The eurozone has “effectively defaulted on a deposit insurance guarantee for bank deposits” following the announcement of a tax on savings in Cyprus banks, writes European economist Wolfgang Munchau in his column in the Financial Times.

“The long-term political damage of this agreement is going to be huge,” he wrote.

“If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. In the short term, the danger consists of a generalized bank run, not just in Cyprus.”

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth’

Munchau supports a tax on deposits above 100,000 euros, which he noted are not covered by deposit insurance.

“I just could not believe it when I heard that eurozone finance ministers went after the small depositors in Cyprus,” Munchau wrote. “They opted for a wealth tax with hardly any progression. There is not even an exemption for people with only very small savings. The eurozone could not agree [to] a full bailout, which would have cost 17 billion euros.”

Cyprus said it planned a 9.9 percent tax on bank deposits over 100,000 euros and a 6.75 percent tax on deposits under 100,000 euros ($129,442) as part of an international bailout.

Munchau wrote that the Germans “rejected a loan which they were certain Cyprus would invariably default on.” The total was cut to 10 billion euros.

“A depositor haircut was the only way to co-finance this,” he explained.

“When they did the math, they found the big deposits would not have sufficed.”

A revised draft bill seen by Reuters would exempt savings under 20,000 euros, charge 6.75 percent for amounts between 20,000 and 100,000 euros and maintain a 9.9 percent tax on deposits above that level.

“Unless there is a last-minute reprieve for small savers, most Cypriot savers would act rationally if they withdrew the rest of their money simply to protect them from further haircuts or taxes,” Munchau noted.

“It would be equally rational for savers elsewhere in southern Europe to join them. The experience of Cyprus tells them that the solvency of a deposit insurance scheme is only as good as that of the state.”

Munchau added that because of Italy’s public sector debt ratio and the combined private and public debts of Portugal and Spain, “there is no way that these governments can insure all banks’ deposits on their own.”

The bank-deposit tax represent an invitation for a run on banks in the eurozone, wrote economist Paul Krugman.

“It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying ‘time to stage a run on your banks!’” Krugman wrote in his New York Times column.

He described Cyprus as a money haven, particularly for the assets of Russian businessmen.

A bailout without the tax “would be perceived as a bailout not only of Cyprus, but also of Russian businessmen with `uncertain probity and moral character.’”

Rejecting any deal could force bankruptcy for the nation, which could be forced to leave the euro.

Russian President Vladimir Putin criticized the bank tax, saying it is unfair and sets a dangerous precedent.

Of approximately 70 billion euros in Cypriot bank deposits, according to Reuters, almost half are held by non-residents, most thought to be Russians.

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth’