Cyprus Mail
CM Regular Columnist Opinion

Deposit haircut was the rational move

By George Koumoullis

FOR DECADES, before 2013 we had been living beyond our means. In other words, we enjoyed a standard of living much higher than the standard of living of our potential.

Obviously, this well-being could not last forever – it had an expiry date. In such cases, the level of the artificial standard of living always falls below the level of the standard of living of our potential for a period of time, so that the debts can be repaid. This is exactly what is now happening in Cyprus.

For the economic meltdown we have only ourselves to blame. It is not the fault of the Americans, the Germans, the English the Eskimos or the natives of Tasmania.

The guilty are, on the one hand, the governments which throughout the years ran the country on budget deficits and, on the other, our crooked bankers who squandered Cypriot deposits worth billions on risky Greek government bonds, while giving loans to insolvent borrowers.

We have named this dive in our standard of living ‘austerity’. It is a policy of necessity rather than a policy of choice. No country in the world would have opted for austerity if it was not forced to do so. In March 2013 we found ourselves at a crossroads. We had to either follow the road of the memorandum and loan agreement or the path of disorderly bankruptcy. There was no middle way.

If these were different times and we were not a member of the EU, bankruptcy would have been disorderly and not controlled. The difference between controlled bankruptcy (which we have at present) and disorderly is that, with the former, the political-business establishment which had caused it survives whereas with the latter it collapses and falls apart with tragic consequences.

If we had not been helped by the ‘hated’ troika to avert disorderly bankruptcy nothing would have been left standing in this country. Our partners might not have had altruistic motives in helping Cyprus, but their help should still be appreciated rather than castigated.

That was why the recent protest rally against austerity and the troika outside the conference centre in Nicosia at which the governing council of the ECB was meeting appeared so daft.

The daftness of the gathering was strengthened by the presence of Demetris Christofias, who, during his presidency, applied to the EU Support Mechanism – that is, he asked for the help of the troika – as well as three other party leaders.

The presence of the leaders, most probably, contributed to the stance of the demonstrators who were rhythmically chanting, “Troika out of Cyprus.” It was a rally of ingratitude, thanklessness and inhospitality, especially when we consider that the ECB chose Cyprus as the venue for one of the two meetings of its governing council not held in Frankfurt.

And because for our economy’s Waterloo foreigners are always to blame, our Napoleons have lashed out against ECB chief Mario Draghi to whom they attribute the decision for the fire-sale of the Greek branches of the Cypriot banks to Greece. Admittedly, it was a big mistake, but I do not think Draghi intended to favour Greeks at the expense of Cypriots. As he explained, there were tactical reasons at the time (March 2013) for the Cypriot banks to get rid of their branches in Greece.

This raises the following question: as all the opposition parties believe that billions were stolen from us, why do they not discard their inferiority complex and direct their fire at those who pocketed out money – Bank of Piraeus – asking at the same time for full backing for their demand from the central bank of Greece and Prime Minister Alexis Tsipras. As they believe the money was stolen, why do they not ask for it to be returned?

In the last few days, the hottest economic issue is who came up with the idea for the haircut of bank deposits in March 2013, as if it were the sin of the century. Swimming against the tide, I firmly believe that the decision taken was the least painful, bearing in mind the prevailing conditions at the time, for three reasons.

First, the alternative solution – the government (the taxpayer, in reality) taking the responsibility for the recapitalisation of the banks – would have led to a much deeper recession.

Public debt would have soared to 150 per cent of GDP and its sustainability would have been doubtful. Salaries, pensions and allowances would have been significantly lower than at present, so that the bigger debt could be repaid. As a result of the fall of aggregate demand, unemployment would have exceeded 25 per cent.

In countries in which the public debt has climbed above 150 per cent of GDP, such as Greece and Argentina, the unemployment rate has exceeded 25 per cent.

Second, it was of critical importance that the deposits haircut did not greatly affect consumption (the expenditure of households for the purchase of goods and services) and thus the national income.

Consumption is not much affected by a hair-cut of the deposits of the rich. The first hair-cut proposal that was rejected by the legislature (6.75 per cent on bank deposits above €20,000 and 9.9 per cent on bank deposits above €100,000) would have had much more negative consequences on consumption, national income and employment.

Third, the Robin Hood effect (an economic term that refers to the reduction of inequality in the distribution of national income) was activated. As we all know, the legendary Robin Hood stole money from the rich to give to the poor. This is what most developed societies do to ensure there is some social justice – the government taxes the rich and distributes the revenue among the poor in the form of benefits and allowances.

George Koumoullis is an economist and social scientist

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