Louis Christofides, an economics professor at the University of Cyprus, which reflects prevailing views in Cyprus as to how the island’s economy collapsed. He emphasises the failure of Cypriots to manage their economy when strains began to show, which exposed Cyprus to hysterical and ill-informed accusations regarding money laundering and Russian oligarchs that reflected less Cypriot reality and more crass German politics – Christofides compares the money laundering rumours to the malicious conjecture surrounding Iraqi WMDs – and, once Cyprus sought recourse to its European partners, Christofides denounces the injustice of the remedy imposed, which he says will bring misery to Cyprus.
Bad luck in a ‘casino economy’
Pierre Moscovici said: ‘To all those who say we are strangling an entire people... Cyprus is a casino economy that was on the brink of bankruptcy.’
As late as 2011, the Republic of Cyprus (Cyprus) was still a good performer within the Eurozone: Its debt to GDP ratio was 71% (lower than many Eurozone members, including Germany and the UK), its fiscal deficit as a percent to GDP was 6.3%, its real growth rate was 0.5%, its unemployment rate was 7.9% and the rate of inflation was 3.3%. How did Cyprus come to the brink of bankruptcy within 12-18 months?
Responsibility rests with the previous government, Cyprus’s legislative and supervisory institutions, and, importantly, its senior bankers. Clouds on the horizon had been gathering for a while: The budget surplus for 2007 and 2008 turned to a deficit in 2009, the current account deficit reached 15.6% of GDP in 2008, nominal wage growth exceeded inflation until 2011 (with minimal productivity growth), the unemployment rate (5.3% in 2009) rose to 7.9% in 2011, and competitiveness slipped. Under full wage indexation, the broader public and banking sector pay gap (relative to the rest) remained substantial. The government ignored these signs, limping into the next election.
During 2011 and until February 2013, the political climate became polarized. Abroad, the Eurozone had decided that the banking system in Cyprus was too big. The German election campaign did not help. Rumours of money laundering reached hysteria, rivaled only by those on chemical weapons in Iraq, even though a US State Department report on money laundering placed Cyprus in the same category as Germany. Mr. Schäuble pronounced that the Cypriot model had failed, not distinguishing between the model and its application (sufficient ring-fencing, maturity matching, extensive diversification, risk awareness and eternal vigilance might have allowed the model to continue). Cypriot senior bankers had, of course, failed to meet these principles.
To the bad luck of election timing was added Basil III, the Eurozone’s PSI in Greek debt which cost the two largest Cypriot banks (the Bank of Cyprus and Laiki) dearly (25% of GDP), and the austerity ‘solution’ for Greece which increased the number of NPLs at Cypriot branches there. Yet, Cypriot banks did not reduce their exposure to Greek debt and NPLs. Mr. Moscovici’s statement should have been targeted at the banks’ leadership, not an entire country: The banking-related business and legal services sector does not exceed 20% of GDP – and there are no casinos in Cyprus!
The new president (March 1, 2013) and his party had supported severe austerity measures (December 2012) and wished to sign an MoU. This change in regime was not used by the Eurozone appropriately, surmising that this government would accept anything. By then, the Danish model, resolving two of its banks in 2011 through bailing in, had gained ground. Mr. Dijsselbloem refused to rule out a haircut on deposits, despite persistent questioning by journalists who warned of a bank run in Cyprus. On the Ides of March, the new president was faced with a take-it-or-leave-it choice involving a haircut on all deposits, including insured ones. A feature which played to crass German politics was that the haircut hit Russian ‘oligarchs’ in Cyprus, a group so numerous in Germany, the
UK, and other countries that the term ‘oligarch’ is a misnomer – polygarchs perhaps?
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