We are in the care of time. “President Anastasiades [of Cyprus] may need extra time to get the deeply unpopular levy on Cyprus bank deposits through parliament and may have to declare Tuesday a public holiday to stave off a possible run on the banks,” writes the Cyprus Property News.

Monday is a public holiday in Cyprus – Green Monday, which marks the start of lent in the Orthodox calendar. Celebrated with picnics and children flying kites, the atmosphere this year will be subdued.

Analysts have described the decision to raid all bank accounts in Cyprus as a threat to the entire economy of the island. Some are predicting a run on the banks as depositors rush to withdraw cash when they re-open after the holiday.

An extra holiday may mean the banks open Wednesday instead of Tuesday. The authorities will try to use this period time to manage the political backlash.  RT says that “Cyprus is currently deciding whether to raise the anti-crisis tax on savings larger than 100,000 euros to 12.5%, while reducing the levy on smaller amounts to 3 per cent, a source told Reuters.”

The decision came as Cypriot officials noted a distinctly sour mood among the island’s inhabitants. “The last minute discussions are allegedly aimed at appeasing ordinary Cypriots who are about to share a major part of the anti-crisis burden imposed on Cyprus by the European Central Bank.” It’s a tough choice. Anger the Russian mafia and they might not like it. Anger the man in the street and he not like it either.

To mollify the restive Cypriots officials have offered to swap bonds for those depositors who keep their money in the banking system. That is either the offer of a century or a litmus test of imbecility depending on your point of view. The situation is still in flux.

A meeting of the Cyprus parliament had been scheduled for Sunday but was postponed for at least a day in order to try and broker a deal between the parties, political sources are saying. The vote on the measure is now expected on Monday.

At the same time authorities have extended for another day Monday’s bank holiday, so the levy is unlikely to come in force on Tuesday morning as was initially planned. The good news for the depositors …

“Those who hold on to their deposits for two years, will get back half of their deposit in bonds,” Nicos Anastasiades said, trying to avert an imminent wave of deposit withdrawals after the holidays.

The president promised that the bonds will be secured by the revenues in the gas field and promised that pension and provident funds will remain untouched by this one-time measure.

Translation: “I’ll gladly pay you Tuesday for a hamburger today.”

Whatever the wisdom of J. Wellington Wimpy, the finger-pointing over the debacle has started already. “According to Reuters, German Finance Minister Wolfgang Schäuble claimed today that it was indeed the Cypriot govenrment’s decision to go for smaller depositors – not Germany’s.” It is part of a larger package of tax increases which attempts to scare up more cash for the bankrupt country.

Apart from forcing losses on depositors, the Eurogroup, led by Dutch finance minister Jeroen Dijsselbloem and under the clear direction of his German counterpart Wolfgang Schaeuble and IMF chief Christine Lagarde, also secured an increase in Cyprus’ corporate tax rate by 2.5 per cent to 12.5 percent, and an increase in the tax on interest on savings by 20-25 per cent.

The euro ministers argued this should boost revenues, limit the size of the loan needed from the eurozone and keep down public debt.

“The solution chosen may be painful, but it was the only one that would allow us to continue our lives without adventures. It’s a decision that leads to the historic and permanent rescue of our economy,” Anastasiades said in a written statement.

Good luck to the buck-passers. In the immortal words of Ed Woods: “Inspector Clay is dead, murdered. And someone is responsible.” The question is who.

But the bigger question is whether the grief will be worth it?  Will the special levy succeed in raising money for failing Cypriot governments? To think about this question consider the following diagram, called the Laffer Curve. The idea behind this curve is simple. If governments collect a zero tax rate they get zero dollars in revenue. If they collect everything people earn (a 100% tax rate) then government revenues also go to zero because nobody has any income.

Somewhere in between is a revenue maximizing point where governments can collect the most money. Beyond it government revenue actually declines because although the tax rates are higher, the income base to which it is applied is lowered.

The Laffer Curve

So where is Cyprus on the Laffer Curve?  Daniel Mitchell argues that pushing new taxes too far will only impoverish both a society and a government. He presented his argument in the following diagram to illustrate the notion of maximizing points.

Don’t kill the Geese that Lay the Golden Eggs

Now Cyprus is way past caring about Growth Maximization. It may even be indifferent to Revenue Maximization. What it probably worried about now can be expressed as: “please God let me survive one more day”. Let us call this point Survival Prolongation Point.

Some economists have calculated that the way to increase government revenue is actually to cut taxes, although “liberals claim that the Laffer Curve has been discredited, and that tax cuts don’t pay for themselves. ” But a country at the Survival Prolongation point needs money so badly that it can no longer do anything long-term rational. The whole focus is on making it to the next day. At the last pinch of the vise there’s only one thing left: taxes on capital.

What the government of Cyprus is effectively doing is raising money by taking the average citizen’s capital — not capital gains or increases in capital — but the principal itself. This is a policy otherwise known as eating your seed corn. This may solve their financing problems in the short run, but the long term prospects of such a strategy are not too bright. It only buys them time. And when the seed corn is gone, not only is everyone screwed. Everyone is permanently screwed. It doesn’t solve the problem.

So the government has extended the bank holiday to Wednesday. But then why not to Thursday, Friday or to the next Monday? Each day of delay only heightens the problem because it underscores the complete desperation of the Cypriot banking system. You can only transfer risk. You can’t abolish it.

The Father of Modern Liberal Finance

But for some simply getting to Monday will be triumph enough.

The Three Conjectures at Amazon Kindle for $1.99

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No Way In at Amazon Kindle $8.95, print $9.99

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