Cyprus: everything you need to know

The tax, the Russians, the insurance, the surprise, and the future.

The tax

The Cypriot government is to impose a levy of 9.9 per cent on deposits of more than €100,000, and 6.75 per cent on deposits of less than that. Or maybe those numbers are 3.5 per cent for the poorer depositors and 12.5 per cent for the richer ones, according to the FT last night. Or maybe it's actually 3 per cent for €0-100k, 10 per cent for €100-500k, and 15 per cent for €500k+, according to Dow Jones' Matina Stavis this morning.

Update: or maybe it's 0 per cent for some as-yet-unidentified portion at the bottom, according to Reuters.

For what it's worth, Stavis Reuters seems most up-to-date, and the proposal she's got hold of is apparently the one set to be negotiated in the Cypriot parliament today.

The Russians

The reason for the tax is the, er, "unusual" make-up of the Cypriot banking system. It is an offshore finance capital which caters to a lot of very wealthy Russians. And it's big - or rather, Cyprus is little. The cost of recapitalising the banks is around sixty per cent of the country's entire GDP, and that's a cost which Cyprus' government can't afford.

At the same time, Cyprus is a small enough nation within the EU that the core nations - for which, read "Germany" - can afford to play hardball. Germany is sick and tired of paying to recapitalise periphery banks, and is doubly unhappy about having to do it when a lot of the deposits in this particular country's banks are borderline - or actually - laundered money. But given the size of Cyprus, most other euro nations could handle its exit from the euro with ease – which isn't the case for, say, Greece – and so the ECB had the courage to make Cyprus an offer it couldn't refuse: either fund some of its bailout with a levy on large depositors, or the ECB would suspend emergency capitalisation for one of Cyprus' two struggling banks, in effect forcing bankruptcy and an exit from the eurozone (Cyprexit? Cyxit? Cexit?).

But it appears Cyprus went further than Germany demanded. Ekathimerini reports that the German finance ministry only requested a levy on deposits over €100,000. Finance Minister Wolfgang Schaeuble is quoted:

We would obviously have respected the deposit guarantee for accounts up to 100,000. But those who did not want a bail-in were the Cypriot government, also the European Commission and the ECB, they decided on this solution and they now must explain this to the Cypriot people.

As Paweł Morski writes:

If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against. Yes, I may have thrown up a little in my mouth typing that.

The exact numbers suggested on Friday night - the ones which have already been modified - make it look like Cyprus went even further, specifically levying a 6.75 per cent levy on small depositors just to ensure that the levy on larger depositors didn't break 10 per cent. Now that that barrier has been broken, hopefully the distinction will keep growing until small depositors pay nothing, and the entire burden is on those who can afford to pay it.

The insurance

The levy on small depositors is unanimously agreed to be the worst thing about Cyprus' case. There is debate about whether or not bank depositors should have to stomach some of the cost, because, to quote Morski again, "when you deposit money in a bank you’re making a loan". There is debate about whether the ECB is continuing its anti-democratic trend, started with the technocratic ousting of Silvio Berlusconi last year, or whether the two choices it presented Cyprus really are the only two options reasonably available to it. There is debate about whether the levy is actually even legal, because, as Joseph Cotterill points out, it may not be "reasonably foreseeable and adequately accessible" enough to satisfy Article 1 of Protocol 1 of the ECHR, which governs the legality of wealth taxes.

But on the penalisation of the poor, all are in agreement: it was a bloody stupid move. The biggest reason is that the levy on deposits under €100,000 hits insured depositors: people who are legally protected from losing their money even in the event of a bank crash. Deposit insurance is disliked by many titans of finance, because it creates a so-called "moral hazard", allowing banks and savers alike to forget that their money is technically at risk and behave in ways that they shouldn't. Nonetheless, it has one major advantage, which keeps it alive in nearly every western nation: it prevents bank runs.

