Cyprus may backtrack over the deal - but the damage has been done

Savers will be thoroughly spooked.

It's a shock to everyone - Cyprus stumbles, and Europe cuts the cord.

The Cyprus deal could be in the process of renegotiation, according to Reuters, but here it is as it stands: Cyprus has imposed a tax on all depositors down to the smallest - with a levy of 6.75 per cent on savings up to €100,000, and 9.9 per cent for those over-€100k. This may be legal, but it goes violently against the spirit of the new banking system everyone has been striving for since the 2008 financial crisis - where those with no responsibility are protected from the losses of those who take risks. These ideas were based on solid reason - if a gamble doesn't pay off, the gambler should pay - a principle that should result in banks controlling their own risks. To fly in the face of this seems like a backward step.

For Cypriot savers, it's too late for action  - you can withdraw as much money as you like, but charges are now fixed. This will be particularly galling for those with deposits up to €100,000 which were guaranteed under EU law, should the bank go under. The fact that the new deal is presented as a tax on these savings will be seen as a sneaky manipulation of a loophole in the law.

Another slap in the face to ordinary investors comes from President Nicos Anastasiades - who claimed yesterday that there was no alternative to hitting small depositors. This is not true - as there could simply be larger cuts over the €100,000 threshold. The 6.75 per cent:9.9 per cent ratio seems terrifyingly arbitrary.

This was the choice European leaders had over Cyprus: sovereign restructuring or losses for bank creditors. The second course was chosen - but it has been done in the worst possible way. They will not restructure the banks immediately, nor will it bail in unsecured senior bondholders. They will however damage the savings of ordinary people in a way that is not only immoral but also unwise - how keen will people be to deposit money in the bank now?

And there is the other problem. While the actual tax hit to ordinary people is much smaller than other hits resulting from bank bailouts, (British savers have been relieved of more than £43bn since the beginning of the financial crisis, which was used to prop up struggling financial institutions) it is the raid-like way this has been managed that is so psychologically damaging to Cypriot depositors. Even if, as Reuters suggests, the deal is changed so that small depositors (under €100,000) are not hit, the risk that come Tuesday a mob will descend on the banks and withdraw every last euro from their accounts is considerable.

The other undo-able damage of course will be political - the credibility of policymakers in the IMF and eurozone is getting ever closer to zero.

Photograph: Getty Images

Martha Gill writes the weekly Irrational Animals column. You can follow her on Twitter here: @Martha_Gill.

Photo: Getty
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The big problem for the NHS? Local government cuts

Even a U-Turn on planned cuts to the service itself will still leave the NHS under heavy pressure. 

38Degrees has uncovered a series of grisly plans for the NHS over the coming years. Among the highlights: severe cuts to frontline services at the Midland Metropolitan Hospital, including but limited to the closure of its Accident and Emergency department. Elsewhere, one of three hospitals in Leicester, Leicestershire and Rutland are to be shuttered, while there will be cuts to acute services in Suffolk and North East Essex.

These cuts come despite an additional £8bn annual cash injection into the NHS, characterised as the bare minimum needed by Simon Stevens, the head of NHS England.

The cuts are outlined in draft sustainability and transformation plans (STP) that will be approved in October before kicking off a period of wider consultation.

The problem for the NHS is twofold: although its funding remains ringfenced, healthcare inflation means that in reality, the health service requires above-inflation increases to stand still. But the second, bigger problem aren’t cuts to the NHS but to the rest of government spending, particularly local government cuts.

That has seen more pressure on hospital beds as outpatients who require further non-emergency care have nowhere to go, increasing lifestyle problems as cash-strapped councils either close or increase prices at subsidised local authority gyms, build on green space to make the best out of Britain’s booming property market, and cut other corners to manage the growing backlog of devolved cuts.

All of which means even a bigger supply of cash for the NHS than the £8bn promised at the last election – even the bonanza pledged by Vote Leave in the referendum, in fact – will still find itself disappearing down the cracks left by cuts elsewhere. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.