Cyprus Bailout: Stock Markets Take Tumble

Cyprus Bailout Will Leave A Lasting Scar

Updated: 10:57am UK, Monday 18 March 2013

By Ed Conway, Economics Editor

Banking is a confidence trick.

The modern financial system – fractional reserve banking as it's technically called – relies on the public putting faith in their banks.

After all, the nature of the system is that at any one time there's never enough cash in bank vaults to give everyone their deposits back - which is why bank runs are so fatal.

That's why in financial crises the cardinal rule is always to attempt to reassure savers that their deposits will be safe. It's why we have things like deposit insurance; it's why all Northern Rock, RBS, etc savers were made good during the crisis in the UK.

Yes, everyone ended up having to pay the eventual price anyway through austerity and higher taxes but people are accustomed to having money confiscated through income and consumption taxes: their savings, on the other hand, are considered inviolable.*

And that is, when push comes to shove, the problem with the way the Cyprus bailout and bank deposit tax has been handled.

If you have money in a bank account - any bank account - in the country, you are being hit with an instant and unavoidable tax. This instantly undermines public faith in banks - not just the rotten ones but every single branch in the country, including branches of perfectly healthy foreign banks.

This is worth reiterating because there are some analysts who, in economic terms at least, can't see that much of a problem with the bank deposit tax.

After all, the country is in need of a bail-out; the money has to come from somewhere; the banking system is full of dirty Russian money, so why not start there?

And in economic terms, this is quite right: plus you avoid all the messy legal complications of defaulting on bondholders. Moreover, technically speaking depositors are just another lender to banks, alongside creditors.

But looking at this through an economic prism misses the point, which comes back to that fragile confidence trick.

There are of course certain circumstances under which a bank's depositor should lose out: basically when that bank collapses. Indeed, that's precisely the kind of system we need in future to prevent bail-outs and too-big-to-fail.

However, in those circumstances 1) other senior creditors should lose out, 2) depositors whose savings are below the deposit insurance scheme limit should be protected and 3) the deposits affected should, logically, be in the bank that's going under.

None of these three criteria were observed in the Cyprus case, where even deposits in Barclays in Nicosia are subject to the tax, in the plan's initial form.

It doesn't take a genius to figure out that such a capricious attitude to principles savers might have reasonably considered inviolable will catastrophically undermine Cypriots' faith in banks - not just Cypriot ones but any within their country.

There is a chance I'm wrong about this - after all, as I've said above, in blunt economic terms it doesn't really matter where Cyprus gets its bailout cash - whether from taxpayers, depositors, fiscal cuts or the Germans - it still needs money to pay the bills.

But the experience of the 1930s showed that when a government intervenes to confiscate deposits, it critically undermines that faith in the banking system.

And, for better or worse, that faith is a key bedrock of the modern capitalist economy.

Would that it weren't the case: but it is. And what's happening in Cyprus begs profound questions about whether there really is a safe place to put one's cash, questions which can now legitimately be asked about all banking systems, not just in Spain, Italy and so on, but also in the UK and the US.

That is why the initial plan being passed around Brussels spared deposits below 100,000 euros. The eventual scheme, involving a tax on all savers, came as a complete surprise to anyone who wasn't in the room when it was being hammered out.

What, after all, is sacred? We used to assume insured deposits were. Now we can no longer be sure.

* I'm talking, of course, about the savings themselves rather than the interest on the savings – there's less of a cultural resistance to taxing that.

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'Mumpreneurs' Could Be Lifeline To Recovery

By Poppy Trowbridge, Business and Economics Correspondent

Companies run by mothers contribute around £7bn a year to the economy but there are calls for the Chancellor to introduce measures to make it easier to start a business from home.

It has been five years since the depths of the financial crash and still the key to kick-starting growth eludes the coalition Government.

The British economy started 2013 with zero momentum, but could helping mums open businesses help get Britain growing again?

According to StartUp Britain, a group that supports entrepreneurs, 60% of small businesses are started from home.

