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.

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Scottish Labour's defeat to the Tories confirms a political transformation

The defining divide is no longer between left and right but between unionist and nationalist.

It was Scotland where Labour's recovery was supposed to begin. Jeremy Corbyn's allies predicted that his brand of left-wing, anti-austerity politics would dent the SNP's hegemony. After becoming leader, Corbyn pledged that winning north of the border would be one of his greatest priorities. 

But in the first major elections of his leadership, it has proved to be Labour's greatest failure. A result that was long thought unthinkable has come to pass: the Conservatives have finished second (winning 31 seats). For the first time since the 1910 election, Labour has finished third (winning 24). Scottish Labour leader Kezia Dugdale stood on a left-wing platform, outflanking the SNP on tax (pledging to raise the top rate to 50p and increase the basic rate by 1p), promising to spend more on public services and opposing the renewal of Trident. But rather than advancing, the party merely retreated.

Its fate confirms how Scottish politics has been realigned. The defining divide is no longer between left and right but between unionist and nationalist. With the SNP as the only major pro-independence party, the Tories, led by the pugnacious Ruth Davidson, framed themselves as the pro-UK alternative - and prospered. In contrast, Dugdale refused to rule out supporting a second referendum and suggested that MPs and MSPs would be free to campaign for secession. The result was that Scottish Labour was left looking dangerously irrelevant. "Identity politics. Labour doesn't get it," a shadow minister told me. Its socialist pitch counted for little in a country that remains ideologically closer to England than thought. The SNP has lost its majority (denying it a mandate for a second referendum) - an outcome that the electoral system was always designed to make impossible. But its rule remains unthreatened. 

Corbyn's critics will seek to pin the baleful result on him. "We turned left and followed Jeremy's politics in Scotland, which far from solving our problems, pushed us into third," a senior opponent told me. But others will contend that a still more left-wing leader, such as Neil Findlay, is needed. Dugdale is personally supportive of Trident and was critical of Corbyn before his election. Should she be displaced, the party will be forced to elect its sixth leader in less than five years. But no one is so short-sighted as to believe that one person can revive the party's fortunes. Some Corbyn critics believe that a UK-wide recovery is a precondition of recovery north of the border. At this juncture, they say, SNP defectors would look anew at the party as they contemplate the role that Scottish MPs could play in a Westminster government. But under Corbyn, having become the first opposition to lose local election seats since 1985, it is yet further from power. 

In Scotland, the question now haunting Labour is not merely how it recovers - but whether it ever can. 

George Eaton is political editor of the New Statesman.