As the Cyprus saga continues, the interesting counterintuitive takes are starting to bubble up. Obviously there's a tendency, when so many people agree on the broad strokes of the news – that Cyprus is in a crap position, that the tax is pretty stupid, and that there's not a whole amount of other options – to go against the grain for the sake of it, but each of these arguments have merit to them.
First up is Philip Inman in the Guardian, who argues that we should ignore the "hysterical reaction" to the tax, because "it is a wealth tax – and about time too." Inman writes:
A wealth tax on bank deposits, where most wealth is held, is consequently a practical solution that also fulfils a basic economic need, which is to shift taxes away from income to wealth. Poorer citizens need to feed themselves, and a tax on incomes, especially for those with no savings, is the worst outcome.
It mimics an argument that was going around Twitter yesterday, pointing out that "a 1 [percentage point] rise in Sales Tax would be way more regressive and not even raise an eyebrow." Of course, it's questionable whether that increase increase in sales tax could raise quite as much as the tax on deposits, but that's even more of an argument in favour of the deposit tax.
The real hope for all of this, in fact, is that the Cypriot government will struggle through the negotiations and come out the other side with a deposit tax which applies entirely to deposits over €100,000. As Ben Hammersley tweeted:
If they go from 6.75% and 9.9% to, say, 0% and 15%, Cyprus' govt would both become Occupy, and keep the faith on deposit insurance. Fun!
— Ben Hammersley (@benhammersley) March 18, 2013
Given that many of the wealthier depositors in Cypriot banks are engaged in questionable financial practices – and even outright money laundering, it seems – it's not a terrible thing to ask that the entire weight of the bailout be put on their shoulders. Of course, even if they weren't, it still wouldn't be that bad an idea, because putting the greatest burden on the broadest shoulders is almost the definition of a progressive tax system.
Except, of course, for the fact that the Cypriot economy benefits from its status as a financial haven. A rebalancing of the economy may still be a good thing for poorer Cypriots, but it's not clear that the hit the country is taking to pay off the ECB is bigger than the hit it would take if it scared away its questionably legal golden goose.
Interestingly, it seems that Cyprus agrees. France has confirmed, and credible reports indicate Germany and Finland back it up, that the negotiations with the Cypriot government only required it to implement a tax on deposits over the insurance threshold of €100,000. Insured deposits were considered sacrosanct to the Troika, but not to the Cypriot government, which needed to "spread the pain".
But the big reason why Inman's counterintuitive take is likely to remain counterintuitive is that a bank run for deposits above €100,000 – or even a bank stroll – is still a bank run. Deposit insurance lessens the chance of people trying to take all their money out, but it still happens, and it does nothing for the money you have above that value.
The chance of contagion is looking slim – although it is still the case that if you're a Portuguese depositor you're likely to be sitting markedly less comfortably than you were last week – but the situation in Cyprus itself is by no means solved yet. If the trust in the country's banks and politicians isn't restored, there will be worse ahead.