If you know that your money is safe even if your bank fails, the motivation to remove your money from a bank which might fail is greatly reduced. And given, of course, one of the things which makes a bank fail is that everyone who thinks it might takes their money out, deposit insurance ought to - and does - prevent systemic crises turning into waves of collapsed banks.

By hitting poor depositors, who thought that their money would be safe, the Cypriot government has created the risk, however small, of a bank run in its own nation and others. Because if you are an Italian depositor worried about the state of your own banks, are you going to be quite as certain as you were that you're insured in the event of a collapse?

Even worse, incidentally, is the fact that deposit insurance is actually required by the EU, and €100,000 is the threshold set by the Deposit Guarantees Scheme Directive. That's why no-one told Cyprus to hit its poor, but it did it anyway.

Finally, as well as stupid, the levy on small accounts is likely to be borderline pointless. Bank deposits in most nations vaguely follow the 80:20 rule: 80 per cent of deposits come from 20 per cent of customers. The changes in the proposed levies back that up: a 5pp increase in the levy on deposits over half a million paid for a 3.75pp decrease on deposits under €100,000. The poor are being taxed, not to aid the fiscal situation of Cyprus, but to fit a bizarre definition of fairness - as well as to stay in "the laundry business".

The surprise

There's one thing that the Cypriot parliament got right: this news was a surprise to nearly everyone. ("Nearly", because there had been unhelpful murmurings about depositors taking a hit for a couple of months, which will have led to some draw-downs). If you want to hit savers, you need to do it before they have a chance to react; otherwise, you're going to see deposits being withdrawn and shoved in shoeboxes under the bed.

The announcement coming, as it did, late on a Friday night of a bank holiday weekend was a stroke of good planning. So good, in fact, that some commentators got a bit caught up in the flow of things, and suggested that the move was a good test of whether any country had what it takes to leave the Euro: keep it a secret, announce on a bank holiday, close the ATMs and freeze funds to prevent capital flight.

Of course, Cyprus then blew it. Rather than passing legislation over the weekend and enacting the levy before markets opened late Sunday night, the country is still debating what should happen as Monday morning becomes Monday afternoon. Don't get me wrong, debate is good. But here, speed is probably better. There's already queues outside ATMs; who knows what will happen if the banks open before the tax is levied?

The future

In the short run, things should work out OK. From its savers and the ECB, Cyprus now has the cash to recapitalise its banks; and it managed to do so without defaulting on its sovereign debt, which is nice for the bondholders at least.

Despite the fact that a Rubicon has undeniably been crossed, this isn't, as some commentators are warning, Lehman II. Cyprus is, from its size to its banking sector to its questionable financial specialisation, nearly unique in the eurozone. As Faisal Islam writes, it won't be long until government ministers are lining up to reassure their citizens that they are not Cyprus - and, unless they are Cyprus, they'll probably be right.

Of course, where most ministers dare to tread walks George Osborne, who has already been quoted saying that Britain is Cyprus, and that if we don't "retain the confidence of world markets", we would go the same way. Joe Weisenthal pulls no punches: Osborne's "Ignorant Comments About Cyprus Are Why The UK Economy Is Such A Disaster".

But in the long-term, the blackmail of Cyprus is representative of the deeper hurdles that the eurozone has to face up to at some point. The crisis, insofar as it is a crisis of collapsing banks and insolvent sovereigns, may end sooner or later; but the question of who actually runs Europe, and whether democracy can ever be allowed to make the "wrong" choices in the continent, looks further from being answered than ever before.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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How English identity politics will shape the 2017 general election

"English" voters are more likely to vote Conservative and Ukip. But the Tories are playing identity politics in Scotland and Wales too. 

Recent polls have challenged some widely shared assumptions about the direction of UK elections. For some time each part of the UK has seemed to be evolving quite distinctly. Different political cultures in each nation were contested by different political parties and with different parties emerging victorious in each.

This view is now being challenged. Early general election surveys that show the Tories leading in Wales and taking up to a third of the vote in Scotland. At first sight, this looks a lot more like 1997 (though less enjoyable for Labour): an increasingly hegemonic mainland party only challenged sporadically and in certain places.

