Published in the Cyprus-Mail on August 17, 2014, under the title “When should the state help?

Let me explain. Private individuals made private contracts with private organisations (banks) regulated by the state (Central Bank of Cyprus) to get mortgages to build houses.

In some cases these loans were sensible, in others they weren’t. Some of the non-performing loans (NPLs) are a product of error (POE) — the banks and their debtors during the initial loan agreements have miscalculated the risks involved and the ability of the debtors to repay their debts. In other cases, the NPLs are a product of brute bad luck (BBL) — an outcome of the sudden downward economic turn of the Cypriot economy, whose magnitude only few, if any, were able to foresee.

We therefore have two types of NPLs: those that are POE and those that are BBL. In the case of POE, I don’t think that the state should have anything to do with protecting anyone’s residences. Its only function should be to ensure the equal distribution of the costs involved. In other words, the only function of the state should be to ensure that banks are held responsible for their part in the NPLs. Some people will lose their houses as an inevitable outcome of the bad choices that they have made. The state has a duty to protect those people from becoming homeless, not to protect their primary residences.

The big question is what to do with NPLs that are a product of BBL? Should the state step in and try and protect those individuals that under no fault of their own will find themselves “thrown out” of their homes? Ideally the state should, in fact, protect people against negative outcomes generated by BBL. Although the ideal principle that “the state should protect individuals from BBL” is not irrelevant to NPLs, it is considerably curbed by considerations of scarcity and feasibility.

Given that the funds of the state are scarce, then the question is whether considerations of general welfare take precedence over protecting people from the undesirable outcomes of bad luck.

I use the term “luck” loosely, not in order to suggest that no one is responsible for what has happened in Cyprus, but rather to stress that in cases of BBL, the reason that a loan became non-performing is not due to an error of the parties involved. Another example of BBL is when an earthquake happens and the state needs to compensate those whose houses have been destroyed.

By general welfare, I mean the ability of the state to provide some basic guarantees for all its citizens short of which a liberal state cannot function. The rights that make it to the list vary form country-to-country. In Sweden, for instance, access to broadband internet is now on the list of sufficient welfare provisions guaranteed by the state. In less affluent countries the list is considerably shorter, and it includes guarantees of access to clean water, electricity, clothing, shelter and others.

This last right, called “right to housing,” which is guaranteed in the Article 25 of the Universal Declaration of Human Rights as part of the “right to an adequate standard of living,” takes precedence over the protection of citizens from bad luck. Not necessarily because it is a superior principle (although I believe that it is), but rather because the state, by guaranteeing the right to housing of its citizens, is also protecting those that have been victims of BBL; those whose loans are now considered non-performing.

If the state wants to be a liberal democratic state it must guarantee the basic human rights of those residing within its bounds, which, in turn, means that it has a duty to make sure that none of its citizens becomes homeless. What we have learnt from the deliberations of the government with the troika is that there are funds available for ensuring that no one becomes homeless; through the semi-governmental Cyprus Land Development Corporation and the Minimum Guaranteed Income (MGI) scheme.

Rather than protecting primary residences or providing an allowance for renting a house, a better way to spend that money would be to invest in social housing. In doing so, the government will more effectively guarantee that no one will be left homeless. Most importantly, it will protect (a) the victims of BBL, but also those (b) that lost (or will lose) their houses as a POE, and (c) the future generations that, amidst a climate of worsening youth unemployment and high interest rates that make it impossible to get a mortgage, will not likely be able to secure housing for themselves and their new or future families.

One possible objection would be that it is unfair to provide the same kind of protection to those found in a difficult predicament due to their own volition and those that have been victims of BBL. Granted, this is true in principle. The appeal of this argument weakens when practical considerations are factored in, like, for instance, the inability of the government to guarantee both primary residences and access to housing, or the negative impact of one policy on the other; e.g. by using funds for the protection of primary residences that could otherwise be used for guaranteeing the “right to housing”.

A further objection related to this, is that I am mixing two unrelated issues: the case of primary residences and the minimum guaranteed income (MGI). It is one thing to talk about protecting people from BBL and another to talk about avoiding homelessness, the objection goes. I don’t think the two are separate issues as they are both part of the welfare programme of the government. If my case for social housing is rejected — never a favourable options for the neoliberals among us — then, on the same grounds, a case can be made for higher MGI, since MGI already aspires to protect the right to housing.

If the right to housing is adequately protected through the MGI scheme (which I don’t think it is), then there is no reason for additional protection of citizens from the effects of BBL on their mortgage. It is not the duty of the state to restore citizens to their position prior to the adverse effects of BBL. Rather, the duty of the state is to help citizens overcome and manage the adverse effects of BBL.

Maybe the most important reason to reject the protection of primary residences, both BBL and POE, is that those most vulnerable in the society didn’t have a primary residence to begin with, and it would be unfair to them to dedicate such considerable (and undefined until now) amounts of state funds to more privileged segments of the society all the while they are living in precarious housing.