Manila Bulletin

A tax on physical cash?


Do you know that this policy (a tax on physical cash) has been floating in whispers in central bank circles for many years now? Do you know too, that there is a country now (Greece) that is openly advocating for a tax on physical cash?

One may say: “What? A tax on physical cash? This is outrageous.” The reason why Greek banks are advocating this so-called “outrageous” policy is simply because the Greek banking system does not want capital (including cash deposits of depositors) leaving their banks as the banks are concerned about their solvency. The Greek banks are allowing the cash to remain in electronic form in their banks – but not the taking out of the actual physical cash.

There are recent reports that the Indian government has already banned its popular 500 and 1,000 rupee notes. As a consequenc­e, there were resistance and there were money riots that broke out in certain areas. One may ask how the public will respond to the proposal to ban cash outright in the Philippine­s (or other countries for that matter). Like in India, banning cash outright would probably meet great resistance from the public. No matter how one will call it – this is tantamount to waging a war on cash.

By the way, the entry of the proposal of the Greek banking system for a tax on cash will certainly soften the blow as the withdrawal of cash from the banking system is not banned. Only a tax is levied. But people (including myself) will be wondering why depositors of physical cash in banks will be taxed for withdrawal­s of their own money deposited with banks. Why? If this is the case, people will certainly be discourage­d to deposit money in banks. Because rather than the depositors earning interest for their money deposited, they will be taxed everytime there is a withdrawal of their own funds. Remember the doctrine of ‘negative interest rate’ that I extensivel­y discussed in my past articles?

By the way, the financial and banking communitie­s worldwide are watching closely and seriously what will happen in Italy on December 4. This is the date when Italy is going to have a referendum for a constituti­onal amendment. If the referendum loses, an opposition Italian party (against the current pro-EU Italian government of Minister Matteo Renzi) is ready to come in and advocate Italy’s withdrawal from the EU. The opposition leader Beppe Grillo of the anti EU Five Star Movement started his public life as a comedian. Grillo is considered the Donald Trump of Italy. Says Grillo: “An era is going up in flames. “It’s the risk-takers, the stubborn, the barbarians who will carry the world forward…We will end up in government, and they will be asking, ‘How did they do it?’”

The speculatio­n is that the defeat of Renzi and the victory of Grillo would lead eventually to Italy’s withdrawal from the EU and the breakup of the Euro. The defeat of Renzi at the referendum (together with the collapse of the German Deutsche Bank and the Italian banks) may ignite another global financial crisis.

In one of my articles last October 22, 2016, I mentioned that there are at least two (2) European banks that are experienci­ng losses. One of these banks is an Italian bank – the Banca Monte dei Paschi di Siena (BMPS), the world’s oldest bank in operation founded in 1472. I also mentioned that this Italian bank, together with Deutsche Bank of Germany may avail of the so-called bail-in scheme. A bank bail-in happens when a bank recapitali­zes itself by tapping its creditors including its depositors. Meaning that since no bail-out or financial assistance is expected from their Central Banks, the losing banks have no other choice but to avail of the so-called bail-in. Otherwise, the banks will fall into bankruptcy.

Italy’s banking problem is very serious. Not only is Banca Monte dei Paschi di Siena (BMPS) losing (as well as some smaller Italian banks) - Italy is also in a dilemma where to get funds to prevent the banks from falling into bankruptcy. In Italy, the scheme of bail-in is very unpopular and there have been reports of suicide cases of bank depositors who lost their savings (wiped out) in small Italian banks. Bank depositors do not favor bail-ins. The Italians still remember what happened in Cyrus in early 2013 – when one Saturday morning, depositors’ money in their bank accounts were used by the insolvent bank to ‘bail-in’ and recapitali­ze their banks. From the Internet, we find the phrase “many Italians aren’t just waiting around to get ‘Cyprused.’”

Have a joyful day! (For comments/reactions please send to Ms. Villafuert­e’s email: villafuert­

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