Is this, then, a return to "politics as normal"? Perhaps the Tories are becoming, once again, the Conservative and Unionist Party. Maybe identity politics is getting back into its box post Brexit, the decline of Ukip, and weak support for a second independence referendum. We won’t really know until the election is over. However, I doubt that we’ve seen the back of identity politics. It may actually bite more sharply than ever before.

Although there’s talk about "identity politics" as a new phenomenon, most votes have always been cast on a sense of "who do I identify with?" or "who will stand up for someone like us?" Many voters take little notice of the ideology and policy beloved of activists, often voting against their "objective interests" to support a party they trust. The new "identity politics" simply reflects the breakdown of long-established political identities, which were in turn based on social class and collective experiences. In their place, come new identities based around people, nations and place. Brexit was never really about the technocratic calculation of profit and loss, but about what sort of country we are becoming, and what we want to be. 

Most social democratic parties in Europe are struggling with this change. Labour is no different. At the start of the general election, it faces a perfect storm of changing identities. Its relationship with working-class voters continues to decline. This is not because the working class has disappeared, but because old industries, with their large workplaces, shared communities and strong unions are no longer there to generate a labour identity. 

Labour is badly adrift in England. The English electorate has become increasingly assertive (and increasingly English). The Brexit vote was most strongly endorsed by the voters who felt most intensely English. In the previous year’s general election, it was fear of Scottish National Party influence on a Labour minority government that almost certainly gave the Tories the English seats needed for an overall majority. In that same election, Labour’s support amongst "English only" voters was half its support amongst "British only" voters. The more "English" the voters, the more likely they were to vote Ukip or Conservative. It shouldn’t be a surprise if Ukip voters now go Tory. Those who think that Ukip somehow groomed Labour voters to become Tories are missing the crucial role that identity may be playing.

So strong are these issues that, until recently, it looked as though the next election - whenever it was called - would be an English election - fought almost entirely in English battlegrounds, on English issues, and by a Tory party that was, increasingly, an English National Conservative Party in all but name. Two powerful identity issues are confounding that assumption.

Brexit has brought a distinctly British issue into play. It is enabling the Tories to consolidate support as the Brexit party in England, and at the same time reach many Leave voters in Wales, and maybe Scotland too. This serendipitous consequence of David Cameron’s referendum doesn’t mean the Tories are yet fully transformed. The Conservative Party in England is indeed increasingly focused on England. Its members believe devolution has harmed England and are remarkably sanguine about a break up of the union. But the new ability to appeal to Leave voters outside England is a further problem for Labour. The Brexit issue also cuts both ways. Without a clear appeal cutting through to Leave and Remain voters, Labour will be under pressure from both sides.

North of the border, the Tories seemed to have found - by accident or design - the way to articulate a familial relationship between the party in Scotland and the party in England. Scottish Conservative leader Ruth Davidson appears to combine conservatism, unionism and distance from English politics more successfully than Scottish Labour, which must ride the two horses of "near home rule" and committed unionism. Scottish Labour has a perfectly good call for a reformed union, but it is undermined by the failure of Labour in England to mobilise enough popular support to make the prospect credible.

Identity politics is not, of course, the be all and end all of politics. Plenty of voters do cast their ballots on the traditional tests of leadership, economic competence, and policy. Labour’s campaign will have to make big inroads here too. But, paradoxically, Labour’s best chance of a strong result lies in taking identity politics head on, and not trying to shift the conversation onto bread and butter policy, as the leaked "talking points" seem to suggest. Plenty of voters will worry what Theresa May would do with the untrammelled power she seeks. Challenging her right or ability to speak for the nation, as Keir Starmer has done, is Labour’s best bet.

 

John Denham was a Labour MP from 1992 to 2015, and a Secretary of State 2007 to 2010. He is Director of the Centre for English Identity and Politics at Winchester University

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