Cyprus looks for plan B

There is no plan B.

At 10am Cyprus time, the Cypriot government started to hammer out another vote on whether they have a plan B to present to the European Central Bank. If they do not have an alternative to the mooted deposit tax by Monday, the bank will cut off emergency liquidity assistance to Cyprus' two biggest banks, plunging them into bankruptcy, and putting Cyprus on a path which will inevitably lead them to an exit from the euro, and possibly the EU altogether.

Cyprus does not, currently, have a plan B.

The plans to be put in front of Parliament cover the winding up of Laiki, one of the two troubled banks (the other is the Bank of Cyprus), splitting it into "good" and "bad" banks, hopefully ensuring that the depositors in the good bank – those with insured deposits under €100,000 – do not immediately withdraw their money once the banks reopen.

That proposal has received a "cautious" response from eurozone finance ministers, according to the Financial Times, but doesn't go anywhere near solving the problem.

In giving the Monday deadline, the European diplomats and ministers who ultimately hold sway over Cyprus also clarified their position about what an acceptable solution would be, and in doing so made things much, much worse.

We already knew that their initial proposal to the Cypriot government offered a loan of €10bn and required the government come up with a further €7bn itself in order to fund the €17bn needed for recapitalisation of the banks. But, reports Felix Salmon:

The stated reason why Europe won’t lend more than €10 billion is that Europe refuses to allow Cyprus’s debt level rise above a certain level.

That means that, at a stroke, most of Cyprus' alternative solutions are bust. It can't take a loan from the Russian government, it can't borrow from its own pension funds, it can't confiscate deposits and replace them with post-dated bonds.

The EU is basically confirming to Cyprus that its options are:

  1. Pass the deposit tax.
  2. Find some other tax which will get €7bn – a little under a third of GDP – in a weekend.
  3. Leave the eurozone.

In a way, though, the background situation has got better for Cyprus in the last week. On Monday, the country was deathly afraid of the deposit tax because it could have signalled the death of Cyprus as a destination for offshore banking. That appears to have been the reason why it took the disastrous choice to "spread the pain" by hitting insured depositors with a tax on top of uninsured.

Now, it doesn't have to worry about that, because its role as an offshore banking destination is dead already. It is, bluntly, inconceivable that the "solution" to the crisis, whatever it is, won't result in deposit flight from overseas depositors. The only hope left is to ensure that it doesn't also result in Cypriots moving their money offshore.

With that in mind, it may turn out to be the case that the best solution for Cyprus is the one it was offered at the start: soak the (largely foreign) rich with a 15 per cent deposit tax, look after the poor's deposits, and move on to trying to find an alternative basis for its economy.

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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Arsène Wenger: how can an intelligent manager preside over such a hollowed-out team?

The Arsenal manager faces a frustrating legacy.

Sport is obviously not all about winning, but it is about justified hope. That ­distinction has provided, until recently, a serious defence of Arsène Wenger’s Act II – the losing part. Arsenal haven’t won anything big for 13 years. But they have been close enough (and this is a personal view) to sustain the experience of investing emotionally in the story. Hope turning to disappointment is fine. It’s when the hope goes, that’s the problem.

Defeat takes many forms. In both 2010 and 2011, Arsenal lost over two legs to Barcelona in the Champions League. Yet these were rich and rewarding sporting experiences. In the two London fixtures of those ties, Arsenal drew 2-2 and won 2-1 against the most dazzling team in the world. Those nights reinvigorated my pride in sport. The Emirates Stadium had the best show in town. Defeat, when it arrived in Barcelona, was softened by gratitude. We’d been entertained, more than entertained.

Arsenal’s 5-1 surrender to Bayern Munich on 15 February was very different. In this capitulation by instalments, the fascination was macabre rather than dramatic. Having long given up on discerning signs of life, we began the post-mortem mid-match. As we pored over the entrails, the curiosity lay in the extent of the malady that had brought down the body. The same question, over and over: how could such an intelligent, deep-thinking manager preside over a hollowed-out team? How could failings so obvious to outsiders, the absence of steel and resilience, evade the judgement of the boss?

There is a saying in rugby union that forwards (the hard men) determine who wins, and the backs (the glamour boys) decide by how much. Here is a footballing equivalent: midfielders define matches, attacking players adorn them and defenders get the blame. Yet Arsenal’s players as good as vacated the midfield. It is hard to judge how well Bayern’s playmakers performed because they were operating in a vacuum; it looked like a morale-boosting training-ground drill, free from the annoying presence of opponents.

I have always been suspicious of the ­default English critique which posits that mentally fragile teams can be turned around by licensed on-field violence – a good kicking, basically. Sporting “character” takes many forms; physical assertiveness is only one dimension.

Still, it remains baffling, Wenger’s blind spot. He indulges artistry, especially the mercurial Mesut Özil, beyond the point where it serves the player. Yet he won’t protect the magicians by surrounding them with effective but down-to-earth talents. It has become a diet of collapsing soufflés.

What held back Wenger from buying the linchpin midfielder he has lacked for many years? Money is only part of the explanation. All added up, Arsenal do spend: their collective wage bill is the fourth-highest in the League. But Wenger has always been reluctant to lavish cash on a single star player, let alone a steely one. Rather two nice players than one great one.

The power of habit has become debilitating. Like a wealthy but conservative shopper who keeps going back to the same clothes shop, Wenger habituates the same strata of the transfer market. When he can’t get what he needs, he’s happy to come back home with something he’s already got, ­usually an elegant midfielder, tidy passer, gets bounced in big games, prone to going missing. Another button-down blue shirt for a drawer that is well stuffed.

It is almost universally accepted that, as a business, Arsenal are England’s leading club. Where their rivals rely on bailouts from oligarchs or highly leveraged debt, Arsenal took tough choices early and now appear financially secure – helped by their manager’s ability to engineer qualification for the Champions League every season while avoiding excessive transfer costs. Does that count for anything?

After the financial crisis, I had a revealing conversation with the owner of a private bank that had sailed through the turmoil. Being cautious and Swiss, he explained, he had always kept more capital reserves than the norm. As a result, the bank had made less money in boom years. “If I’d been a normal chief executive, I’d have been fired by the board,” he said. Instead, when the economic winds turned, he was much better placed than more bullish rivals. As a competitive strategy, his winning hand was only laid bare by the arrival of harder times.

In football, however, the crash never came. We all wrote that football’s insane spending couldn’t go on but the pace has only quickened. Even the Premier League’s bosses confessed to being surprised by the last extravagant round of television deals – the cash that eventually flows into the hands of managers and then the pockets of players and their agents.

By refusing to splash out on the players he needed, whatever the cost, Wenger was hedged for a downturn that never arrived.

What an irony it would be if football’s bust comes after he has departed. Imagine the scenario. The oligarchs move on, finding fresh ways of achieving fame, respectability and the protection achieved by entering the English establishment. The clubs loaded with debt are forced to cut their spending. Arsenal, benefiting from their solid business model, sail into an outright lead, mopping up star talent and trophies all round.

It’s often said that Wenger – early to invest in data analytics and worldwide scouts; a pioneer of player fitness and lifestyle – was overtaken by imitators. There is a second dimension to the question of time and circumstance. He helped to create and build Arsenal’s off-field robustness, even though football’s crazy economics haven’t yet proved its underlying value.

If the wind turns, Arsène Wenger may face a frustrating legacy: yesterday’s man and yet twice ahead of his time. 

Ed Smith is a journalist and author, most recently of Luck. He is a former professional cricketer and played for both Middlesex and England.

This article first appeared in the 24 February 2017 issue of the New Statesman, The world after Brexit