And a growing number of those are being started by women who have left the workforce to have, or care for, their children.

Julia Hunter is a former City bond trader, and mum. Starting a family prompted her to start a business.

"I was looking to start my own business rather than work for somebody else purely because of the family side of things. It is important to me to just be around."

Mum-run companies are contributing a significant amount to the economy already.

According to Mumpreneur UK, there are 300,000 mum-run companies in the UK today.

As a group, they add about £7.4bn a year to the economy. Yet the average startup cash they require is only £500.

That's a low-risk, high-reward ratio that the Chancellor would admire.

Ms Hunter says British business needs more support from the Chancellor. She believes cutting VAT would be one way to encourage enterprise in the upcoming Budget.

Becky Jones from StartUp Britain says big banks and established companies should be encouraged more to support smaller startups.

She told Sky News: "Giving them support at the early stage can be a complete game changer for the life of a small business."

After all, these are the firms that will hire, produce, sell and export - at each stage contributing to the tax that the Government so desperately needs to slowly pay down debt.

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Clegg Launches £1bn Aerospace Pledge

By Mark Kleinman, City Editor

The Government will next week commit hundreds of millions of pounds of public money to Britain's aerospace industry as it attempts to accelerate the rebalancing of the flagging economy.

I understand that Nick Clegg, the Deputy Prime Minister, will make the pledge on Monday when he unveils the latest phase of the Aerospace Growth Partnership (AGP).

Similar to initiatives already launched in the automotive and defence industries, the AGP will involve money committed by the major companies in the sector - including Airbus, Bombardier and Rolls-Royce - being match-funded by the Government.

Insiders said on Saturday that the total funding under the AGP could reach £1bn within a few years.

Unusually for an industrial initiative of this kind, Mr Clegg will commit to resourcing the AGP well beyond the lifetime of the Coalition Government by saying that the commitment will run for 10 years.

The longer duration of the pledges to support the aerospace industry are designed to counter accusations that the Government is too short-term in its industrial outlook and should enable big companies to make longer-term investment decisions, officials said.

The focus of the new funding will go towards supporting the infrastructure on which the aerospace industry depends, such as research and development activity, and protecting and enhancing the sector's supply chain.

Aerospace is one of the UK's most important industries, directly employing more than 100,000 people and recording more than £24bn in annual earnings, according to a document published by the Government last week.

"The UK's current strength is the result of significant public and private investment in research and technology in the late last century.

"The UK aerospace industry is faced with increasing competition globally, not only from traditional aerospace manufacturing nations but also from developing aerospace nations," it said.

"We can't stand still. To stay at the forefront of the increasingly global aerospace industry, the UK needs to secure strategic work packages on the new programmes, as those we are currently working on come to the end of production and support over the next few years.

"Action is needed now to ensure that public and private investment is increased to globally competitive levels."

Mr Clegg's announcement will come two days ahead of a Budget in which George Osborne, the Chancellor, is under pressure to provide much greater stimulus for industrial growth.

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Osborne Fast-Tracks Pension And Care Reforms

Chancellor George Osborne is bringing forward the introduction of a new, simple state pensions system and a cap on the cost of social care.

Ahead of his Budget on Wednesday, Mr Osborne announced that the single-tier pension would be introduced in 2016 - a year earlier than previously planned.

The cap on social care costs, originally set for £75,000 and due for introduction in 2017, will now start in 2016 as well but at £72,000.

Mr Osborne said the changes would be a "huge boost" for people trying to save for their retirement.

The announcement came as he warned there are no "miracle cures" for the UK economy and raised the spectre of Britain following Cyprus if he changes tack.

The Chancellor is under mounting pressure to ditch his economic "Plan A" and to find some way of kickstarting growth.

A new opinion poll suggests most voters - including more than a quarter of Conservative supporters - think his policies are failing.

But Mr Osborne said the UK could end up facing an economic disaster like Cyprus if he does not stick to his austerity plans.

