Imagine checking your bank statement one day only to discover that someone had just taken 10 percent out of your savings account without your permission.
You'd be pretty upset, wouldn't you? So were many citizens of Cyprus, whose government announced last Friday it would be assessing a 9.9 percent "stability levy" on all deposits of more than $100,000 and a 6.75 percent levy on deposits less than that. Cypriots quickly deduced that the government was seizing their property to bail out their nation's banks and immediately tried to withdrawal their funds. To prevent them, the government of Cyprus has declared a bank holiday that has been extended through at least Wednesday.
The Cyprus crisis began last spring when the face value of Greek debt was cut after that government was bailed out last spring. Cyprus banks, which have longstanding cultural ties with Greece, carried substantial exposure and lost billions. Cyprus Popular Bank alone had $3.4 billion in Greek government debt, whose value was reduced to $2.5 billion. Cyprus was forced to nationalize that bank last November, and things haven't gotten any better since.
Like the rest of the European Union, Cyprus has been mired in recession since 2011. Its government has been seeking a bailout from its EU partners since last June. But EU member nations, especially Germany, are tired of bailing out their spendthrift neighbors, especially ones like Cyprus, where the banking sector was recently measured to be eight times as large as the entire Cypriot economy.
Cyprus had reportedly fashioned itself as a haven for tax avoiders and money launderers and is especially popular with Russian tycoons and mobsters. It's hard to blame German citizens for not wanting their tax dollars used to bail out Russian criminals. Hence, the "stability levy," which was expected to raise $5.8 billion to supplement the $10 billion coming from the European Stability Mechanism and the International Monetary Fund.
Having already spooked the public, the government of Cyprus tried to modify the bailout package so that it would not tax deposits of less than $20,000, with graduated rates for higher deposits of up to 15 percent. But this package was defeated in parliament on Tuesday. So it's back to the drawing board.
Unfortunately, the damage had already been done. Depositors in countries with similarly weak banking sectors -- like Spain and Italy -- have begun to move their money elsewhere. And the specter of an EU government effectively seizing their citizens' property has generally undermined faith in the rule of law throughout Europe.
But this could never happen in the United States, could it? Wrong. It already did.
When the Obama administration bailed out Chrysler in 2009, it threw out more than 100 years of federal bankruptcy legal precedent by stiffing Chrysler's secured creditors and giving that money to its political allies in the United Auto Workers union.
The lesson Americans should draw from Cyprus is simple: The more the government controls the economy, the less safe their property is from confiscation.