In all the discussions in the press on the “Cyprus financial crisis” very little attention has been paid to the private sector debt problem.
Cyprus has very high private indebtedness (household and non-financial company debt), in 2010 of €51.4 billion rising to €56.6 billion in 2011 (source Eurostat May 2013). As a share of GDP, in 2010 only second to Ireland at 275%, in 2011 Cyprus moved to first place with 283% of GDP. The highest in both the euro area and the 27-strong EU; this makes the Cyprus private sector very exposed, as the economy contracts and unemployment rises, severely reducing the ability of households and companies to both service and repay their debts.
What is very worrying; these numbers are greater than the forecasts (IMF and Eurogroup), of Government debt to GDP for the country as a whole and a lot larger than the bailout needs.
The private business sector has been in decline for a number of years, due in part to the oversupply of goods and services to a limited market. The shortfall in cash flow being largely made up; by obtaining easy credit from banks or taking extended credit from suppliers. The slowdown and tightening of credit had the effect of businesses and individuals not paying their debts in a timely manner (won’t pay) resulting in their creditors in turn being unable to pay their own creditors (can’t pay). The consequence is a gradual hardening of the financial arteries of the economy, reducing liquidity in the private sector and indeed the country.
The bail in and the terms of the Troika memorandum of understanding, has brought this slow motion car crash to an abrupt and untidy end, to continue with the medical metaphor “a financial heart attack”, with the banks unable or unwilling to lend and capital controls imposed.
What now? It is widely recognized that the state and households have become accustomed to living beyond their means, the only solution; is to plan for the worst and hope for the best, there is no easy alternative. The debt has to be reduced to manageable levels, both private and government; it would be refreshing for the authorities to acknowledge, as Winston Churchill did in 1940 “I have nothing to offer but blood, toil, tears and sweat”, warning the British people of the hardships to come in WWII. The situation now is not a war, but it will be a battle to reduce debt; it can be done and it will be painful, but Cyprus has to learn to live well within its means.
There’s no doubt there will be difficult times ahead for both individuals and businesses but the resourceful and the best will survive the recession and be well placed when the economy finally improves. What a recession does; is make businesses take stock of their activities and challenge established systems and methods. This will help businesses go back to fundamental principles and emerge from the crisis as up to date, well managed efficient companies. For individuals, recessions, unpleasant as they are, often offer life changing opportunities that they may not have considered in the past.
This recession will end and those people and businesses that take effective measures to counter the problems facing them will survive and prosper, doing nothing is not an option.
Paul Rowland is a founder member of a European consultancy for asset protection and debt management, and former senior executive in international banking in the Channel Islands.