He dismissed calls for extra borrowing to cut taxes or finance a "spending spree" and warned changing now would be a "disaster".

The Chancellor will deliver his Budget on Wednesday

The Chancellor said the crisis in Cyprus was an example of "what happens if you don't show the world you can pay your way".

He told the BBC's Andrew Marr Show: "That is why in Britain we have got to retain the confidence of world markets."

Mr Osborne acknowledged his austerity measures were "difficult" and the effort to rebalance and repair the economy was "painstaking work".

But he said that "unless we in Britain front up to our own problems ... then the difficult economic situation in Britain will get very much worse".

"There is no easy answer to Britain's problems, there is no miracle cure because if there was a miracle cure it would have been deployed," he said.

"It's just a lot of hard work of dealing with Britain's debts, helping businesses create jobs, helping families who want to work hard and get on."

Writing in The Sun on Sunday, Mr Osborne hinted he would also do more to help homebuyers, business start-ups and apprentices in his Budget on Wednesday.

Helping create jobs would mean "cutting tax rates and red tape, backing scientific advance, building new roads and broadband" and making the UK an attractive investment option, he said.

However he warned of "more tough choices" to be made on further slashing public spending from 2015 - with the scale of the squeeze to be unveiled in his statement.

"It won't be easy," he warned, amid rows between ministers over where the axe should fall.

His comments came as a report revealed families have cut back on spending by more than £3,000 a year since the start of the credit crunch.

Consumer watchdog Which? found the cut in discretionary spending's opening up a £136bn black hole in the economy over the last five years.

Former cabinet minister Liam Fox is leading Tory calls for a change of course on the economy, suggesting Corporation Tax be reduced to zero and far bigger cuts to public spending.

Other prominent backbench demands include cancelling a fuel duty rise due in the autumn and scrapping the beer duty escalator that automatically ups the price of a pint.

Mr Osborne is tipped to announce extra investment in housebuilding and road projects - called for by leading business groups - and help for people to buy homes.

But he will not abandon "Plan A" by increasing borrowing to fund it - a move being mooted within the coalition by Liberal Democrat Business Secretary Vince Cable.

Shadow chancellor Ed Balls said he would welcome extra borrowing to fund a cut in the basic rate of income tax to put more money into people's pockets.

But Mr Osborne hit back: "I think the British people know there are no easy answers in today's world. They aren't fooled by the miracle cures peddled by the same snake oil politicians who got us into this mess.

"Labour's answer to Britain's borrowing problems is to borrow even more - that simply doesn't make sense. If there were easy options and miracle cures then of course I would take them, but sadly there aren't."

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Lloyds Paid 30 Staff £1m Last Year

By Mark Kleinman, City Editor

The state-backed lender Lloyds Banking Group paid dozens of staff more than a million pounds last year, taking the number of UK-based bankers earning seven-figure sums to more than 750.

I understand that Lloyds will disclose in its annual report next week that roughly 30 of its staff were awarded pay packages of more than £1m.

The figure will be the first time that Lloyds, which is 39% owned by taxpayers, has disclosed the number of millionaires in its ranks.

It threatens to re-ignite anger among critics of banking sector pay after a year in which Lloyds lost more than £500m as it continued to deal with the massive financial penalties associated with mis-selling payment protection insurance (PPI).

The Lloyds millionaires largely work in its corporate and investment banking division, according to insiders.

Among those receiving £1m-plus packages was Antonio Horta-Osorio, the chief executive. His £1.48m bonus will vest depending on either the bank's share price performance or the Government's disposal of part of its shareholding.

In total, Lloyds paid out £375m in bonuses, lower than the other state-backed bank, Royal Bank of Scotland (RBS), which forked out £607m.

RBS, which has a larger investment bank than Lloyds, awarded £1m-plus pay deals to 95 staff, while Barclays handed the sums to 428 employees. The two banks were fined a collective £680m for manipulating the interbank borrowing rate, Libor.

