By Costas Apostolides
OVER THE past week it has become clear that the Eurogroup and the troika are unreliable and dishonest partners, and that even their technical capabilities must be brought into question.
Three separate events took place last week that re-enforce the view that the imposition of extreme measures – most notably the so called bail-in and the plundering of people’s deposits in Laiki and Bank of Cyprus over the €100,000 guarantee – were based to a large extent on misinformation and outright lies. Though there is much that makes sense in the Memorandum of Understanding, notably the suggestions for greater efficiency in the public sector and targeted hand-outs, Cyprus’ position has been undermined by exaggerations and unfounded statements regarding its dependence on Russian deposits and money laundering which were deliberately presented negatively by the troika.
The events that reinforce this view were a presentation and discussion at the University of Nicosia on the relations between Cyprus and Germany following the Eurogroup “haircut”. At the event a member of the Reichstag clearly stated that the Cyprus package was mainly designed to meet the demands of the German elections in the autumn, and the implicit response that German cooperation with organised crime (mainly data theft from banks) in the case of German deposits in Liechtenstein Banks were justified because they brought in a lot of income to the German treasury. I believe that our German “friends” should check on what happened to the Christian Democrats in Italy when it was discovered that they were using the mafia to political ends.
The second was a strong response from the governor of the Central Bank about a troika summary of the Delloite and Moneyval reports on money laundering in Cyprus which had been submitted to the Eurogroup. The summary left out the positive findings of the two reports and concentrated on their suggestions for improvements, which the troika summary in turn exaggerated as indicating negative features of the Cyprus system. There can be little doubt that the misleading troika summary was not a result of technical incompetence, but a deliberate measure to justify the prevailing view disseminated on March 25 in the Eurogroup.
This lack of balance in reporting seems now to have come to the fore again in a European Commission report that Marten Verwey, the representative of the European Commission in the troika, has reportedly prepared for the European Commission and ECOFIN on Cyprus. According to reports in the Greek press, the study presents seven dangers to the Cypriot economy.
- There will be a major decline of the economy, resulting in a fall in property prices and a significant increase in unemployment (2013 GDP fall of 8.7 per cent and similar in 2014).
- The targets in the memorandum for the government’s primary surplus (that is revenues minus costs before charges for loans are considered) will not be met.
- The implementation of the restructuring measures will be inadequate or deficient.
- The revenues from privatisation will be below expectations.
- Tax measures applied will be lower than anticipated and revenues less than planned.
- The economic and financial position of commercial enterprises will deteriorate.
- Cyprus will fail to return to the financial markets for funding on time.
The only recommendation made was that Cyprus must implement the Memorandum of Understanding to the letter.
These are not particularly surprising findings. So what is the problem, what is wrong with this analysis? My following remarks are made with the reservation that I am responding to press reports in Greek, and do not have before me the report itself. But apart from the fact that it should be stressed that if the economic projections are correct, and they are less damaging than other reports (where 20 per cent reduction in GDP in 2013/2014 are predicted), the targets of the Memorandum cannot be met even with the most complete and timely implementation measures. This is simply because falling incomes result in falling revenues.
What is missing is the greatest risk of all, which appears to have been deliberately omitted from the report. And that is the bail-in itself which has reduced confidence in the financial system and could cause a massive flight of funds out of the banking system. That would change all the calculations of the Eurogroup and troika. If this omission is the case, then it is a major deficiency in the report, and changes everything.
We have all to realise that the key to any hope of implementing the memorandum or revitalising the economy is re-establishing confidence in the banking system. The blow forced on Cyprus by the Eurogroup and the troika is very serious, and could upset all the calculations irrespective of how effectively the memorandum is applied.
Is there hope for stabilisation of the banking sector? There is because the citizens of Cyprus have up to now responded very well, despite the difficulties. But the return to normal conditions must be done slowly and carefully. That requires good management here, a commitment to the memorandum and balanced reporting by the troika, the Eurogroup and the European Commission and IMF.
Costas Apostolides is chairman of EMS Economic Management Ltd ([email protected])