"It must realise its current business model is dead"

Merkel on Cyprus.

Merkel summed up the situation earlier this morning in Cyprus, via Reuters.

She's right - when Cyprus gave in to political pressure and decided to ditch the levy on small savers, it also said goodbye to its economic structure. If it had taxed under $100,000 depositors, it may have been able to maintain its weird, top-heavy banking sector fuelled by Russian oligarchs. It's too late now though. Cyprus's solutions are falling away fast - today's news was that Russia is really, really unlikely to come to Cyprus's aid.

Cyprus's banking system is odd though. At times it has done well - back before the financial crisis, Cyprus was described by the International Monetary Fund as going through a "long period of high growth, low unemployment, and sound public finances" - but it this wasn't sustainable. Here's the Telegraph's Rachel Cooper on what happened next:

By 2011, the IMF reported that the assets of Cypriot banks were equivalent to 835pc of annual national income. Some of that was down to investment by foreign-owned banks, but most was Cypriot.

This imbalance might have been sustainable had the country’s two largest banks not made loans to the Greek government worth 160pc of Cypriot GDP.

When the value of the debts owed by the Greek state was cut by 75pc, the Cypriot banks were hit hard. Cyprus became stuck in a familiar negative cycle: already weak government finances were further ravaged by slow economic growth and the turmoil in the eurozone.

It will be painful, but in the long run the dismantling of Cyprus's financial foundations may be no bad thing.

Angela Merkel. Photograph: Getty Images
Photo: Getty
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Theresa May is paying the price for mismanaging Boris Johnson

The Foreign Secretary's bruised ego may end up destroying Theresa May. 

And to think that Theresa May scheduled her big speech for this Friday to make sure that Conservative party conference wouldn’t be dominated by the matter of Brexit. Now, thanks to Boris Johnson, it won’t just be her conference, but Labour’s, which is overshadowed by Brexit in general and Tory in-fighting in particular. (One imagines that the Labour leadership will find a way to cope somehow.)

May is paying the price for mismanaging Johnson during her period of political hegemony after she became leader. After he was betrayed by Michael Gove and lacking any particular faction in the parliamentary party, she brought him back from the brink of political death by making him Foreign Secretary, but also used her strength and his weakness to shrink his empire.

The Foreign Office had its responsibility for negotiating Brexit hived off to the newly-created Department for Exiting the European Union (Dexeu) and for navigating post-Brexit trade deals to the Department of International Trade. Johnson was given control of one of the great offices of state, but with no responsibility at all for the greatest foreign policy challenge since the Second World War.

Adding to his discomfort, the new Foreign Secretary was regularly the subject of jokes from the Prime Minister and cabinet colleagues. May likened him to a dog that had to be put down. Philip Hammond quipped about him during his joke-fuelled 2017 Budget. All of which gave Johnson’s allies the impression that Johnson-hunting was a licensed sport as far as Downing Street was concerned. He was then shut out of the election campaign and has continued to be a marginalised figure even as the disappointing election result forced May to involve the wider cabinet in policymaking.

His sense of exclusion from the discussions around May’s Florence speech only added to his sense of isolation. May forgot that if you aren’t going to kill, don’t wound: now, thanks to her lost majority, she can’t afford to put any of the Brexiteers out in the cold, and Johnson is once again where he wants to be: centre-stage. 

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