HSBC paid 204 of its staff at least £1m last year, making a total for the big four UK banks - including Lloyds' approximately 30 employees - of 757.

Lloyds declined to comment.

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HMRC Tax Helpline Is 'Disgraceful', MPs Say

A "disgraceful" tax helpline run by HM Revenue and Customs (HMRC) costs callers £136m a year through delays in answering calls, a spending watchdog has said.

The Commons Public Accounts Committee found a quarter of the 79 million annual calls to the HMRC phone line go unanswered, despite a £900m investment in customer service.

It said a new target to answer 80% of calls within five minutes was "woefully inadequate and unambitious" and questioned whether waiting times would increase if staff numbers are cut.

HMRC plans to close 281 tax inquiry centres in favour of a targeted "mobile" system in homes, businesses or community locations, claiming the move will save customers £12m a year in lost time and travel costs.

But Margaret Hodge, the Labour MP who chairs the committee, said changes to the way companies report payments to employees, as well as a shake-up of tax and benefit systems, would "drive up the number of phone calls to the department".

Sky News will have Budget coverage throughout Wednesday, starting from 9am

"Just how the department is going to improve standards of customer service, given the prospect of it having fewer staff and receiving a higher volume of calls, is open to question," she said, adding that HMRC should be aiming to answer the majority of calls within 20 seconds.

A spokesman for HMRC said it had "already recovered" from its "previous poor standard of service".

"In the past three months, we have been answering more than 90% of calls to our contact centres," he said.

"During the current year we have replied to 84.5% of the 16 million pieces of post we have received within 15 working days.

"We are investing an extra £34m in our contact centres to maintain this industry-standard level of performance.

"To make it cheaper for customers to call us, we have already transferred our Tax Credits phone lines from 0845 to 0345 numbers, and will begin to move our remaining lines to 03 numbers from April.

"We will continue to build on these improvements until we deliver the consistent quality of service that our customers are entitled to expect."

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Budget: Chancellor 'To Overborrow By £8bn'

The Chancellor will be forced to reveal a downgraded growth forecast and a £8bn borrowing overshoot in this week's Budget, it has been predicted.

The Ernst & Young Item Club said the Office for Budget Responsibility (OBR) was likely to slash its growth forecasts to just under 1% for 2013 from 1.2%, adding to pressure for bolder moves to kick-start the economy.

Weak income tax receipts, disappointing revenues from the sale of the 4G spectrum and a lower-than-expected boost from the Bank of England's asset purchase programme were also expected to see the OBR reveal that public borrowing has climbed to more than £88bn this year, it added.

Sky News will have Budget coverage throughout Wednesday, starting from 9am

Senior economic adviser Andrew Goodwin said the forecasts would be politically "embarrassing" and said it was time for a "bold move" from the Chancellor.

The negative prediction comes just two days before George Osborne delivers his latest Budget.

The Item Club report is calling for spending on a £10bn package of infrastructure projects in each of the next two years, even if this would require more borrowing.

A defiant George Osborne resisted pressure for a switch from his tight austerity measures yesterday as he warned there were "no easy answers" to the UK's economic woes.

The prediction comes as the Chartered Management Institute (CMI) says bad weather has exacerbated the situation.

The CMI said it was the top cause of disruption to UK businesses over the last 12 months, with as many as 77% of organisations affected by this winter's snow.

It said managers have estimated the average cost to their organisation in excess of £52,000, with some claiming up to £1 million in losses because of the cold.

The CMI added that further disruption was caused to 42% of firms by staff illness, while 40% were hit by IT woes and 27% suffered from transport disruption.

With the UK teetering on the brink of a triple-dip recession and the country's once-cherished AAA credit rating lost, Mr Osborne faces rising demands to abandon his Plan A.

The CMI says many companies were hit hard by the winter's snow

But the Chancellor insisted that failing to tackle the country's debt and deficit problems could leave the UK on the brink of a crisis like that in Cyprus.

