be a cut of all executive pay and bonus monies in any bank that so poorly managed themselves that they needed a bailout.

If I lived in Cyprus, would the government now take some 6% of my savings and leave my loans untouched?

Anyone?

Can't you see the larger issue here? This shortsighted measure will backfire.

Imagine you saved just enough money to cover rent, or see a dentist. You counted on that money being there. Wouldn't this be upsetting and a betrayal of your trust? Would you be so quick to leave money in a bank account ever again?

Edit: Actually, re-reading your comment, you went both ways and waffled like a politician. You didn't actually say anything.

The problem is that the state is broke. It's that or they're out of the eurozone.

Socialism is basically government spending. That is all. Capitalism is the bit that raises the money for the government spending. The very simple problem is when the balance goes wrong. The balance has gone wrong, every where.

Thing is, what the anti socialists seem very keen to forget is that this all kicked off with subprime loans, badly regulated, free market loans, not government loans or spending. That was us, the public and its ever increasing demands for personal borrowing, and capitalism absolutely lapped it up, until it failed. Capitalism failed, not socialism. Capitalism ran rampant and crashed. Luckily socialist levied money was there to bail it out. The bail outs are government spending. If government didn't have money to bail them out, they would have catastrophically failed. I assume the anti socialists wanted the banks to fail? Fair enough actually, that is how capitalism works, the weak fail. In some ways, I think the banks should have failed. But, if we are to get angry at 10% of people money being converted in to bank shares (did people miss that? It is a bullet point here: http://www.bbc.co.uk/news/world-europe-21818598 ), then losing everything in a bank fail must be very much a no no. So, we do like government spending when it suits.

So, one cannot complain about the spending when it was the money provider, capitalism, that screwed up in the first place, leaving no money to spend.

Put it this way: If Mr Hubby lose his job, its not the wife's fault for spending the family budget each week, is it? Equally not the wife's fault if she asked Mr Hubby if she could take out a loan, he agreed, and not cant pay it back because hubby lost his job. More, over, if Mr Hubby was pushing her to take loans, it is even more not her fault.

So stop with the finger pointing rightard anti socialism hate stuff. It doesn't work, its childish, and way too Glen Beck for sensible discussion.

Now, of course the socialism bit has to do its bit and contract so that the capitalism bit can breathe and rebuild, while regulating it enough such that insane lending and borrowing cant happen again. The balance must be restored.