Living within our means: lessons from Cyprus

However, all that changed last week when it was revealed that the terms of the proposed bailout of Cyprus included a tax of 9.9% on bank deposits of more than €100,00 and 6.75% on bank deposits of less than that amount.

Like the proverbial first shot, this announcement caused a collapse in trust and confidence that risks spreading to the European banking system.

A vote in the Cyprus parliament comprehensively rejected the terms of the bailout, which has plunged the small nation into further turmoil.

The damage this has inflicted on confidence throughout the Eurozone is potentially enormous.

Russian investors have been hit particularly hard as they have historically used Cypriot banks as an offshore financial hub, with more than €30 billion invested out of the total €70 billion held in Cypriot bank accounts.

President Vladimir Putin described the proposal as “unfair, unprofessional and dangerous”.

There are reports of Russian investors notifying banks in Cyprus of their intention to withdraw billions of euros.

Banks on the island have been and remain closed to prevent spooked locals withdrawing their savings en masse.

The citizens of Cyprus could not have anticipated this development for it is common practice throughout the EU for bank deposits of up to €100,000 to be guaranteed by the government.

There is a danger that confidence in the banking system has been shattered in other parts of Europe, even if the Cyprus proposal is not implemented.

Whether this act triggers a further crisis remains to be seen.

The lesson for Australia is clear – governments must learn to live within their means and public finances must remain on a sustainable footing at all times.