He said Wednesday's Budget would contain measures to "help those who aspire to work hard and get on" but would also set out the scale of further curbs on public spending from 2015.

Mr Osborne indicated there would be help with the cost of childcare and announced that a £72,000 cap on the amount people must pay for social care would be brought forward to 2016.

The £144-a-week single state pension will also be introduced a year ahead of schedule in 2016.

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M&S Shares Surge Amid Takeover Talk

Shares in Marks & Spencer have risen by up to 8% on the FTSE 100, amid speculation it is being stalked by Middle Eastern investors.

M&S, which has been no stranger to bid talk in recent months, has so far refused to comment on a report that a consortium led by the Qatar Investment Authority (QIA) was considering an £8bn bid.

According to The Sunday Times, the Gulf state's sovereign wealth fund is in talks with private equity and banks about an approach.

Any such bid promises to be the biggest private equity takeover of a British blue chip firm since Alliance Boots was snapped up by KKR for £11bn in 2007.

Tough spending conditions on the high street have hit the M&S share price, which has fallen 70% in the last year alone.

Clothing sales have struggled in particular and a turnaround plan by chief executive Marc Bolland, including a new management team for the division, is not expected to deliver results until the summer.

Sky News will have Budget coverage throughout Wednesday, starting from 9am

The weak pound, coupled with the share price, makes M&S attractive to bidders.

However, there are significant hurdles in the way of an offer. Aside from the price tag needed to win over management and investors, M&S has a hefty pension deficit of about £300m which means the scheme's trustees have a big say in any deal.

Other bidders have tried and failed to bag M&S in the past, with BHS and Topshop tycoon Sir Philip Green launching an unsuccessful hostile £10bn bid in 2004.

QIA's Qatar Holding subsidiary bought Harrods three years ago for £1.5bn and also has a 25% stake in supermarket Sainsbury's.

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Drugs Firm AstraZeneca To Cut 700 UK Jobs

AstraZeneca is to cut 700 jobs in the UK as part of a restructuring, partly aimed at saving costs.

The pharmaceuticals firm, which employs 6,700 people in the UK, said it wanted to implement the changes over the next three years.

While it planned to open a new research and development (R&D) centre in Cambridge through an investment of £330m, its largest R&D facility at Alderley Park in Cheshire would close.

A majority of the 1,600 people who work there would be relocated to Cambridge, to the fury of unions who said it would mean that the North West would lose high-quality jobs.

Pascal Soriot, chief executive officer, said: "The changes we are proposing represent an exciting and important opportunity to put science at the heart of everything we do because our long-term success depends on improving R&D productivity and achieving scientific leadership.

"This is a major investment in the future of this company that will enable us to accelerate innovation by improving collaboration, reducing complexity and speeding up decision-making.

Sky News will have Budget coverage throughout Wednesday, starting from 9am

"The strategic centres will also allow us to tap into important bioscience hotspots, providing more of our people with easy access to leading-edge academic and industry networks, scientific talent and valuable partnering opportunities."

AstraZeneca estimated the proposals would lead to just under £1bn in one-off restructuring charges but annual benefits of the overhaul would be expected to reach approximately £125m by 2016.

1,600 jobs would go in total worldwide, Mr Soriot confirmed.

He added: "I recognise that our plans will have a significant impact on many of our people and our stakeholders at the affected sites.

"We are fully committed to treating all our employees with respect and fairness as we navigate this important period of change."

The announcement came two months after AstraZeneca revealed that its annual net profits had slumped on the back of patent expiries, while it also warned that sales would dive further this year.

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Cyprus Bailout: Savings Shift Amid Russia Offer

Cyprus has ordered its banks to stay shut until Thursday as the government seeks to alter the terms of a controversial EU bailout that taxes savings.

The uncertainty comes as Russia's finance minister said his country would consider restructuring its loans to Cyprus.

Russian energy giant Gazprom has also reportedly offered financial assistance to Cyprus in exchange for access to the island's gas reserves.

