Thursday, 28 March 2013

Who’s to blame for Cyprus’ economic crash?

Here’s Hermes’ comment responding to the views Christophoros Pissarides has expressed in the international media (which I’ve posted on here, here and here) regarding the Cyprus ‘bailout’ deal, which Pissarides regards as outrageous and ignorant:

I understand Pissarides is angry at this stage of the crisis. However, when things being to settle a bit, I hope for the sake of Greek Cypriots and Greeks, that Pissarides will tell the truth. The best friends are the ones that are honest rather than the ones that tell you what you want to hear.

Putting aside for a second the brutality of the IMF, EU and German diktats, the fact that Cyprus developed very lax banking standards (even before the Greek PSI, Laiki was deteriorating fast), was very slow in responding by cutting government expenditure below revenues when it became obvious that the banks were very unhealthy, they did not have the wherewithal to recapitalize its banks; the responsibility of this should not wholly fall onto the German and northern European taxpayer. They were prepared to provide most of the funds but not all of them. Also, why would they really care if Cyprus has many accounting and finance graduates. If Germany suddenly priced itself out of exports markets, and thousands of engineers become unemployable, should Greece and Cyprus be expected to pay for that? The Greek Cypriots orientated its economy a certain way; and in turn, churned out certain skills, but did not get the basics right.

Here’s my response:

You’re missing the point, which is that the punishment being meted out to Cyprus does not fit the crime.  And you’re also insulting the intelligence of Cypriots, since no one – apart perhaps from AKEL – denies that Cypriots got carried away, and wanted to create an Eastern Mediterranean Switzerland without the necessary standards, probity and professionalism. They got greedy, complacent. They put in charge of a liberal economy a bunch of idiotic and unreconstituted communists. Too many Cypriots, with relatively modest incomes, because of an ability to take out easy loans, lived millionaire lifestyles. The saga with Vgenopoulos is a perfect example of how Cypriot bankers and politicians succumbed to greed, leaving good sense at the door when he promised them he could make them even richer, when in fact his intention was to loot Laiki to support his dishonest dealings in Greece and for the enrichment of friends and family.

However, having got themselves into trouble, Cypriots did expect solidarity from the EU, not only because the trouble Cyprus found itself was due in part to the flawed way the euro was constructed and the incompetent way the eurozone crisis has been handled; but also because the EU is supposed to be moving towards a political as well as economic union, in which there are no northern European and southern European taxpayers, just like there is no distinction between taxpayers in NSW and those in Victoria. So Cypriots were entitled to expect reasonable treatment from the EU and not bullying, threats, prejudice, lies (about money laundering) and becoming an unwitting pawn in Germany’s forthcoming elections. And unlike Greece, Cypriots didn’t expect to take the money and carry on as before. They were prepared to make massive changes to their society and economy – which was not as rotten and corrupt as Greece’s (though Pissarides’ talk of impeccable or British standards of probity is optimistic) – but instead of being given this chance to reform their economic system, much of which was in good order, they will see it wrecked, with all the social and human consequences – thirty years of hard work, in which there was continuous growth and full employment – all done in the aftermath of the Turkish invasion, in which hundreds of thousand of people lost everything, becoming destitute overnight, and often worked two-three jobs to get on their feet again – down the drain.

And I would also stress that this is not simply an economic or standards of living issue. Because of the Turkish occupation and Turkey’s continuous threats, against which Cyprus’ only defence has been the legitimacy of the Republic of Cyprus and the strength of its economy, what is at stake is national survival – this is not an exaggeration. Indeed, since we know that the existence of the Republic of Cyprus is a thorn in the sides of powerful players in the region – who have sought for decades, and most recently through the Annan plan, to dismantle the Republic of Cyprus – we are entitled to suspect that what’s going on here is not a simple economic crisis, but a means to diminish the Cypriot state and make it vulnerable to the political and geopolitical machinations of unfriendly powers.

*Above and below are two interviews with Chris Pavlou, until recently vice president of Laiki Bank. The first interview, in English with Faisal Islam from Channel 4 news, describes the browbeating Cyprus was subjected to by the troika and the the corrupt dealings of the Greek units of Laiki, whose losses ended up being covered not by Greek but by Cypriot authorities; while the second interview is in Greek with Fanis Papathanasiou from Greek state TV network NET, in which Pavlou describes Laiki Bank as out of control and a political establishment not fit to reign it in.


Hermes said...

Like I said, things are raw and people are lashing out. The same thing happened when the enormity of the situation started to hit mainland Greeks. I have also noticed some Cypriots think that when they are successful it is due to "Cypriot" genius, hard work, honesty; but, when things go wrong it is Greece's fault. Greece is the convenient punching bag. The same phenomenon happens in mainland Greece where Eptanessians or Cretans or other periphery Hellenes, detest Athens when things go bad but attribute the good to their own brilliance. Often, this is true but it can only be stretched so far. This is probably borne from some inferiority complex.

I think greater solidarity from the EU should have been expected. I did say in my post that the IMF, EU and Germany were brutal. But, if you really want an economic and political union in the EU, where Hellenism is subsumed and eventually snuffed out by the EU, then I find that surprising. I think that most patriots, when the crisis begins to subside, would prefer an EU where the nation-state is still the most important decision-maker rather than Brussels. However, that preference comes with certain responsibilities. We cannot have it both ways. When there is a crisis we want political and economic union and when there are good times where want an EU of nation-states.

I noticed you have used Faisal Islam to comment on Cyprus. Weird.

John Akritas said...

