The spectre of deposit confiscations in Europe rears its head again

Martin Amstrong

Martin Armstrong, a well known economist (if not always for the best reasons!), lit the blue touch paper of private wealth security when he published a blog just before Xmas warning about a potential 10% expropriation of individuals savings throughout Europe via a proposed levy applied to everyone’s bank account as long as they run a positive balance. It seems that the idea has been gaining momentum over the last year and in fact popped up in the last few Fiscal Monitor reports published by the IMF. Perhaps it will materialise sooner than anyone expects..?

After applying the controversial levy to bank accounts in Cyprus last year, the IMF and the European Union have been thinking about expanding the measure throughout the whole Euro area as a way to restore public finances in principally the embattled Southern European countries (as if this is something their citizens really need!). With many European countries running heavy public debts and with growth expected to remain muted for years to come, the current proposals that are on the table can basically be summarised into three measures –

1. Inflate the monetary system and erode away the debt burdens (a la the Japan and U.S. models)

2. Creditors accept a haircut

3. “Confiscate” private wealth

While the U.S. & Japan  have embraced following the first path through their extensive quantitative easing programs, the German “way” doesn’t allow for debt monetisation. Ever since the hyperinflation experienced in the Weimar state in the early part of the last century. So, it seems that there are just two alternatives: accepting there is not enough money to pay for the debts and so negotiate a haircut with lenders in order to avoid a disorderly bankruptcy of certain countries or simply look to confiscate private wealth. In looking at IMF reports, in particular page 49 of the most recent one that you can check here – http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf it seems to us that there are few remaining doubts that they now feel comfortable with a tax applied on bank accounts.

On box 6 of that page it can be seen that the IMF is showing concern over the huge public debts in European countries and theyexpress their beliefs that a one-off capital tax on private wealth can restore sustainability. They find support for it through economists like Pigou, Schumpeter and Ricardo and, amazingly, believe no adverse effects would derive from it as it would be perceived as a one-off tax. In summary, even if such a measure would be criticised at first, they reason that everyone would be happy to keep their remaining funds in those same banks as it is (a) a one off and (b) if it was imposed Europe wide then it is pointless trying to avoid it as all banks would impose the haircut. The only alternative would be the mattress…

Of course, what would likely happen is capital flight would occur to the UK most likely and so put huge upwards pressure on the pound. This would create a major headache for Mr Carney who is riding the coat tails of an increasingly vigorous UK economic rebound although inflation would be pushed much lower due to lower import costs.

It seems that Mr Armstrong believes that France is in charge of the IMF and that the French are Marxists! The French aren’t really in charge of the IMF and nothing could be farther from the truth in stating that these are Marxist ideas. Reality is that bondholders lend state governments money and depending on their perception of risk they charge them an interest rate which compensates for inflation, default risk and some other factors. If there were no inflation and no risk, the creditors would simply receive the risk free interest rate, nothing more. But that isn’t the case. The 10-year yield on a Portuguese sovereign bond is around 7%, while inflation is less than 3% with the reference risk free interest rate being 0.25% as set by the ECB. This means bondholders are getting compensated for the risk taken. Now let’s suppose that at some point the Portuguese government decides that they can’t pay their creditors. Who should carry the loss?

I believe that in free capitalist system, bondholders should be prepared to take the loss as they are being compensated for that possible event. There’s no need for anyone’s intervention. Bondholders would take the hit and the system would re-equilibrate again. What the IMF wants to do is to socialise the loss, and I believe that isn’t really in line with Marx ideas, and in fact isn’t also with capitalist ones. The only explanation is that they’re protecting a few at the cost of the majority. Once again! Bankers are being protected at all costs against you and me.

Filipe R Costa