Cyprus Mail

A total reversal of fiscal policy (INDEPTH)

By Stefanos Evripidou

FORMER CENTRAL Bank Governor Athanasios Orphanides went on the warpath yesterday, blaming AKEL, the previous government, his successor, and EU governments for taking Cyprus a generation back and letting the eurozone crisis spread like a virus.

Testifying before the committee of inquiry set up to look into the near collapse of the economy, Orphanides pulled no punches in identifying where the blame lay for Cyprus’ current predicament.

The former governor slammed the previous government’s repeated failure to take preventive action, putting party before country, by choosing instead to focus on the February 2013 presidential elections than take necessary structural measures.

He feared the crude choice AKEL made led the country to the point where he now expects GDP per capita and unemployment figures to drop below 1974 levels.

Orphanides further warned that the eurozone debt crisis was far from over and would likely flare-up again after German elections in September.

During his lengthy testimony before the three-member inquiry, Orphanides argued that former president Demetris Christofias failed to heed any of his warnings about the risks to the economy from increased government spending, communicated in countless letters that went unanswered.

“None of the letters I sent Mr Christofias were answered,” he said.

“If the former president of the Republic had allocated five minutes this country could have been saved,” he added.

Instead, billions of euros were lost and Cyprus’ economic model, built up over decades, was destroyed in one fell swoop, taking the island backwards by at least a generation.

Orphanides, who ran Cyprus’s central bank from 2007 to 2012, was testifying a day after Christofias had walked out of the panel inquiry, refusing to answer questions. The former president took issue with his ranking in the order of testimonies scheduled by the committee, and felt that his recent post justified different treatment, such as the right to receive and reply to questions in writing.

The former governor had no such qualms and was happy to answer questions and read out his own pre-prepared 26-page testimony after the Q&A session was done.

Asked what about the state of the economy when he took over the duties of governor of the Central Bank, Orphanides said the economy was in good shape but there were challenges of a structural nature.

“Everyone knew that pension requirements were unmanageable in 2006 and 2007,” he said.

Orphanides said the downfall of the economy began immediately after the 2008 election of Christofias and his administration.

Orphanides called it a “total reversal of fiscal policy”.

“We started with the Easter bonus in an untargeted way when the country did not need it. There was reckless spending,” he said.

The Central Bank, when the economy began overheating in the spring of 2008, issued strict instructions to the banks with regard to lending “because there were fears of a property bubble.”

But on their first meeting, former finance minister Charilaos Stavrakis had asked him not to make any statements that conflicted with or contradicted the policies of the government, Orphanides said.

He added that Stavrakis also asked to sell the gold reserves to strengthen public finances and help implement the government’s election pledges.

The former finance minister allegedly called Orphanides and asked him to intervene and help issue a licence for a Russian bank. “This made an impression on me,” he said.

Pressure also came from the finance ministry to approve a request by former Laiki strongman Andreas Vgenopoulos for Marfin Investment Group to increase its shareholding in Laiki, something which Orphanides resisted.

“And these unethical interventions continued. I explained that the policy of the CBC was not to serve any government,” he added.

The former governor also accused Stavrakis of violating the supposed independence of the Public Debt Management Office- which had been transferred from the CBC to the Finance Ministry- to the detriment of the economy.

Orphanides had a few choice words for his successor at the CBC, Panicos Demetriades, who he accused, without naming him, of working in cahoots with former ruling party AKEL to destroy the banking system by allowing PIMCO to inflate the estimated recapitalisation needs of the banks.

Even the IMF found PIMCO had used “more conservative methodology in arriving at the numbers”, he said.
AKEL’s effort was to deflect attention away from the fact the state had been locked out of the markets since 2011, and needed €7bn-€8bn from international lenders.

Instead it focused on inflating the roughly €2bn needed by the banks, he said.

The decision to haircut Greek bonds in 2011- excessively damaging for Cyprus’ banks which stocked up on them – was “terribly wrong”, he said.

Cyprus’s two major banks of the time, the now wound-down Laiki and Bank of Cyprus, lost about €4.5 billion on Greek bonds – a sum equal to 25 per cent of the island’s GDP.

When the two Cypriot banks were forced to seek state assistance, the government was unable to help, having been locked out of financial markets since May 2011.

Had the haircut remained under 40 per cent instead of reaching double that figure, the two banks could have absorbed the losses and found adequate capital to meet their obligations, he said.

