March 17, 2013

Cyprus Levy and Europe plan B to reduce debt

In light of the forced levy of Cyprus it is worth reading the following article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted what is happening now in Europe. The study concludes that such mandatory, coercive wealth tax (aka Levy) is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since ballooned to over $30 trillion. And with inflation not showing up to inflate away the accumulated debt, Europe is finally moving to Plan B, and is using Cyrprus as its Guinea Pig.
Restructuring the debt overhang in the euro zone would require financing and would be a daunting task. In order to finance controlled restructuring, politicians could well conclude that it was necessary to tax the existing wealth of the private sector. Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations) will be unable to meet their commitments. Exhibit 3 shows the one-time tax on financial assets required to provide the necessary funds for an orderly restructuring.

For most countries, a levy on deposits of 11 to 30 percent would be sufficient to cover the costs of an orderly debt restructuring. Only in Greece, Spain, and Portugal would the burden for the private sector be significantly higher; in Ireland, it would be too high because the financial assets of the Irish people are smaller than the required adjustment of debt levels. This underscores the dimension of the Irish real estate and debt bubble.
 To ensure a socially acceptable sharing of the burden, politicians would no doubt decide to tax financial assets only above a certain threshold—€100,000, for example. Given that any such tax would be meant as a one-time correction of current debt levels, they would need to balance it by removing wealth taxes and capital-gains taxes. The drastic action of imposing a tax on assets would probably make it easier politically to lower income taxes in order to stimulate further growth. (See Exhibit 4.)

Curiously, not even BCG expected the initial shot across the bow to be so bad that everyone, not just those above the €100,000 threshold would be impaired. Alas, that is the sad reality in Europe, where as the chart above shows, a total of €6.1 trillion in additional wealth (confiscation) tax is coming.

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