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The Cyprus bail-in & policy lessons, a book by Orphanides & Michaelides

The auditorium at Journalist House in which “The Cyprus Bail-in: Policy Lessons from the Cyprus Economic Crisis,” on how Cyprus was led to the banking crisis and how it was handled, was overflowing. Those who came late, had to sit on the floor, others decided to attend the presentation standing in the corridors. The audience consisted largely of Diko members and voters but also many politicians, economists, academics and businesspeople not affiliated to this party showed up to the presentation of the book organised by the Tassos Papadopoulos Centre for Studies.

The two editors of the book, containing 11 essays written by an equal number of authors who were keynote speakers at a two-day conference in May 2013, two months after the bail-in, are the former Central Bank of Cyprus governor Athanasios Orphanides who teaches economics at the Massachusetts Institute of Technology and Alexander Michaelides, a Cypriot professor at the Imperial College Business School who also served as board member of the banking supervisor, had a lot to tell those who gathered to listen to them. Much of it was their personal accounts.

Athanasios OrphanidesThe government could have disputed PIMCO’s inflated numbers and so help avoid the bail-in and the subsequent loss of deposits, the former governor said. If only the Central Bank of Cyprus had informed the finance ministry about BlackRock’s reservations. Negligence, ignorance, incompetence, maliciousness? They may all have played a part in Cyprus’s crisis. After all, Cyprus had a communist government -elected with Diko’s help- with someone at its helm who never distinguished himself for anything other than being indecisive, lacking resolve, courage, judgement and any other conceivable quality for leadership.

It was not a coincidence that Cyprus lost market access in May 2011, saw half of its power generation capacity destroyed by the Mari explosion weeks later, consented to the writedown of Greek government bonds held by its banks and on top had a leftish academic, who once proposed that Germany should leave the euro in order to help save the single European currency appointed as Orphanides’s successor. Every Cypriot has the right to question the motives of the disgraced Leicester professor who failed to protect the banks he was supposed to supervise, after the president who appointed him failed to do so on so many occasions. But they were “casino banks” for them. One of them by the way even got additional €6bn in emergency funds from Frankfurt after the Central Bank of Cyprus vouched for it, on top of €1.8bn in taxpayers money. Even today all that sounds too grotesque to be real.

The Cyprus Bail-inAnd yes, the European Union principle of equal treatment had indeed been violated: no other euro area country which requested a bailout was subjected to a bail-in, the former governor continued. Just like Cyprus, they all got austerity prescribed, they all agreed to reform, they all promised to pay back their debts after they also got their banks recapitalised.

But why did they get a better treatment? It all appeared that Cyprus was victimised and yes, the average man or woman on the street would agree. But wasn’t it Cyprus, the only euro area country which delayed the decision to ask for a bailout for 13 months and then waited another nine months before agreeing the terms of its bailout? Could bad timing be the reason?

But here comes also some (convenient) conspiracy theory which gives hope to those who lost their deposits and investment in the bail-in that they can reclaim it with legal action: Cyprus may have been forced into a bail-in and its banks were forced to sell their operations in Greece to Bank of Piraeus. The latter spent €500m to acquire the Greek branch network of Bank of Cyprus, Laiki and Hellenic Bank with a cumulative loan portfolio before provisions of almost €24m against deposits more than half of that amount. Piraeus posted a €3.4bn profit in the first quarter of 2013.

Could this have been designed and implemented by a communist government and their sidekicks at the Central Bank? Some of them certainly had an opportunity. Likely also a motive. And what about the means? Did they also have flunkies at the European Central Bank and the International Monetary Fund? Bank of Piraeus or Bank of Global Omnipotence? Why not moving on instead?

Some background on the matter: certain media and journalists in Cyprus do support this theory, some others don’t. Definitely, they received “donations,” some were told months ago. Some would argue that the Cypriot version of the 2004 spectre of McCarthyism  lives on: It’s not accuser who needs to present the evidence. It is the other way around. Or do some among us know the truth but are reluctant to share their knowledge?

Alexander MichaelidesAnd by the way, there were also those “economic imbalances” Cyprus was facing and still faces since the early years of the Republic and on top came the slow reaction. Thankfully, Michaelides, the Imperial College professor did good to remind us of what we collectively often forget. That we had in other words devised a deficient development model which in fact neither allows for development nor can be described as a model. And instead believe that relying exclusively on low tax rates to attract investment does the job. Even if “this is what England does at this moment” there are other ways to do so.

It was Cyprus’s experience after all, with a prolonged period of economic growth which created “overconfidence,” that proved it. Cyprus’s fate is caught in a phrase: “From boom to bail-in,” with the boom representing both the high economic growth rates that preceded the crisis and the explosion in Mari which shattered all delusions.

“A highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provoke a crisis of confidence that pushes it off,” Michaelides said -citing Reinhart and Rogoff. This goes to Cyprus and again also to England, he added.

“And when it happens, you have to take decisions quickly,” which in the case of Cyprus was not the case at all, Michaelides continued.

The book, which contains also contributions from former ECB governing council member Lorenzo Bini Smaghi, former Cypriot finance minister Michael Sarris, his former Greek counterpart Gikas Hardouvelis, Irish academic economist and central banker Alan Ahearne and many other well-known Cypriot and Greek academics, will surely be an interesting read for those who can afford it at least. “The Cyprus Bail-in, Policy Lessons from the Cyprus Economic Crisis” (Imperial College Press, 2015) is sold for $132 at Amazon.com. Those lucky to attend yesterday’s event though, got it for only €39.

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