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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Hannan Fodder: This week, Daniel Hannan gets his excuses in early

I didn't do it. 

Since Daniel Hannan, a formerly obscure MEP, has emerged as the anointed intellectual of the Brexit elite, The Staggers is charting his ascendancy...

When I started this column, there were some nay-sayers talking Britain down by doubting that I was seriously going to write about Daniel Hannan every week. Surely no one could be that obsessed with the activities of one obscure MEP? And surely no politician could say enough ludicrous things to be worthy of such an obsession?

They were wrong, on both counts. Daniel and I are as one on this: Leave and Remain, working hand in glove to deliver on our shared national mission. There’s a lesson there for my fellow Remoaners, I’m sure.

Anyway. It’s week three, and just as I was worrying what I might write this week, Dan has ridden to the rescue by writing not one but two columns making the same argument – using, indeed, many of the exact same phrases (“not a club, but a protection racket”). Like all the most effective political campaigns, Dan has a message of the week.

First up, on Monday, there was this headline, in the conservative American journal, the Washington Examiner:

“Why Brexit should work out for everyone”

And yesterday, there was his column on Conservative Home:

“We will get a good deal – because rational self-interest will overcome the Eurocrats’ fury”

The message of the two columns is straightforward: cooler heads will prevail. Britain wants an amicable separation. The EU needs Britain’s military strength and budget contributions, and both sides want to keep the single market intact.

The Con Home piece makes the further argument that it’s only the Eurocrats who want to be hardline about this. National governments – who have to answer to actual electorates – will be more willing to negotiate.

And so, for all the bluster now, Theresa May and Donald Tusk will be skipping through a meadow, arm in arm, before the year is out.

Before we go any further, I have a confession: I found myself nodding along with some of this. Yes, of course it’s in nobody’s interests to create unnecessary enmity between Britain and the continent. Of course no one will want to crash the economy. Of course.

I’ve been told by friends on the centre-right that Hannan has a compelling, faintly hypnotic quality when he speaks and, in retrospect, this brief moment of finding myself half-agreeing with him scares the living shit out of me. So from this point on, I’d like everyone to keep an eye on me in case I start going weird, and to give me a sharp whack round the back of the head if you ever catch me starting a tweet with the word, “Friends-”.

Anyway. Shortly after reading things, reality began to dawn for me in a way it apparently hasn’t for Daniel Hannan, and I began cataloguing the ways in which his argument is stupid.

Problem number one: Remarkably for a man who’s been in the European Parliament for nearly two decades, he’s misunderstood the EU. He notes that “deeper integration can be more like a religious dogma than a political creed”, but entirely misses the reason for this. For many Europeans, especially those from countries which didn’t have as much fun in the Second World War as Britain did, the EU, for all its myriad flaws, is something to which they feel an emotional attachment: not their country, but not something entirely separate from it either.

Consequently, it’s neither a club, nor a “protection racket”: it’s more akin to a family. A rational and sensible Brexit will be difficult for the exact same reasons that so few divorcing couples rationally agree not to bother wasting money on lawyers: because the very act of leaving feels like a betrayal.

Or, to put it more concisely, courtesy of Buzzfeed’s Marie Le Conte:

Problem number two: even if everyone was to negotiate purely in terms of rational interest, our interests are not the same. The over-riding goal of German policy for decades has been to hold the EU together, even if that creates other problems. (Exhibit A: Greece.) So there’s at least a chance that the German leadership will genuinely see deterring more departures as more important than mutual prosperity or a good relationship with Britain.

And France, whose presidential candidates are lining up to give Britain a kicking, is mysteriously not mentioned anywhere in either of Daniel’s columns, presumably because doing so would undermine his argument.

So – the list of priorities Hannan describes may look rational from a British perspective. Unfortunately, though, the people on the other side of the negotiating table won’t have a British perspective.

Problem number three is this line from the Con Home piece:

“Might it truly be more interested in deterring states from leaving than in promoting the welfare of its peoples? If so, there surely can be no further doubt that we were right to opt out.”

If there any rhetorical technique more skin-crawlingly horrible, than, “Your response to my behaviour justifies my behaviour”?

I could go on, about how there’s no reason to think that Daniel’s relatively gentle vision of Brexit is shared by Nigel Farage, UKIP, or a significant number of those who voted Leave. Or about the polls which show that, far from the EU’s response to the referendum pushing more European nations towards the door, support for the union has actually spiked since the referendum – that Britain has become not a beacon of hope but a cautionary tale.

But I’m running out of words, and there’ll be other chances to explore such things. So instead I’m going to end on this:

Hannan’s argument – that only an irrational Europe would not deliver a good Brexit – is remarkably, parodically self-serving. It allows him to believe that, if Brexit goes horribly wrong, well, it must all be the fault of those inflexible Eurocrats, mustn’t it? It can’t possibly be because Brexit was a bad idea in the first place, or because liberal Leavers used nasty, populist ones to achieve their goals.

Read today, there are elements of Hannan’s columns that are compelling, even persuasive. From the perspective of 2020, I fear, they might simply read like one long explanation of why nothing that has happened since will have been his fault.

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.