Eurozone countries across the region have seen markets shudder as a result of the weekend bailout offer, which includes a one-off tax on bank deposits, with many losing more than 2% and the FTSE dropping 1.6%.

Officials in southern Cyprus, which does not include the Turkish north of the island, have now delayed the parliamentary vote until Tuesday in order to soften the impact of a levy on smaller savers.

Sky News will have Budget coverage throughout Wednesday, starting from 9am

Banks stayed closed on Monday due to a long weekend and will remain closed on Tuesday to prevent a run on the banks.

Yiannakis Omirou, the speaker of parliament, said the delay is needed to give the government time to amend the deal agreed late last week.

Authorities had planned a 6.7% tax on deposits under 100,000 euros (£85,000), triggering queues at cash machines as people in Cyprus rushed to withdraw their money on a bank holiday weekend.

But the country's government is thought to now want a 20,000-euro (£17,000) minimum to the levy, with the tax set at 6.7% on the next 80,000 euros (£68,000) and 9.9% above that figure.

In exchange for the levy which would raise 5.8bn euros (£5bn), Cyprus would receive another 4.2bn euros (£3.6bn) in aid to help recapitalise its banks.

Meanwhile, eurozone ministers planned a conference call to discuss the issue, as Germany insisted it was not behind the extraordinary weekend bailout proposal.

But Russian President Vladimir Putin slammed the proposed tax in Cyprus, where some 30,000 of his compatriots live.

"(Mr) Putin said that this decision, in case of its adoption, will be unfair, unprofessional and dangerous," Russian news agencies quoted Kremlin spokesman Dmitry Peskov as saying.

The Cypriot government discussed the bailout deal offer from the EU

Cypriot President Nicos Anastasiades, who was elected just three weeks ago, had earlier said the island must accept a painful compromise or face bankruptcy.

International Monetary Fund (IMF) boss Christine Lagarde added: "The IMF has always said that we would support a solution that is sustainable, that is fully financed, and that appropriately allocates the burden sharing."

Depositors in the eurozone's weaker economies have been unnerved by the levy, with investors fearing it will set a precedent that could reignite market turmoil.

But the European Central Bank (ECB) moved to soothe investor nerves, saying Cyprus is a special case and other countries should not fear contagion from its bailout deal.

ECB governing council member Ewald Nowotnytold Austria's ORF radio: "For other countries, there is absolutely no reason to fear contagion."

He said Cyprus' banking system accounted for an above-average proportion of national output, and that the island nation had a particularly high share of foreign depositors.

Savers have queued to withdraw their money from cash machines across Cyprus

The British Government said staff and military personnel in Cyprus will be protected from any levy on their bank deposits.

Foreign Secretary William Hague told Sky News that Britain had been "separated" from contributing towards the bailout, adding that 3,000 Britons in the country would not suffer in the proposed raid on bank savings.

The tax on deposits in Cyprus, which accounts for only 0.2% of the eurozone's economy, is expected to raise up to 6bn euros (£5bn) and affect rich Russians with deposits in Cyprus and domiciled European retirees, as well as Cypriots themselves.

The levy will apply to all deposits held in banks within Cyprus, including an estimated 2bn euros (£1.75bn) of British money, according to the ECB.

It will not affect deposits held in the UK branches of Cypriot banks, such as Bank of Cyprus, whose UK subsidiary is regulated by the Financial Services Authority.

However, Laiki Bank UK said on its website: "Your eligible deposits with Laiki Bank UK are protected up to a total of 100,000 euro by the Cyprus Deposit Protection Scheme and are not protected by the UK Financial Services Compensation Scheme.

"Any deposits you hold above the 100,000-euro limit are not covered."

Cypriot banks lost 4.5bn euros (£3.8bn) - equal to a quarter of the island's gross domestic product - when eurozone leaders decided to write off Greek debt last year.

As part of its bailout deal, corporate tax will rise from 10% to 12.5%, while state assets will be sold off to help balance the public finances. Cuts to government workers' salaries and pensions have already been approved.

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