Cyprus isn't something happening "over there"

Europe – and that includes Britain – is unavoidably connected.

In case anyone thought that the bank and sovereign debt crisis that has engulfed certain parts of the eurozone has produced all its dramatic twists, events this weekend came as a rude awakener.

Eurozone leaders agreed early on Saturday morning a deal to bailout and restructure the Cypriot banking sector.

The most controversial part of the deal sees a tax levied on depositors to raise about 5.8 billion euros, to add to the €10 billion committed by the Eurozone and (probably) IMF. A 9.9 per cent levy will be imposed to deposits over 100.000, while deposits below 100.000 will face a levy of 6.75 per cent.

So for the first time depositors, who were considered sacrosanct until now, are forced to share the cost of a bail-out.

A lot has been said about how this decision was reached. The blame shifts depending who one talks to, but the Financial Times give a good account. It seems that considerations about the future of Cyprus as an off-shore financial centre played a role when deciding how widely to spread the pain among depositors in Cypriot banks. It was feared that taxing only non-resident depositors would scare investors away.

So the main bone of contention (in an overall contentious decision) is that smaller depositors are put on the firing line, in a move that is seen as unfair and dangerous. Asking working people and pensioners to sacrifice their savings in the service of a failed banking sector is indeed cruel. But WSJ’s Simon Dixon makes a fair point, there is an element of fairness when asking locals to contribute to the bail out of their country’s banking sector, especially when that sector represents such a huge part of the country’s economy.

Many argue that it should not have come to this at all, that depositors should have been spared all together. But as Hugo Dixon of Reuters argues the Eurozone and the Cypriot government had very little choice. Imposing a haircut on government debt, like it was done in Greece’s case, was not possible because most of the country’s sovereign debt is held under English law (making a Greek-style restructuring hard) and the remaining is held by Cypriot banks, making a hair-cut self-defeating.

Hence the decision to impose a tax on depositors, many of whom are non-resident, predominately Russian and in many cases suspect of money-laundering. It would have been a hard task politically to explain to taxpayers across the Eurozone why they should contribute more to a bail-out that would have, to some extent, helped Russian oligarchs.

The most important thing that one should consider is what would be the cost of an alternative. In the absence of a bail-out deal (one that the Cypriot government had delayed long enough) Cypriot banks (which are already under ECB life-support) would collapse, taking the Cypriot economy with them. Lest we forget that the banking sector in Cyprus is more than 5 times the Cypriot economy.

The one good thing that can come out of this is the de facto reduction of Cyprus’ banking sector to a size closer to the EU average, as the Eurogroup statement, that followed the bailout agreement, calls for. As we have seen in other European countries like Ireland and the UK, an oversized financial sector holds huge risks for the host country, especially for one whose economy is as small as that of Cyprus. To a large extent this is a banking crisis, rather than a “euro-crisis” and no matter what the structural inefficiencies of Eurozone’s governance (and European politicians inability so far to separate bank from sovereign debt) what Cyprus is faced with is the collapse of a banking sector that grew too big for its own good and made far too many bad decisions.

There is still a lot to play for, not least a parliamentary vote to approve the bail-out deal. Until then there is time and room to reconsider how the burden will be spread among depositors, and there are many proposals on the table on how to shield small depositors and reduce their contribution to the bail-out pot of money. Some reports talk about reducing to 3 per cent the levy imposed to deposits up to €100.000.

One last thing. The situation in Cyprus shows that in an interconnected world we are not immune to what happens “over there”. Capital as well as people are mobile, the banking sector interconnected and as a result banks and people’s savings are affected, irrespectively whether we are part of the Eurozone or not. The fact that British citizens who live and hold deposits in Cyprus will have to be part of the bail-out levy shows how important it is for the British government to be as involved as possible in Eurozone governance and EU-wide efforts to address the systemic faults of Europe’s financial sector.

