Stavros  A.  ZENIOS  

University  of  Cyprus  

Senior  Fellow,  The  Wharton  School,  USA  

 

Grande  Conference,  University  of  Luxembourg,  March  2013  

How to sink an Island. Mixing politics and economics in the Cyprus crisis

Μεταξύ  Σοφίας  και  Αμαθίας  

¤   We  were  wronged  

¤   We  were  wrong      

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1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Unemployment in Cyprus

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Corporate, non financial Households Financial Government

The Cyprus debt crisis dissected

0 100 200 300 400 500 600 700

Ireland

Greece

Cyprus

Cyprus -post Greek PSI

Mature economies

Households NFC FINANCIAL Govt

Is Cyprus like Greece or Ireland?

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De

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Income Debt

Household debt vs income

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1.00

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Debt/Taxes

Government debt 71% GDP

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-15

-10

-5

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5

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Current account balance %GDP

Can we get export led growth?

Competitiveness

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2006 2007 2008 2009 2010 2011 2012

Ireland UK Cyprus Spain

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100 Short run crisis

Financing aging population

Adjusting primary account balance

EC Cyprus Fiscal Sustainability Report

11

Source ECB.

2009 data, include bank assets in their foreign operations. στοιχεία αυτά είναι για το 2009 και περιλαµβάνουν το ενεργητικό των ντόπιων τραπεζών στο εξωτερικό.

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Κυπρος Ελλαδα Ιρλανδια Λουξεμβουργο Μαλτα Ολλανδια ΗνωμενοΒασιλειο

ΣΥΝΟΛΟ

ΕΝΕΡΓΗΤΙΚΟΥ

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ΑΕΠ

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Ξενα Υποκαταστηματα Ξενες Θυγατρικες Ντοπιες Τραπεζες

Cyprus tipping point: the banking sector

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Domestic Total non-residents

Hot money

Enter politics: “Injecting uncertainty”

We  were  wronged:    Impact  of  Greek  PSI  on  Eurozone  countries    

!! Cyprus! Greece! Germany! Belgium! France! Portugal!! ! ! ! ! ! !

%!GDP! 23.03% 11.65! 0.14! 0.56! 0.25! 0.25!!!Source:!EBA!and!author’s!calculations.!EBA!data!available!at!http://www.eba.europa.eu/documents/10180/15935/CY006.pdf!

!

We  were  wronged:    ad  hoc  bail-­‐in  5.8  billion  bank  deposits  

¤  Directive 2014/59 issued in 2014.

¤  Article 44 -scope of bail-in: ¤  Exempts covered deposits

¤  Accrued salary

¤  Pension benefits

¤  Liabilities arising from the provision of goods or services that are critical to the daily functioning of the creditor.

¤  Capital controls

Cyprus bail-in detrimental to notion of common currency.

We were wronged: unfairness of the bail-in

¤  Bailed-in depositors of BOC contributed €3,806mil in cash and received shares at €1.00 per share.

¤  CPB contributed net assets €425mil and received shares at €0.503.

¤  Capitalization of BOC was €371,95mil and received shares at €20,66.

¤  81.5% bailed-in depositors, 18.1% ex-CPB, 0.4% BOC shareholders.

¤  82.7% bailed-in depositors, 9.2% ex-CPB, 8.1% BOC shareholders.

Fail the John Rawles “veil of ignorance” test.

What does a haircut look like?

We were wronged: narrative of money laundering

Spiegel, 5 November 2012 German Secret Services Secret report

Basel Institute of Governance AML Index

Cyprus 4.93

Holland 5.03

Germany 5.80

Financial Action Task Force

Narrative of money laundering

It is simply not true!

Fits Noam Chomsky theories.

We were wrong

Shadow economy

Political corruption

Cronyism

Politics vs policy

Shadow economy

Shadow Economies All over the World Policy Research Working Paper 5356, The World Bank

Country % GDP

Switzerland 8.5

USA 8.6

Singapore 13

Ireland 12

Italy 21

Greece 24

Cyprus 25

EU-27 18.5

Political corruption

¤  GRECO Report of Council of Europe 2011

¤  Transparency in party financing

¤  Eight significant recommendations

¤  Only 2 partially complied by 2013

Don’t get mad, get even.

¤  Petition

¤  5000 signatures

¤  Public pressure –TV, radio, newspapers, social media

¤  Elections challenge

Approved by Council of Ministers, February 2015.

Cronyism

¤  Electoral reform: Horizontal Voting

e-petitions

We were wrong: politics over policy !

!

Mid-­‐way  conclusions  

¤   We  are  fixing  our  mistakes    

¤   EU  InsPtuPons  should  fix  theirs      

Eurozone  wrongs  

GDP  growth  

Unemployment  

EU  or  eurozone  problem?  

And the role of Central Banks

Interest  rates  seRng  by  ECB  and  FED  

European  imbalances  

 European  Dilemma  

Impossible  to  meet  Maastricht  rules  without  growth  

Impossible  to  have  growth  with  Maastricht  rules  

Amassed a large external debt that cannot be repaid no matter what fraction of the country’s real domestic economic output is appropriated through austerity measures.

Revenues can only be used to pay external debt to the extent that they accrue from export revenues, or if the foreign creditors use payments to acquire domestic goods and services or domestic assets.

If this is not the case, then there is an inconsistent flow of funds with the flow of goods and services.

This inconsistency ultimately leads to default on external debt or domestic sector bankruptcies and forced reallocation of resources to the export sector wit loss of efficiency.

Keynes 1920 -explaining the futility of reparation payments of Post WWI Germany

(Varoufakis ÷ 2) ÷ 2

Know thy math!

Greece debt under Troika

Greece debt under Tsipras-Varoufakis

Final  conclusions  

Abandon  austerity,  embrace  reforms  

€  Fix  it  or  abandon  it  Cyprus  is  not  Greece      

 

Karl Marx Society poses itself only such problems as it can solve.

John F. Kennedy

Our problems are man-made, therefore they can be solved by men.

Stavros A. Zenios amendment Our problems are man-made, therefore they can be solved by women.

Bibliography  –  on  SSRN

Zenios,  S.A.,  The  Cyprus  debt:  Perfect  crisis  and  a  way  forward.hXp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2233239  

Zenios,  S.A.,  Fairness  and  reflexivity  in  the  Cyprus  bail  inhXp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2409284