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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Who will win in Manchester Gorton?

Will Labour lose in Manchester Gorton?

The death of Gerald Kaufman will trigger a by-election in his Manchester Gorton seat, which has been Labour-held since 1935.

Coming so soon after the disappointing results in Copeland – where the seat was lost to the Tories – and Stoke – where the party lost vote share – some overly excitable commentators are talking up the possibility of an upset in the Manchester seat.

But Gorton is very different to Stoke-on-Trent and to Copeland. The Labour lead is 56 points, compared to 16.5 points in Stoke-on-Trent and 6.5 points in Copeland. (As I’ve written before and will doubtless write again, it’s much more instructive to talk about vote share rather than vote numbers in British elections. Most of the country tends to vote in the same way even if they vote at different volumes.)

That 47 per cent of the seat's residents come from a non-white background and that the Labour party holds every council seat in the constituency only adds to the party's strong position here. 

But that doesn’t mean that there is no interest to be had in the contest at all. That the seat voted heavily to remain in the European Union – around 65 per cent according to Chris Hanretty’s estimates – will provide a glimmer of hope to the Liberal Democrats that they can finish a strong second, as they did consistently from 1992 to 2010, before slumping to fifth in 2015.

How they do in second place will inform how jittery Labour MPs with smaller majorities and a history of Liberal Democrat activity are about Labour’s embrace of Brexit.

They also have a narrow chance of becoming competitive should Labour’s selection turn acrimonious. The seat has been in special measures since 2004, which means the selection will be run by the party’s national executive committee, though several local candidates are tipped to run, with Afzal Khan,  a local MEP, and Julie Reid, a local councillor, both expected to run for the vacant seats.

It’s highly unlikely but if the selection occurs in a way that irritates the local party or provokes serious local in-fighting, you can just about see how the Liberal Democrats give everyone a surprise. But it’s about as likely as the United States men landing on Mars any time soon – plausible, but far-fetched. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.