Why are Cypriot banks so big? Because the country is a tax haven where corporations and wealthy foreigners stash their money. Officially, 37 percent of the deposits in Cypriot banks come from nonresidents; the true number, once you take into account wealthy expatriates and people who are only nominally resident in Cyprus, is surely much higher. Basically, Cyprus is a place where people, especially but not only Russians, hide their wealth from both the taxmen and the regulators. Whatever gloss you put on it, it’s basically about money-laundering.
The proposed tax on the Cyprus bank accounts was interesting. (I don’t know enough about it to really have a reasoned position one way or another.) On one hand, if you dump a huge amount of money in an account to avoid taxes … you accept some risks. On the other hand, how much would it suck to think you have $10,000 in the bank and then have $9,000 the next day. Of course, that’s still a lot better than learning that the bank had collapsed and taken all $10,000 with it.
The other curious element of the proposed bank account levy was that it had both the flavor and the appeal of a sin tax. Don’t want to pay a cigarette tax? Stop smoking. Don’t want to lose money as a tough term in a weird sovereign bailout? Stop putting money tax havens.