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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I was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.