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.

Photo: Getty
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What the tragic case of Charlie Gard tells us about the modern world

People now believe medical science can perform miracles, and many search for them online.

If Charlie Gard had been born 40 years ago, there would have been no doubt about what would, and should, happen. Doctors treating a baby with a rare genetic condition that causes the body’s organs to shut down would have told his parents “nothing more can be done for him”. Charlie – deaf, epileptic, his muscles wasted, his brain probably damaged – would have died peacefully and unremarked. If an experimental US treatment had given such children an estimated 10 per cent chance of survival, his parents would not have known about it. Even if they had, they would have sorrowfully deferred to British doctors.

Now people believe that medical science can perform miracles and, through the internet, search the world for them. Yet they do not trust the knowledge and judgement of the medical profession. They rally public support and engage lawyers to challenge the doctors, as Charlie’s parents unsuccessfully did in the hope of being allowed to take their child for experimental treatment in America, despite warnings that it would be ineffective and distressing for him. This is a strange situation, the result of medical progress, social media, globalisation and the decline of deference. It causes much heartache to everybody involved but, like Charlie’s death, it is probably unavoidable.

Mogg days

A few weeks ago, Jacob Rees-Mogg was a 50-1 outsider for the Tory leadership. Now, as I write, he is third or fourth favourite, quoted by the bookmakers at between 6-1 and 10-1. For a few days, he was the second favourite, ahead of both Boris Johnson and Philip Hammond and behind only David Davis, the clear front-runner. Perhaps Davis organised rich friends – of which I am sure he has a few – to flood the market with bets on Rees-Mogg to frighten Tory MPs into rallying behind him.

But do not write off the man dubbed “the honourable member for the early 20th century” – generously, in my view, since he looks and behaves as though he has stepped off an 18th-century country estate and he actually lives on a 17th-century one. Rees-Mogg, a hard Brexiteer, would be an appropriate leader if we left the EU with no deal. Having excused ourselves from the world’s largest and most cohesive trading bloc, our best prospect for earning our living would be as a giant 18th-century theme park. Who better than Rees-Mogg to front it?

The royal revenue stream

Princess Diana is the gift that keeps on giving. TV companies produce documentaries on the anniversaries of her death and marriage. New tapes, photos and letters are unearthed. Anyone who cut her hair, cleaned her windows or sold her a frock can make a bob or two from “my memories of Diana”. Most important, Diana guarantees the future of the royal family for at least another half-century. In an ITV documentary, Prince William spoke movingly and sincerely (as did his brother, Harry) about losing a mother. Even the most hard-hearted republicans must now hesitate to deprive him also of a throne.

Strictly newsreading

I am a BBC fan. I regard the requirement, imposed by the Tories, that the corporation publishes the names and salary bands of employees paid more than £150,000 a year as an attempt to exploit “the politics of envy” of which Labour is normally accused. But I wonder if the corporation could help itself by offering even more transparency than the government demands.

It could, for example, explain exactly why Gary Lineker (£1.75m-£1.79m), Jeremy Vine (£700,000-£749,999) and Huw Edwards (£550,000-£599,999) are so handsomely paid. Do they possess skills, esoteric knowledge or magnetic attraction to viewers and listeners unavailable to other mortals and particularly to their women colleagues who are apparently unworthy of such lavish remuneration? Were they wooed by rival broadcasters? If so, which rivals and how much did they offer? Have BBC women received lower offers or no offers at all? The BBC could go further. It could invite a dozen unknowns to try doing the jobs of top presenters and commentators, turn the results into a programme, and invite viewers or listeners to decide if the novices should replace established names and, if so, at what salaries. We elect the people who make our laws and the couples who go into the final stages of Strictly Come Dancing. Why shouldn’t we elect our newsreaders and, come to that, Strictly’s presenters?

Mail order

A tabloid newspaper, founded in 1896 and now with its headquarters in Kensington High Street, west London, obsessed with the Islamist terror threat, convinced that it speaks for Middle England. An editor, in the chair for a quarter-of-a-century, who makes such liberal use of the C-word that his editorial conferences are known as “the vagina monologues” and whose voice is comparable to that of “a maddened bull elephant”. Sound familiar?

Two weeks ago, I wrote about Splash!, a newly published satirical novel about a tabloid newspaper from the long-serving Daily Mail columnist Stephen Glover. Now I have had early sight of The Beast, due out in September, also a satirical novel about a tabloid paper, written by Alexander Starritt who briefly worked on the Mail after leaving Oxford University. Like Glover, he pays homage to Evelyn Waugh’s classic Scoop, where the main characters worked for the Daily Beast, but there the similarities end. Glover has written what is essentially a defence of tabloid journalism. Starritt offers a fierce, blackly comic critique, though he cannot, in the end, quite avoid casting the editor Paul Dacre – sorry, Charles Brython – as a heroic, if monstrous, figure.

How many other journalists or ex-journalists are writing satirical novels about the Mail? And why the presumed public interest? Newspapers, with fewer readers than ever, are supposed to be dying. Fiction publishers seem to disagree. 

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 27 July 2017 issue of the New Statesman, Summer double issue