Photograph: Getty Images

Petros Fassoulas is the chairman of European Movement UK

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I worked as a teacher – so I can tell you how regressive grammar schools are

The grammars and "comprehensives" of Kent make for an unequal system. So why does Theresa May consider the county a model for the future?

In 1959 my parents moved me from a Roman Catholic primary school to the junior branch of King Henry VIII, Coventry’s most high-profile grammar. The head teacher berated my mother for betraying the one true faith, but although she was born in Galway, my mum was as relaxed about her religion as she was about her native roots. Any strong feelings about the English Reformation had disappeared around the same time as her Irish accent. Her voice gave no clue to where she was from and – as a result of a wartime commission – the same was true of my father. Together, Mrs and Mr Smith embodied postwar Britain’s first-generation upwardly mobile middle class.

Their aspiration and ambition were so strong that my mother saw no problem in paying for me to attend a Protestant school. Why, you may ask, did my dad, a middle manager and by no means well off, agree to pay the fees? Quite simply, my parents were keen that I pass the eleven-plus.

King Henry VIII School benefited from the direct grant scheme, introduced after the Education Act 1944. In Coventry, the two direct grant schools were centuries old and were paid a fee by the government to educate the fifth or so of boys who passed the eleven-plus. When secondary education in Coventry became comprehensive in the mid-1970s, King Henry VIII went fully independent; today, it charges fees of more than £10,000 per year.

A few years ago, I returned to my old school for a memorial service. As I left, I saw a small group of smartly dressed men in their late seventies. They had strong Coventry accents and intended to “go down the club” after the service. It occurred to me that they represented the small number of working-class lads who, in the years immediately after the Second World War, were lucky enough to pass the eleven-plus and (no doubt with their parents making huge sacrifices) attend “the grammar”. But by the time I moved up to King Henry VIII’s senior school in 1963 there appeared to be no one in my A-stream class from a working-class background.

From the early 1950s, many of the newly affluent middle classes used their financial power to give their children an advantage in terms of selection. My parents paid for a privileged education that placed top importance on preparation for the eleven-plus. In my class, only one boy failed the life-determining test. Today, no less than 13 per cent of entrants to the 163 grammar schools still in the state system are privately educated. No wonder preparatory schools have responded enthusiastically to Theresa May’s plans to reverse the educational orthodoxy of the past five decades.

Nowhere has the rebranding of secondary moderns as “comprehensives” been more shameless than in Kent, where the Conservative-controlled council has zealously protected educational selection. Each secondary modern in east Kent, where I taught in the 1970s, has since been named and renamed in a fruitless attempt to convince students that failing to secure a place at grammar school makes no difference to their educational experience and prospects. That is a hard message to sell to the two-thirds of ten-year-olds who fail the Kent test.

Investment and academy status have transformed the teaching environment, which a generation ago was disgraceful (I recall the lower school of a secondary modern in Canterbury as almost literally Edwardian). Ofsted inspections confirm that teachers in non-grammar schools do an amazing job, against all the odds. Nevertheless, selection reinforces social deprivation and limited aspiration in the poorest parts of the south-east of England, notably Thanet and the north Kent coastline.

A third of children in Thanet live in poverty. According to local sources (including a cross-party report of Kent councillors in 2014), disadvantaged children make up less than 9 per cent of pupils in grammar schools but 30 per cent at secondary moderns. University admissions tutors confirm the low number of applications from areas such as Thanet relative to the UK average. Though many of Kent’s secondary moderns exceed expectations, the county has the most underperforming schools in the UK.

When I began my teaching career, I was appallingly ignorant of the harsh realities of a secondary education for children who are told at the age of 11 that they are failures. Spending the years from seven to 17 at King Henry VIII School had cocooned me. More than 40 years later, I can see how little has changed in Kent – and yet, perversely, the Prime Minister perceives the county’s education system as a model for the future.

This article first appeared in the 22 September 2016 issue of the New Statesman, The New Times