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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Leader: The great revolt

The vote for Brexit has plunged Labour and the Conservatives into crisis.

Britain has taken a great leap into the unknown. More than four decades after joining the European Economic Community, it has turned its back on a union of 27 other nations and 500 million people at a time of profound crisis in Europe. For the European Union, which has helped maintain peace and security in Europe for half a century, it is a great blow. The shock waves are being felt across the world.

We respect the wishes of the 17 million people who voted for Leave but strongly believe it was the wrong decision. Britain will be a diminished force for good in the world, unable to influence and shape events in Europe and beyond. The UK’s reputation as a proud, outward-looking, liberal and tolerant nation has been damaged. Many Britons feel that they no longer recognise or understand their own country, while foreign nationals living in Britain feel similarly perplexed, and even afraid. Young people, who voted overwhelmingly for Remain and will have to live with the consequences of Brexit the longest, are understandably aggrieved. Yet we should not condemn those who voted for Brexit, especially the less fortunate; rather, we should seek to understand and explain.

The only good thing to say about the referendum campaign is that it is over. Seldom have facts mattered so little, and nastiness and smears been allowed to carry the day. The Leave campaign was built on half-truths, false promises and more than a whiff of xenophobia. Its leaders dismissed warnings of negative consequences of Brexit – for the economy, and for the unity and political stability of the UK – as “Project Fear”. The Remain campaign’s intention may have been to scare voters with the claims, but that does not make them untrue.

Since the result became known, the pound has tumbled to a 30-year low against the US dollar. The FTSE 250 index of shares – the best proxy for the British economy – is down 11 per cent, even after a bounce on Tuesday. This is worrying for anyone who has a pension and is near retirement. Companies that were considering investing in Britain have put their plans on hold. Several big banks are weighing up whether to shift their operations abroad. Inflation is likely to rise and economic growth to fall. A recession is looming and many jobs will be lost. And for what? A vainglorious attempt by a feeble prime minister to settle a long-burning feud in the Conser­vative Party, and to satisfy the demands of Nigel Farage’s UK Independence Party and the xenophobic right-wing press.

Investors hate uncertainty, but uncertainty is about the only thing that can be guaranteed. The breaThe vote for Brexit has plunged Labour and the Conservatives into crisis.k-up of the UK, only narrowly averted in 2014, is perhaps inevitable, with all the consequences for Britain as a world power. Scots voted to stay in the EU, and who can blame First Minister Nicola Sturgeon for agitating for a second independence referendum? Why should the Scottish people be dragged out of the EU against their democratically expressed wishes?

The vote for Brexit has plunged Labour and the Conservatives into crisis. David Cameron, who so recklessly gambled the country’s future on the referendum and will for ever be defined by his calamitous error, will be gone in September, his premiership an abject failure. His successor may well be the preposterous and mendacious Boris Johnson. Wit, ­energy and bombast are poor substitutes for truthfulness, honour and competence.

In his £5,000-a-week column for the Daily Telegraph on 26 June, Mr Johnson said that the Leave victory was not driven by fears over immigration, and the pound and the markets were stable. Both claims were false, as he well knew. His assertion that Britons’ rights to live, study, work and own property in Europe would be unaffected was equally misleading – this will have to be negotiated.

Not only are the Leave leaders in denial about the consequences of Brexit, they have given scandalously little thought to how Britain’s new relationship with the European Union might work in practice. The EU – which, as we said two weeks ago, is a troubled and failing institution – is in no mind to grant the UK any favours. Nor should it.

Mr Johnson wrote that Britain’s “access to the single market” will continue. As any of the “experts” of whom the Leave leaders were so dismissive during the campaign could have explained, for a non-member to obtain access to the EU’s single market, of the sort that Norway enjoys, it must accept freedom of movement. Perhaps Mr Johnson, who some suspect was a reluctant Brexiteer at heart, may be willing to accept this compromise if he becomes prime minister, as seems likely. Yet the majority of Leave voters will not: if it is forced upon them, their rage will make the anger that fuelled Brexit look like a child’s tantrum.

This article first appeared in the 30 June 2016 issue of the New Statesman, The Brexit lies