Imagine diligently saving $100,000 over 10 years only to wake up the next day to see $93,250 in your account. Now imagine having to fork over $99,000 of your $1,000,000 nest egg right before you plan to retire. The Cyprus president has basically negotiated a 6.75% tax on all deposits under €100,000 and a 9.9% tax above this amount in order to receive bailout money from the EU!
There are so many things wrong with this scenario:
* Trust of the government is now completely broken.
* The government is asking savers to foot the bill instead of spenders.
* The policy promotes moral hazard as any reasonable person will simply spend everything they have and wait to get bailed out by more fiscally responsible citizens.
* The media will capture images of bank run frenzies, causing more panic to spread to anybody who has access to a TV or internet connection.
* Citizens of weak EU countries like Portugal, Italy, and Greece may start withdrawing cash further hurting their economies.
* Equity risk premium rises causing a sell-off in stock markets overall which dampens returns, earnings, and corporate enthusiasm for spending and hiring.