By Pavlos Loizou
WHENEVER economists talk, they always mention the terms ‘short-run’ and the ‘long–run’. Typically, good or bad things happen in the short-run, whilst in the long–run somehow magically all things are fixed or become balanced again.
One could argue that the long-run is just a series of consecutive short-runs, which makes our assumption that in the long run everything will be OK nothing more than our mind’s way of providing us with a positive outcome in a world filled with uncertainty and turbulence. This also explains why economists are great at rationalising things after they have happened, only telling us when the storm has past that the ocean is flat again. Cynics of course will remember that Keynes said that the long run doesn’t matter, because by then we are all dead.
Thinking about these things is more than pure semantics; when trying to make an assessment of the current situation in Cyprus, it’s easy to get trapped thinking about just the short-run or just the long-run. Those wanting to paint a gloomy picture focus on the uncertainty regarding the survival of the (new) Bank of Cyprus, the lack of action by the government, and the on-going feud between the Central Bank, government, and political parties. Those wanting to put a positive spin focus on the long-run, pointing to the gas finds on the sea boarder with Israel, on the positive signs regarding the tourism industry, and on Cypriots coming together at times of adversity. Reality is somewhere between the two.
There are two things that need to happen by the end of the year; the stabilisation of Bank of Cyprus and the review of Cyprus’ adherence to the bail-out/bail-in terms. It is difficult to see how the bank can be stabilised without maintaining capital controls, even if the ECB provides unlimited support. People are scared because there is no stability in the country, so if they have a chance to take their money out they will take it. It’s a simple case where ones actions make sense for themselves, but if all act in the same manner the system collapses hurting all of us. As for the government, it gets an “F” for progress and an “A” in filibustering.
The problem of the Cyprus government is one of de jure and de facto decision making. De jure designates what the law says, while de facto designates what happens in practice. The de jure situation is that the President runs the country with the support of the parliament in the interests of the people, and that in this case the President comes from a pro-capitalist/ reform party. The de facto situation is that the biggest companies in Cyprus are in the construction sector and are heavily indebted. In parliament the government has a slim majority of one vote, with this majority coming from a coalition of three parties.
How can the government carry out structural reforms if its parliamentary coalition is weak and its main supporters are the ones who are most heavily indebted in a country which went bust because of too much debt? The answer is simple; it will be forced to, just like in Greece, Portugal, Spain and Ireland. The government will try to convince the Troika that it’s trying to carry out reforms; the Troika will say that it’s not; things will come to a head; and the one with the money will win. Thus, whilst we expect economic conditions to worsen and unemployment to rise to 20-23% by the year end, it is likely that reforms will only begin to materialise in 2014. By then, the pain will be much more to bear, causing the inevitable public sector pay cuts, banking sector dismissals, and tax hikes, to be much more than currently needed.
Cypriots still think that they are standing on the edge of the pool, dipping their toes in the water and wincing. In really, they are wearing lead boots at the bottom at the deep end of the pool. And, the waiting is becoming intolerable as populist politicians refuse to do what they were voted for; to make decisions.
Pavlos Loizou is Managing Partner | Real Estate Advisory at Leaf Research