Cyprus could have handled the Greek haircut had the final figure been more rational, he said.

Orphanides also pointed the finger at the finance ministry for failing to flag the risks to Cyprus’ biggest banks before Christofias agreed to the massive Greek haircut at a European Council meeting in October 2011.

The former governor pointed to a Eurogroup memo dated May 31, 2011, which listed all the risks posed by a haircut to European banks, detailing how many Greek bonds were held by each bank.

He questioned why Cyprus’ finance ministry didn’t undertake similar efforts of other eurozone countries to ensure the country’s banks were not affected by the writedown.

Asked by committee chairman Giorgos Pikis whether the government consulted with him before agreeing to the two haircut decisions, first on July 21, 2011 and then October 27, 2011, Orphanides said no.

He could understand the omission the first time as it took place ten days after the Mari explosion.

He was less forgiving of the lack of consultation before the fateful October decision for a PSI on Greek debt.

Orphanides suggested the finance minister at the time Kikis Kazamias might not even have been aware of what was about to happen as they talked in Frankfurt a week earlier and no mention of it was ever made.

Even until the end of his term in office, May 2012, Orphanides believed that a crisis could have been averted. The goal was to regain the trust of the European Central Bank (ECB), which would have followed recent practice and accepted Cyprus bonds in exchange for the recapitalisation of Cypriot banks.

“Unfortunately, though, to prevent the worst, the AKEL government had to want to help the country.”

He arranged for Kazamias’ successor Vassos Shiarly to go to Frankfurt to meet with the ECB on April 17, 2012, in an effort to regain that lost credibility.

While there, Shiarly promised a host of reforms that would be implemented within a month.

On his return, Shiarly publicly announced that new measures would be taken.

On the same day, then government spokesman Stefanos Stefanou denied that measures would be taken, while a few days later Christofias, in a live press conference, famously belittled his minister saying mandarins don’t decide on fiscal policy, he does.

Ironically, on Thursday, Christofias argued before the committee that he was not an economist and therefore should not be forced to undergo a question and answer session.

After all credibility had been lost following Christofias’ public rebuke of Shiarly’s plans, the AKEL government then delayed signing a memorandum of understanding with the troika, said Orphanides, adding that this delay “took us back a whole generation”.

When reports surfaced in the local press on July 4, 2012 that Cypriot banks would need €10bn to recapitalise, Orphanides said he called Shiarly and asked him if he realised that he was effectively convincing the troika that Cyprus needs a much bigger bailout.

Shiarly allegedly replied that he understood what was happening but that he was out the loop as “the central bank is in direct consultations with the party and government”.

Orphanides also claimed that the previous government was aware that a haircut on Cypriot bank deposits was the “preferred option” from December 2012.

The Europeans did not escape criticism either, with Orphanides frequently hinting throughout the near four hour testimony that the current crop of eurozone governments were simply not up to the task, and that the debt crisis was far from over.

“The euro zone is in an existential crisis,” Orphanides told the judicial inquiry.

“Markets are currently calm, but I will not hide from you that I am deeply concerned that after the German elections in September we might have a flare-up of the crisis in the eurozone,” said Orphanides, who now teaches macro-economics at the MIT in the United States.

On the one hand, Germany and France introduced the notion of private sector involvement (PSI), where holders of eurozone sovereign debt take a hit, and on the other, the EU considers sovereign bonds ‘zero risk’.

Orphanides, who also sat on the board of the European Central Bank (ECB) during his Cyprus tenure, said the CBC could not legally prevent Cypriot banks from buying bonds in another sovereign since it was a member of the eurozone.

“This is something which still concerns me,” Orphanides said. “Even today, such (sovereign) bonds are considered zero risk, for regulatory reasons. I think that is madness, but that is the reality of the regulatory framework.”

Related Posts

Coronavirus: Face masks to be reintroduced in pharmacies after uptick cases, hospitalisations

Antigoni Pitta

Sol Hareket member denied entry in Turkey

Gina Agapiou

Man arrested for assisting illegal entry

Staff Reporter

Soldier 27, critical after being injured during helicopter training (Updated)

Gina Agapiou

Still lots to be done for people with disabilities, MPs say

Antigoni Pitta

Back to the drawing board on VAT rates for first homes

Elias Hazou


Comments are closed.