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Can #Cyprus recover without leaving the eurozone?

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.

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  1. But how would going back to Cyprus pounds help? How would you re-value the Cyprus pound after 6 years? How would you value a currency of a country that’s gone bankrupt?
    Plus, I don’t think Cyprus or any other country for that matter can leave the Eurozone without leaving the Union – at least with the current legal framework of the EU, exiting the monetary union without exiting the EU does not seem possible.

    • Exit from the eurozone will probably lead to an exit from the euro EU, which I am not saying is a good idea. An intermediate position is a better option – having some limits and controls – but I very skeptical about the willingness of the EU to allow for the violation of its foundational principles, like movement of people, goods and capital.

      Cyexit should be researched, if anything as a negotiating strategy. Currently I have yet to read a complete suggestion of how to proceed with the exit, how to make the transition, what are the immediate and future costs and what will be the benefits if any.

      • I agree with you about researching the impending cyexit. I haven’t seen any facts about what would happen after an exit even though I have heard/read that it will be catastrophic or that it won’t be worse than what is happening now.

        As I do not have background in economics here are some (naive) questions to get us started:
        What will be the value of the new currency in euros/$?
        Assuming that it will not be convertible what are our needs in foreign currency to cover imports of oil, equipment, pharmaceuticals? Time to stop this stupid desalination business and bring back water restrictions to save on oil.
        What will give us this foreign currency other than tourism? In 2012 the tourism income was 2bn euros. It will probably be less since the low value of out currency will mean that the tourists will pay a lot less in accommodation.
        Other than the above imports what else do we need to buy with foreign currency?
        So regarding foreign currency how much can we bring in and how much do we have to spend to avoid blackouts, medicine shortages etc?

        What will happen to the foreign loans of the government? Do they have to be paid in euros if we exit? Can we pay them back in the new currency?
        The government can print enough money to pay back its internal loans at the expense of hyperinflation. What will that mean for the people? Their savings will be in effect eliminated due to the inflation?

        • These questions have not been answered because (I am afraid) have not been researched. This is what I am saying. Even if leaving the Euro is not a realistic option, we need to explore it as a path both now and in 5 years. The possibility of exit can be a negotiating strategy. Currently Anastasiades goes into deliberations with troika with the latter knowing that he has absolutely no bargaining power because his only alternative is uncontrolled default. We need academics who are in favour of cyexit to come to Cyprus and consult the government in drafting this alternative Plan X (I don’t care if it’s Plan E – it doesn’t matter). When things come to worse, even bad options are useful options.

          Since I am not an economist either, I have another question to add to the mix: Why is everyone worried about how to repay the debt in € after we leave the eurozone? My understanding is that leaving the eurozone assumes that we default as well, although judging from the discussions of the past few days, this is not the default view.

          I agree with you about the non-factual discussions regarding cyexit. Those in favour, mainly AKEL and EDEK, didn’t do their homework and yet they are on camera all day talking favourably about something that they don’t know how to implement, what the immediate and future costs will be and whether it is worth it. On the other hand, those against cyexit, again without any plan in mind, apply obsolete theories to terrorise people.

          We have two extreme scenaria. The first is the one that is currently in place. The other extreme is cyexit. We need them both as reference in order to strike a middle-ground (or if the one doesn’t work, and the ‘partners’ are not willing to find a middle-ground, then to have a plan about how to proceed).

          What is of more interest to me and will largely affect my position towards #cyexit is to find out which groups in the society take the most heat under each of the two options. This is why I am saying that we need more research and alternative plans, irrespective of whether we will actually follow them. To say now that I prefer cyexit, I think would be naive and populist. That being said, I don’t think that we should disregard it as an option, especially a few years from now. In the meantime, we can do something about this amazing sun that shines over Cyprus, like say, create electricity out of it!

          [I am/was actually pro-European: for better or worse, the adoption of the directives of the EU had a positive effect on Cypriot society. This is why this assault on basic fundamental freedoms caught me by surprise.]

  2. The question of coping within the eurozone is of course valid at this point. I am not for an immediate exit and recall of the agreement with the troika as some parties have called for. However, the future does have various lingering questions. With a shrinking economy who will be able to pay their loans as companies close, unemployment increases and there is no credit or loans for businesses to survive or for new ones to start up. As some have argued for a euro exit and a rapid downfall (devaluation and inflation) that will begin the rebuilding faster.

    I have seen people refute the euro exit but not many have quantified the businesses that will close, jobs lost, unemployment or the issues that will derive from these – increase in government payouts, social issues, homes lost etc…. I guess we are all waiting to see and everything is up in the air. And this is the worst part – the unknown. Even if a euro exit is not a choice … has anyone measured the cost of this deal? Not only for the state and the stats…

    In any case, my view is that we will rebound faster – a small state has disadvantages but there are also advantages and usually things tend to spread quickly… Let’s see.

  3. One more point – regarding the 9 bln ELA liability – I’ve heard that BoC was not going to take it on, then that it would take the whole amount, then that only 3bln would be transferred to it… so once again – who knows?

    • Uncertainty is killing everyone, especially those whose jobs are at an immediate risk, like for example the Bank employees, who have been supporting their middle-class lifestyle with loans. These are ‘good’ loans though. They are (were rather) people with secure jobs and decent salaries that banks trusted as solvent clients and gave them loans, that they repay with interest. Moreover, they have been guaranteed a large one-off retirement payment and a pension after they turn 63.

      The mainstream life-plan of a Cypriot bank employee was to repay the bulk of their loans with the one-off retirement payment and live comfortably until the end of their lives with the pension. Now they will be forced to retirement, with a slashed one-off payment that will not even cover their loans, 10 years before they get a (again slashed) pension. They will have to choose: either default on their loans or live without income for 10 years. These people are now locked in their houses depressed. I am afraid that we will see a severe increase in suicides quite soon.