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Cyprus sets a sad precedent in the sense that a government considered taxing up to 10% of private bank savings in order to improve the financial situation of a country.

The decision did not pass but this could happen in the future. What possible measures could one take to avoid savings being taken in this way ?

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    There are no measures that will work. As Mark Twain aptly said, “No man's life, liberty, or property are safe while Congress is in session.” Mar 27 '13 at 2:49
  • Diversification in several asset classes and jurisdictions. If structured correctly, your tax footprint will be a lot smaller than others, even if your host country's legislature disincentives storing wealth outside of that country. For instance, if you do report, will you take the tax on Controlled Foreign Corporations at 10% or the 35% income tax on the corporation and tax on dividends as your personal income.
    – CQM
    Sep 13 '13 at 4:51
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What EU wanted to force Cyprus to do is to break the insurance contract the government has with the bank depositors. The parliament rightfully refused, and it didn't pass.

In the EU, and Cyprus as part of it, all bank deposits are insured up to 100,000EUR by the government. This is similar to the US FDIC insurance. Thus, requiring the "small" (up to 100K) depositors to participate in the bank reorganization means that the government breaks its word to people, and effectively defaults. That is exactly what the Cyprus government wanted to avoid, the default, so I can't understand why the idea even came up.

Depositors of more than 100k are not guaranteed against bank failures, and indeed - in Cyprus these depositors will get "haircuts". But before them, first come shareholders and bondholders who would be completely wiped out. Thus, first and foremost, those who failed (the bank owners) will be the first to pay the price.

However, governments can default. This happened in many places, for example in Russia in the 90's, in Argentina in 2000's (and in fact numerous times during the last century), the US in the 1930's, and many other examples - you can see a list in Wikipedia.

When government defaults on its debts, it will not pay some or all of them, and its currency may also be devaluated. For example, in Russia in 1998 the currency lost 70% of its value against the USD within months, and much of the cash at hands of the public became worthless overnight. In the US in 1933 the President issued an executive order forbidding private citizens keeping gold and silver bullions and coins, which resulted in dollar devaluation by about 30% and investors in precious metals losing large amounts of money. The executive order requiring surrender of the Treasury gold certificates is in fact the government's failure to pay on these obligations.

While the US or Russia control their own currency, European countries don't and cannot devaluate the currency as they wish in order to ease their debts. Thus in Euro-zone the devaluation solutions taken by Russia and the US are not possible. Cyprus cannot devaluate its currency, and even if it could - its external debt would not likely to be denominated in it (actually, Russian debt isn't denominated in Rubles, that's why they forced restructuring of their own debt, but devaluating the currency helped raising the money from the citizens similarly to the US seizing the gold in 1930's). Thus, in case of Cyprus or other Euro-zone countries, direct taxes is the only way to raise money from the citizens.

So if you're in a country that controls its own currency (such as the US, Russia, Argentina, etc) and especially if the debt is denominated in that currency (mainly the US) - you should be worried more of inflation than taxes. But if you're in the Euro-zone and your country is in troubles (which is almost any country in the zone) - you can expect taxes. How to avoid that? Deal with your elected officials and have them fix your economy, but know that you can't just "erase" the debt through inflation as the Americans can (and will), someone will have to pay.

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  • The first line is flat out wrong. The EU side of the story was a 10 billion euro loan; Cyprus had to come up with 5.8 billion. It was their president](economist.com/blogs/charlemagne/2013/03/cyprus-bail-out) who decided to break the guarantee. The big difference with the FDIC is of course that the EU is not federal. Each state insures its own banks.
    – MSalters
    Mar 27 '13 at 9:51
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    @MSalters I'm sorry, how's what you said contradicts what I said? It was one of the conditions of the 10B loan that the Cypriots would get the rest from the deposits' haircut.
    – littleadv
    Mar 27 '13 at 17:23
  • The EU gave the Cypriots the freedom where to get the 5.8 billion, which allowed a haircut on non-insured funds (>EUR 100.000). That would leave the guarantee intact. Your first line states that the EU insisted on breaking the insurance contract. There's the contradiction.
    – MSalters
    Mar 28 '13 at 11:02
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    @MSalters that is my understanding of what I read in the news. Unfortunately (or, rather, fortunately) , I'm not privy to the discussions, and haven't seen the actual papers.
    – littleadv
    Mar 28 '13 at 17:18
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Don't worry. The Cyprus situation could only occur because those banks were paying interest rates well above EU market rates, and the government did not tax them at all. Even the one-time 6.75% tax discussed is comparable to e.g. Germany and the Netherlands, if you average over the last 5 years.

The simple solution is to just spread your money over multiple banks, with assets at each bank staying below EUR 100.000. There are more than 100 banks large enough that they'll come under ECB supervision this year; you'd be able to squirrel away over 10 million there. (Each branch of the Dutch Rabobank is insured individually, so you could even save 14 million there alone, and they're collectively AAA-rated.) Additionally, those savings will then be backed by more than 10 governments, many of which are still AAA-rated.

Once you have to worry about those limits, you should really talk to an independent advisor. Investing in AAA government bonds is also pretty safe. The examples given by littleadv all involve known risky bonds. E.g. Argentina was on a credit watch, and paying 16% interest rates.

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    Could it only occur because of that? It occurred in Russia in 1998, and they didn't have non-taxable high-rate interests there. And how about the Iceland bonds prior to 2008? Very AAA.
    – littleadv
    Mar 27 '13 at 17:24
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Over the last few years I've read quite a bit about monetary history.

I've developed two very important rules from this study:

  1. Always keep some of your cash outside the fractional reserve banking system.
  2. Always keep some of your cash in a hard currency.

If you follow these two rules you will be able to weather almost any governmental or banking crisis.

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