I don’t see how Cyprus can remain within the Eurozone and potentially recover. The overnight destruction of the financial sector left the economy of Cyprus devastated. All of us already know people who have lost their jobs and people that will soon lose them. The hope is that new productive sectors will be developed that will help the economy recover from the loss of the financial sector. I list four challenges to this scenario. I neither am nor pretend to be an economist, so I would be glad to be proven wrong.
Problem 1: For new sectors to emerge money for investment are needed. The Cypriot banks do not have the ability to give loans therefore the Cypriot people – the local entrepreneurs – will not be able to create and expand these new sectors. This is what Hollande calles ‘development’ and this is exactly what we can’t afford at the moment.
Problem 2: Let us entertain the idea that these new sectors somehow emerge and more Cypriot products are available. How will they be able to match the European ones at least in terms of price? New sectors need time before they become competitive. How can we buy that time without tarrifs? Why woud a Cypriot or a European buy a local product if it is uncompetitive (more expensive)?
Problem 3: The ‘good’ and ‘bad’ dichotomy of Popular (Laiki) Bank is artificial and largely wishful thinking. Many of the good Laiki loans will not be such for long. Unemployment will rise and people will lose their jobs and their ability to repay their debts. The Bank of Cyprus that now absorbed Laiki will only be able to seize their assets and auction them. Here comes another problem, which is the real-estate bubble. There is an oversupply of houses and flats and almost zero demand. If the Bank is not in position to get something out of the assets of the good-turned-bad loans, then by giving the ‘good loans’ of Laiki to BoC we give the latter another burden.
Problem 4: €9bn ELA debt. The money from the Emergency Liquidity Assistance fund that were given to Laiki Bank must be repayed by BoC. BoC will not start repaying the loan now (it will only pay the interest rate at the moment). How is a struggling bank expected to carry this impossible burden? From what I understand, it is the Central Bank that will be responsible for the repayment of the ELA debt; in other words, BoC will repay the debt through the CB who was the one giving the ELA money to Laiki in the first place. The survival of the BoC therefore is tied to the survival of the state. This was always the case in Cyprus and this is partly the cause of the current problem – a banking sector that was too large to fail because it would take the state down with it. I don’t see how we are dealing with the problem.
For what is worth, the little money that I have will remain in the Bank of Cyprus.