Cyprus is paying a painful price for bowing to international capital

Being controlled by global financial interests does not benefit ordinary people, their economy or democracy, writes the Jubilee Debt Campaign's Tim Jones.

A small country is being brought to its knees by a huge banking system which has recklessly been lent money from overseas. Controls on money leaving the country have had to be introduced. The size of the debts owed mean there is no way the government can simply bailout the banks. For Cyprus in 2013 read also Iceland in 2008.

Both small islands let themselves become home to casino banks many times the size of their actual economies. Banks borrowed money from overseas, lending it on again in even greater quantities. But when these loans could not be paid, the banks were bust, threatening the savings of all those with accounts in the banks, including normally Icelanders and Cypriots who had no idea their money was being put on a global roulette wheel.

In 2008, the Icelandic government could simply not afford to bailout its banks. Instead it sought to protect savings of domestic Icelanders, a limited bailout, whilst letting the reckless banks go bust to their foreign creditors. Iceland inevitably went through a crisis, but its economy is now growing, unemployment falling, and its experience measures favourably against that of Ireland, Spain and even the UK.

Iceland’s approach is a good lens through which to try to assess what is happening in Cyprus. The original plan of last week was madness, hitting domestic savers however small their savings. Now the deal rightly protects Cypriots who had been told by the EU that their deposits up-to €100,000 were safe.

Depositors over €100,000 will see their claims taken into a bad-bank, from which they could get back very little. Reckless lenders to banks via bonds will also take a hit on their loans, unlike under the original plan. This appears to be fair; there is no reason why Cypriot or other taxpayers should bailout reckless lenders such as rich Russians, hiding their money away in a secretive tax haven. In many ways it repeats the Icelandic experience. However, by hitting Cypriots as well as foreigners, it could have major ramifications for Cyprus’ businesses. It is also questionable whether the EU is only allowing this approach this time because it is rich Russians who are set to lose out, not German, French and British banks.

And so we come to the "help" from the EU through bailout loans. Cyprus’ government cannot afford to protect all the deposits under €100,000, even though the EU has brought in a collective rule to that effect. Not having its own currency, Cyprus has no ability to bring in inventive policies to keep money moving round the economy. But by taking €10 billion of loans from the EU and IMF, Cyprus is taking on a further debt of 60 per cent of national income, on top of the over 60 per cent already owed, and with national income set to crash. These loans are not payable, yet as with Greece, Portugal and Ireland today, or Africa and Latin America in the 1980s and 1990s, huge suffering is about to be imposed in the name of trying to pay.

True assistance from the EU would be to provide this support as grants, a policy which would be fair given that it is to protect the EU wide deposit protection policy, and necessary because of the existence of the single-currency. The European Central Bank could create the one-off money to do so, with no visible impact anywhere else.

Cyprus is not Iceland. The single currency, and the failure to discriminate between domestic and foreign lenders to banks, means the crisis for the Cypriot people is set to be far worse. The EU should be giving real help to prevent the destruction of the economy and many peoples lives.

Much debate in Cyprus has seemed to be driven by the fear of what will happen if all the foreign financiers leave. But it is the very same people who have driven the country into crisis. The controls on moving money out of Cyprus need to be rigorously enforced to give some protection, just as they were in Iceland, and in Argentina following its default in 2001, and Malaysia during the Asian Financial Crisis. Thankfully the EU is turning a blind eye to the Lisbon treaty which prevents all regulations on the movement of money between countries. But the pity is that other such regulations were not used to prevent the reckless lending into the country in the first place.

Regulations on the movement of money between countries were common-place in the decades after the second world war, a period when there were hardly any debt crises. After they began to be removed in the 1970s, such crises have become common place, affecting every continent from Latin America and Europe, to East and Central Asia and now Europe today.

The crisis in Cyprus shows how damaging the banking industry can be when it gets too large, just as in Iceland, Ireland, Spain and the UK. For the country to emerge from this crisis, Cyprus, like so many other countries, needs to get control over its banks in order to get them to invest in productive industries, rather than being part of a global speculation and tax avoidance ring.

Being controlled by global financial interests does not benefit ordinary people, their economy or democracy. Whilst Cyprus is going someway to making reckless lenders share in the pain, the failure to truly discriminate between domestic and foreign debts, and the lack of real help from the EU, means much suffering lies ahead.

Photograph: Getty Images

Tim Jones is policy officer at Jubilee Debt Campaign. Jubilee Debt Campaign is part of a global movement demanding freedom from the slavery of unjust debts and a new financial system that puts people first.

Photo: Getty
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Labour will win the London elections – they’ve just lost the spin war

The question is, does that matter? 

Cancel the champagne in Jeremy Corbyn’s office? A new YouGov poll for Queen Mary’s Mile End Institute shows Labour slipping back from the record-breaking heights of 53 per cent in the local elections in London… to the still record-breaking heights of 51 per cent.

There are two things to note first off: the first, of course, is that Labour would still be posting the best result of any party in the capital since 1971, and its best since these boroughs were founded. The second is that as the change is within the margin of error, it could all be noise.

My sense, from talking to the local parties throughout the capital is that there has been a slight fall in Labour support but it is not evenly spread. In Barnet, the party’s ongoing difficulties with antisemitism have turned what looked a certain victory into a knife-edge fight. In Wandsworth, stories in the Standard about the local Momentum group have successfully spooked some residents into fearing that a Labour victory in that borough would imperil the borough’s long history of ultra-low council tax, while the presence of a fairly well-organised campaign from new party Renew is splitting angry pro-Remain vote. But elsewhere, neither Labour nor Tory local activists are reporting any kind of fall.

However, it does show how comprehensively Labour have lost the spin war as far as what a “good” set of local election results would be next week: as I laid out in my analyses of what a good night for the major parties would be, Wandsworth and Westminster councils, both of which would stay blue if this poll is borne out, should not be seen as essential gains for Labour and should properly be seen as disastrous defeats for the Conservatives.

However, CCHQ have done a good job setting out a benchmark for what a good night looks like to the point where holding onto Bexley is probably going to be hailed as a success. Labour haven’t really entered the spin wars. As I noted on our podcast this week, that’s in part because, as one senior member of Team Corbyn noted, there is a belief that whatever you do in the run-up, the BBC will decide that there is merit in both sides’ presentation of how the night has gone, so why bother with the spin war beforehand? We may be about to find out whether that’s true. The bigger question for Labour is if the inability to shape the narrative in the face of a largely hostile press will be a problem come 2022. 

Stephen Bush is special correspondent at the New Statesman and the PSA's Journalist of the Year. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.