Haircuts in Cyprus: Our Crisis of Debt Conscience

Americans pride themselves on outdoing the rest of the world in output, in the sheer number and magnitude of our accomplishments. This is no less true when it comes to furiously spending money we don’t have. But if the ongoing brouhaha in Cyprus is any indication, we had better enact a few more trillion-dollar stimuli before the EU catches up to us.

The great project for a European Confederation is steadily hurtling towards its logical conclusion. It was always a dicey proposition to expect Italy, France, Germany, and Spain (to name a few of Europe’s historic powerhouses) to come together for anything other than mutual advantage. This is, after all, the business of nation-states. Then consider the United Kingdom, whose most serious threat to absolute sovereignty has come in the form of colonial revolts and civil wars waged in part on the basis of hardcore English patriotism. Throw in European outliers like Slovakia and Malta, and one should be suitably impressed, ex ante, by the difficulty of such a project. The American federal republic barely worked, and we started with thirteen relatively homogenous states coming off the cusp of a shared, brutal struggle for independence.

Greece’s sovereign debt crisis is still fresh in the public consciousness, in part because we all know the solution won’t possibly work. Appropriating wealth from the people of Germany (and elsewhere) will only forestall the inevitable for the land of Homer and Aristotle. As a condition of the funding, Greece was required to commit to austerity measures, ostensibly to avoid a repeat disaster. Such conditions govern for now, but the proletariat are not taking it lying down. The current leadership are dead men walking, large majorities disapproving of the settlement.

Now hop in your trireme and sail east from Crete. Cyprus is a land barely fifty years free from colonial rule, whose population remains bitterly fractured by a territory war that is still officially underway. The island nation is most inconveniently placed right between Turkey and Greece. The total population of the island is about 1.1 million, but something like three hundred thousand of them live in the self-proclaimed “Turkish Republic of Northern Cyprus.” To put it in perspective, Cyprus is closer to Baghdad than Brussells (the EU’s de facto capital).

Whatever actually counts as Cyprus (only Turkey recognizes a separate sovereign in the North), the nation’s debt has reached crisis levels. As a member of the Eurozone, Cyprus’s default is everyone’s problem. When it joined the Eurozone, Cyprus surrendered its ability to print money – the normal easy way out to these kinds of problems. Printing money inflates the currency rapidly, meaning the value of each dollar (Euro) is less. This amounts to a regressive tax on those whose wealth is tied to the value of the currency – namely, all but the very rich (who will never be caught unawares) and the very poor (who have no wealth). Your $100,000 life savings suddenly barely covers the rent for a year.

Since Cyprus can’t just start cranking out Euros on its own, the other nations of Europe are obliged to intervene. Sure, the Eurozone could issue its own form of “quantitative easing” and alleviate Cyprus’s debt. But Chancellor Merkel isn’t going to fleece the frugal German people on Cyprus’s behalf, at least no more than she has to. The same goes for the other stable (for now) Eurozone members. So what’s a Eurozone finance minister to do? Why, if you can’t levy a backdoor tax on savings, just go after them directly!

Would-be rescuers insisted that Cypriot authorities “tax” savings accounts, a move charitably called a “haircut” and more realistically called “confiscation” or “theft.” Predictably, the ATMs were drained as the nation’s middle-class and foreign depositors scrambled to avoid the haircut. Although there does not seem to be a full-scale run on the banks (yet), the government ordered banks to remain closed through Wednesday after a bank holiday on Monday. Not a single legislator was willing to publicly support the deposit confiscation (19 members of parliament abstained from the vote). But with that madness averted, Cyprus faces the same crisis that drove them to such desperate measures. The austerity conditions imposed on Greece were sunshine and candy next to what was proposed in Cyprus.

The greatest rhetorical appeal for the rise of welfarism is that only a large and complex state can properly care for the poor. This argument should make Christians think twice about breezily parroting a laissez-faire line. But just as we must care for the least among us, we must also be wise in so doing. Overspending with good intentions destabilizes the currency and inevitably hurts the very poorest. When Russian megacorporations are offering to bailout sovereign nations, one begins to see that prudence and mercy converge on sound economic policy.

Cyprus’s debt is almost $20 billion USD, each citizen’s share about $18,000, or almost 75% of GDP. It takes the United States less than three weeks to accrue, in interest payments alone, the entire national debt of Cyprus. Per capita – each man, woman, and smiling baby in America – that comes to $50,000. Our debt is 105% of GDP – it would take more than an entire year of confiscating every penny of wealth produced by all 300 million people in every industry just to take care of what we’ve racked up in the past. The world’s sovereign debt is somewhere near $50 trillion, of which the United States carries almost a third. It turns out we really are the best at everything!

You can probably tell I’m no economist. Maybe there is some special way that our much more serious debt problem ends up in a much less devastating place. But we shouldn’t be comfortable with going on as we are – not if we really care about our families and our neighbors.

About S. L. Whitesell

Lee studies law at the University of Pennsylvania. He and his wife Joanna live in Philadelphia.

  • S. L. Whitesell

    A Greek-American friend objects to my breezy declaration that the Cyprus haircut much worse than the Greek austerity measures. He also points out that the Cyprus savings tax was directed at all accounts, and levied a higher rate against larger accounts. Here is my brief response to him:

    “What I mean by the Cyprus haircut being worse is that it undermines the basic confidence in banks, which is absolutely essential for any modern economy.

    The savings confiscation was actually going to be a little bit worse for the rich. But my point is that the rich have their ways. For one thing, they have a lot of assets that aren’t tied directly to the currency and certainly aren’t in savings accounts. For another, they are much more sophisticated at avoiding taxes, even haircuts like this. Rich people can probably wire their money out much more easily, or they will have more complicated agreements with the banks that allow them escape, etc.

    I said in my post that this hurts everyone except the very rich and the very poor. It also hurts the normal-rich and the normal-poor. But it hurts the normal-poor worse, because they’re poor.”


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