SPEAKING at a special panel at the Brussels Economic Forum 2016, Finance Minister Harris Georgiades yesterday argued that the crisis in Cyprus was mainly a crisis in confidence. “Through the (assistance) programme we tried to restore confidence; it was the means not the end in itself,” he said.
It was a rather astonishing comment by a minister who has accustomed us to his rational and well-grounded analyses of the economy and the problems it faced. The problems of the economy went much deeper than perceptions. We had an economy that was booming because of excessive levels of bank credit, a state that kept borrowing to fund its ever widening deficits and banks with record numbers of non-performing loans (NPLs) and dangerously low capitalisation. One bank was bankrupt and another on the verge.
The economy was heading for collapse because this was an unsustainable economic model. No economy could live beyond its means indefinitely and Cyprus households, businesses and the state were all living on credit which they were unable to pay back. This is why it is a bit difficult to accept Georgiades’ assertion in Brussels that “all problems Cyprus faced were due to delaying taking proper policy action.”
The effects of the recession would not have been so painful, if there had been prompt action by the Christofias government. The complete collapse of confidence may have been avoided but the market distortions would not have been corrected without a shock to the system.
There is no easy way of tackling the record NPLs as our experience has shown. We may have successfully exited the assistance programme but banks’ NPLs are still close to 50 per cent and government bonds still have high yields despite the economy being on the road to recovery.
This is why it was ill-advised for Georgiades to claim that our problem was a crisis in confidence caused by the refusal of the government of the time to take corrective measures. His remark creates the impression that we had been doing nothing wrong in the period that led to the economic collapse and could well be construed as encouragement to return to our old discredited ways. The crisis in confidence was not caused only by the failure of the government to take action, although it was a big part of it, but also because after years of bad economic choices, a corrective recession was inevitable.
It is imperative that this point is made over and over again, if we are to avoid the same mistakes being made in a year or two.