It is five years to the day when President Anastasiades agreed to the bail-in of the Bank of Cyprus’ depositors and shareholders as the Eurogroup decided to test its new bail-in policies on a tiny member-state, secure in the knowledge there was no risk of contagion in the Eurozone. Banks in Spain and Greece had been bailed out with much bigger amounts than what was needed for the Cyprus banks.
In the end, the burden of the bail-in was shouldered by the uninsured depositors of Laiki that lost all deposits over €100,000 and those of Bank of Cyprus that lost almost half of them. They saved the bankrupt state that was unable to cover the insured deposits, but whose own bank deposits with those of the municipalities remained intact. This targeting of the two banks also ensured that the €9 billion ELA (emergency liquidity assistance) the Cyprus Central Bank irresponsibly gave to Laiki would be returned in full, while the uninsured deposits in the Greek branches of the two banks were left untouched. Litigation will eventually resolve these issues.
All this could have been avoided if political parties voted through the proposed levy on all bank deposits, including the uninsured, as Anastasiades had agreed with the Eurogroup a week earlier. What a monumental mistake it proved. By the time the president returned to Brussels, Laiki had been placed under the resolution authority while the bail-in of the Bank of Cyprus shareholders and depositors was presented as an ultimatum. “I had a gun to my head,” Anastasiades claimed, in an attempt to justify his capitulation after having pledged he would never allow a haircut of deposits.
While the economy was already in recession in March 2013, after the Eurogroup meeting things became much worse, with banks unable to operate normally, businesses going under, across the board pay cuts and unemployment on an upward path. ‘Social groceries’ sprang up in all towns to provide impoverished families with free food, public schools offered free snacks to children in need as households became 40 per cent poorer. The economy hit rock-bottom in what was the worst recession to have hit the country since the Turkish invasion.
It is astonishing that today, only five years after the Eurogroup meeting, everything appears to have returned to normal. Expensive new cars are everywhere, restaurants and bars are packed in all towns, exclusive shops are opening and we are witnessing yet another construction boom, funded by foreign money. The rate of growth in 2017 was close to 4 per cent, boosted by a second successive year of record tourist arrivals and the citizenship by investment scheme that has brought in more than €5 billion and saved struggling developers from bankruptcy. The recession suddenly seems a long time ago even though many businesses are still feeling its effects.
Cyprus benefited from the misfortune of rival tourist destinations in the Mediterranean, which suffered terrorist attacks, while the citizenship by investment scheme proved a masterstroke, injecting new money into the economy at a time of a tight credit squeeze that kick-started the recovery. The main beneficiaries of the scheme, as usual, were the developers, many of whom were saved from bankruptcy, as well as the law and auditing firms that were provided with a new means to make huge amount of money. We seem incapable of developing a business model for the economy not geared to opportunism and short-termism.
In the mid-noughties lawyers and accountants were bringing in wealthy clients who deposited their millions in the Cyprus banks, which grew too big for the size of the economy and were recklessly giving loans to businesses and individuals that could not pay them back. The bank credit-fuelled boom eventually collapsed, the recession arrived bringing with it a large number of non-performing loans that continue to pose a huge risk to the economy. Now the economy is being powered by the citizenship scheme, but for how long will it last? It is entirely possible the European Commission will put an end to it at some point and what will we then have to fall back on? Tourism, assuming it carries on thriving, cannot sustain the economy.
Unfortunately we have learnt nothing from what happened five years ago. Again, we have chosen a short-term business model for the economy – an easy money scheme for lawyers, accountants and developers – that is unlikely to last. We could have used the 2013 collapse to build the foundations for a longer-term, sustainable growth model for the economy, developing new or stagnating sectors, but the government went for the easy option that is unlikely to last. It is hardly surprising, considering it also passed up on the opportunity to streamline the public sector and reduce the public wage-bill. After some restraint being shown during the assistance programme, the across the board pay rises and hiring of staff has resumed.
The disaster of five years ago has been erased from the collective memory and we are free to make the mistakes that brought it about once again.