Obviously, I follow the Cypriot media more closely than you and, despite an upsurge in patriotism, I don’t recognise the picture you’re portraying of Cypriots ‘lashing out’ at foreigners, and particularly Greeks. There has been criticism of everybody and everything – mostly self-criticism (the government today set up a committee to look at what went wrong with the banking system) or political parties accusing each other of being at fault; but also criticism of the EU and, to a lesser extent, Greece. It feels to me that there has been a rupture in political relations between Athens and Nicosia, with Nicosia feeling Athens didn’t support it enough these last couple of weeks – it was noticeable that Anastasiades in his address to the nation did not thank Greece for its help, which is customary. However, I’ve also noticed a renewed Greek interest in Cyprus, reflected in the extensive coverage given to the crisis in the media; so government relations may be strained, but this doesn’t impact in other ways. Why should it? Kalamarades are not going to be insulted or turned away if they come to Cyprus. Far from it.

Channel 4 News is a flagship news programme here in the UK and Faisal Islam is economics editor, who happens to be out in Cyprus reporting on the situation. What am I supposed to do? Switch off the TV because of the guy’s race and religion? I wouldn’t get very far in London if I started boycotting people because of their race and religion.

John Akritas said...

There's a fairly comprehensive interview with Athanasios Orphanides, ex Central Bank head, and man at the heart of the crisis as it unravelled over several years, which gets to the heart of what went on in Cyprus. The only person he could be accused of 'lashing out' against is Christofias.

Hermes said...

John, there have been some reports in the media and some blogs that suggest Greece was somehow to blame for Cyprus's woes and it has not done enough to help. If Cypriot banks decided to lend to dodgy credits in order to provide very attractive rates to depositors, that is not the fault of Greece that is the fault of the Cypriot bankers, the central bank and other prudential authorities in Cyprus. If the Cypriot banks were forced to participate in the Greek PSI haircut without seeking compensation from the EU in a timely manner, again that is not the fault of Greece. Remember, Greek banks and other institutions also suffered from the haircut. Also, the creditors were given cash sweeteners and the securities that were issued as part of the swap have traded higher since then. If Vgenopoulos played a major role in Laiki Bank becoming an aggressive lender, then again that is not the fault of Greece. Vgenopoulos is a private citizen and the Cypriot regulators should have kept him in check but it suit too many people to let the circus go on and on. Also, what could Greece do to help after two years of Cypriot delays? I am quite sure their bank recap funds are earmarked for just that, recaps of Greek banks. I am quite sure Greece cannot just give Cyprus 2-3bn euro. Note, remember the struggle to close the 2bn gap in their fiscal deficit recently. Also, if Greece did provide the funds, then Cyprus would not receive the 10bn from the EU because one of the conditions of receiving the 10bn was not to become more indebted. An additional 2-3bn of debt on Cyprus's balance sheet would also send it towards an uncontrollable debt spiral. Hence, why the EU was so against additional loans from Russia. Greece did buy the Greek branches of the Cypriot banks. If they did not, then the Cypriot state would have been expected to make the difference.

Orphanides says pretty much what I have been saying. The previous government has to answer why it did not consolidate the budget earlier (actually, expenditure increased whilst revenues fell) and why it did not ask for assistance. However, I still think many question marks have to be asked of Orphanidis. Also, the whole regulatory and prudential framework has to be examined. Often, people say that Cyprus has English law. Big deal! Look at the way England manages itself. It is also a basketcase. And is also actually haircutting depositors but most people do not realise because it is happening in stealth i.e. negative real rates.

Hermes said...

What a disasterous article by Michael Moller for the New York Times!!

Loukas Leon said...

I agree, it's utter scrap. Sell our soul and nation out for €2500 per year? The Annan Suicide Pact (2004) was rejected purely on economic grounds? We should bow down before Turkey as it's increasingly more 'powerful' and a so-called 'major anchor of stability in a turbulent region'? Turkey and Greece are now friends, apparently. Friends forever. I guess Greece should, like so many of Moller's like-minded friends suggest, completely do away with their military spending, bend over and spread their cheeks to the Turks. 'The Turkish Cypriot leadership is now in a stronger position than ever to negotiate a solution on more equal terms.' This tells us everything we need to know about Mr Moller.

'Turkey’s European aspirations can no longer be denied. But part of that road goes through Cyprus, and the sooner that problem is solved, the sooner Turkey can be welcomed as a full member of a stronger and more integrated Europe.'

… LOL.

John Akritas said...

Moller was UN Cyprus mediator until 2008, before being ditched at the insistence of the Turks who regarded him as being pro-Greek. Moller's replacement was Alexander Downer, much more to Turkey's liking. Moller's piece is usual waffle, except, reading between the lines, what he's saying is this:

1. With the collapse of the Cypriot economy and rising living standards among TCs; TCs no longer need fear being overwhelmed by GC economic strength.

2. Greece has neither the wherewithal or inclination to project strategic interests in Cyprus.

3. The only pressure on Turkey to come to a Cyprus settlement emanates from its ambitions to join the EU, which must now take the lead in efforts at reunification, displacing, presumably, the UN, under whose auspices Turkey prefers to conduct negotiations.

Hermes said...

Below is a very good recent interview with the Greek Central Bank governor, Provopoulos. Early on he answers whether Greece could have helped Cyprus more, following the DISY MP's retarted statements:

The rest of the interview presents some of the hard reality of Greece's so called reform program.

As for Greece projecting strategic interests in Cyprus, what has changed? Nothing much.

From another perspective, what can change, if Cypriots see themselves as an indivisible part of Hellenism then Greek interests are partially projected by Cypriots simply being on the island. However, if Cypriots, led by the treacherous hard Left and much of the youth, see themselves, as a separate country, with only a common heritage to the Greeks, then a lot can change.

Faisal Islam said...


Why would it be 'weird' for me to "comment" - actually report honestly from Cyprus?

What's your problem? I'm intrigued.

Faisal Islam
Economics Editor
Channel 4 News