"Government is theft."
The old libertarian battle cry came to mind when the news hit, two weeks ago, that Cyprus was about to confiscate 7 percent of all the insured deposits in the island's two biggest banks. Nicosia also planned to siphon off 10 percent of uninsured deposits, those above 100,000 euros ($130,000), and use that cash as well to finance Cyprus' share of a eurozone bailout.
The reaction was so scalding that the regime had to back off raiding insured deposits. The little people of Cyprus were spared. Not so the big depositors, among whom are Cypriot entrepreneurs and thousands of Russians. Their 10 percent "haircut" has now become an amputation.
Large depositors in the Bank of Cyprus, the island's largest, face confiscation of 60 percent of their capital. In Laika, the No. 2 bank, which is to be euthanized, the large depositors face losses of up to 80 percent. All of Laika's bondholders will be wiped out, and all employees let go.
When the Cypriot banks opened again on March 28, capital controls had been imposed. Only 300 euros may be withdrawn daily from a bank. Folks leaving Cyprus may take only 1,000 euros.
What has this crisis to do with us? More than we might imagine.
Last week, Jeroen Dijsselbloem, the Dutch chairman of the eurozone's finance ministers, let the cat out of the bag. The bail-in of big depositors and bondholders, who are being forced to eat a huge slice of the Cypriot bailout, may serve as a model for future bailouts.
The hot money that came into Cyprus, said Dijsselbloem, either to be laundered or hidden from taxes, or to seek a higher rate of return, was wagered money. And when bets go bad, government is not obligated to made the gamblers whole again.
The former eurozone policy of protecting senior bondholders and uninsured depositors, said the Dutch conservative, is history. If money comes from Northern Europe to bail out the Club Med, Club Med bank bondholders and big depositors will be "bailed in."
Translation: Uninsured savings in Spain, Italy and Slovenia may be raided and bondholders liquidated to bail out their troubled banks. To Malta, Luxembourg, Latvia and other banking centers, the handwriting is on the wall: What happened in Cyprus could happen here.
So great was the shock from Dijsselbloem's remarks, by day's end he was backtracking, declaring Cyprus was not a template but a "specific case" with unique circumstances.
None too soon. For as Barclay's bank noted, "The decision to bail in senior bank debt and large depositors will likely have a price impact on equity and credit instruments of those euro area banks that are perceived as the weakest."
Barclay's was saying that bondholders and big depositors in banks of other troubled eurozone countries may take a second look at where they have stashed their cash and whether their assets may be subject to sudden confiscation. And the monied class may decide, in the wake of the Cyprus slaughter, that security of principal is preferable to a higher rate of return in a risky institution.
When capital controls are lifted in Cyprus, why would any depositor, who had been scorched in the inferno, risk leaving any major deposit in a Cypriot bank? Nicosia's days as a banking center, where total bank deposits exceeded seven times its gross domestic product, are over.
And facing a dramatic contraction in their economy, what do Cypriots do now?
The effect across Europe is likely to be a gradual selloff of bonds in Italian and Spanish banks and transfers of cash out of these banks into U.S. and European banks where the interest rate offered may be lower but the principal is more secure.
Nor is this an unhealthy development.
If taxpayers in Northern Europe have to rescue mismanaged Club Med banks, why should not bank bondholders be wiped out, just as they were at Lehman Brothers? And ought not uninsured depositors who stuffed cash into these banks to get higher rates of return or evade taxes or launder dirty money get burned as well?
From Asia to Europe, people concerned about the safety of their money are looking at Cyprus, with many surely saying, "There, but for the grace of God, go I!" And they likely hear in the anguished cries of Russian, British and Cypriot depositors, who got no warning and failed to get out in time, a fire bell in the night for themselves.
If this persuades depositors to seek security first for their income, pensions and savings, and to transfer funds out of risky banks into more solid institutions, is that such a bad thing?
If Kipling's Gods of the Copybook Headings, who arrived on Cyprus in March with their terrible swift sword, are back in charge, is this not better than having Western taxpayers forever securing the deposits and investments of the rich and feckless?
Those Russian depositors wiped out in the Cyprus slaughter may not have died in vain.
Today, Cyprus, Tomorrow ...
"Government is theft."