Professor Athanasios Orphanides published an article titled What Happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe. You can find the MIT Sloan Research Paper that Professor Orphanides published on May 28th here. I include the abstract of the paper below:
This paper reviews developments in the Cypriot economy following the introduction of the euro on 1 January 2008 and leading to the economic collapse of the island five years later. The main cause of the collapse is identified with the election of a communist government in February 2008, within two months of the introduction of the euro, and its subsequent choices for action and inaction on economic policy matters. The government allowed a rapid deterioration of public finances, and despite repeated warnings, damaged the country’s creditworthiness and lost market access in May 2011. The destruction of the island’s largest power station in July 2011 subsequently threw the economy into recession. Together with the intensification of the euro area crisis in the summer and fall of 2011, these events weakened the banking system which was vulnerable due to its exposure in Greece. Rather than deal with its fiscal crisis, the government secured a loan from the Russian government that allowed it to postpone action until after the February 2013 election. Rather than protect the banking system, losses were imposed on banks and a campaign against them was coordinated and used as a platform by the communist party for the February 2013 election. The strategy succeeded in delaying resolution of the crisis and avoiding short-term political cost for the communist party before the election, but also in precipitating a catastrophe right after the election.
I am surprised that the prestigious Sloan School of Management of the MIT agreed to put its name to this paper. The paper is not up to academic standards, at least not up to the standards of the discipline I am in and I guess not up to the standards of MIT. From what I understand this is a working paper, so it hasn’t gone through peer-review yet — the process by which academic work is double reviewed anonymously before it is published by an established academic journal — but given the name of the author and the name of the institute attached to it, I have little doubt that it will eventually be published in a high-profile journal. The partisan language used and the misrepresentation of the Cypriot political scene make for a sensational read, full of vindictiveness and bitterness towards the way Professor Orphanides was treated by the former government, but it should have no place in academia, which usually adheres to higher standards.
Orphanides is the ex-Central Bank of Cyprus Governor, an independent official appointed by the president, responsible for overseeing the banks in Cyprus. It was during Professor Orphanides’ time in office that the Cypriot banks became exposed to Greek debt and to the local property bubble that eventually bankrupted them. Orphanides was their supervisor, yet he accepts no responsibility and blames the former government for being late in asking for assistance and for overspending in social provisions .
The former government is partly to blame of course, but Orphanides is shifting all the responsibility to it, using it as a scapegoat to avoid his own share of the burden for the calamity that the high-ranking bankers in Cyprus caused under his supervision.
The very fact that he describes the former coalition government as “the last communist government in Europe” is simply incorrect and indicative of the political motives behind the paper. AKEL government can, at best, be described as a failed centre-left socialdemocratic government, nowhere near as radical as Orphanides depicts it.
Even if we accept Professor Orphanides’ view that the “the communist government started overspending” from the moment it got elected (p.4, also see s.3 “The Spending Spree”) , it does not follow that the reason that Cyprus is in this mess is due to the spending of the government. Dr Delia Velculescu, the IMF Mission Chief for Cyprus, in a video published by the IMF on May 2o, explains that the problems in Cyprus were caused by (a) the global crisis, (b) the crisis of the European periphery, (c) the heavy exposure of Cypriot banks to the local property bubble and (d) their exposure to Greek government bonds.
The banking industry, for which Professor Orphanides was responsible “became very large relative to the size of the economy” according to the IMF video. “The culmination of all this”, Dr Velculescu remarks, “was a loss of market confidence in Cyprus itself. The government lost market access; it couldn’t borrow anymore to finance its spending and its obligations”. In the video Dr Velculescu explains that the problem originated in the “risky decisions and risky investments” of local banks, the losses of which the government could not bear. Professor Orphanides refuses to engage with this side of the story. He refuses to accept his responsibility and shifts the blame to the former government, which, as I said above, is partly to blame for not seeking international help earlier. The only way for Professor Orphanides to clear his name is by whitewashing the disastrous decision-making of the top-bankers, for which he was responsible as the top official of the highest supervising body in the country.
Even when Professor Orphanides points out that the Central Bank warned the government of the imminent dangers looming over the economy, his suggestion was to implement a “meaningful fiscal consolidation, primarily on the expenditure side” (p.8). Professor Orphanides does not comment on the fact that the size of the banking sector and the totality of the losses caused by the greedy investments could not be covered by the state, no matter how much fiscal consolidation it did. Neither does he comment on his own share of the responsibility for the loss of trust in the Cypriot economy: it was him, after all, that had written numerous articles published in the Cyprus-Mail and the Financial Times accusing the government of overspending in social provisions.
Professor Orphanides is partly responsible for the loss of trust in Cyprus that lead to the subsequent downgrade of the economy and for poorly supervising the local banks who, by IMF admission, are responsible for bringing the Cypriot economy to its knees. The former government is responsible for delaying taking action because of the political costs it would bear in the following year’s presidential elections. Misrepresenting the other (the previous government was not a communist one) and shifting all the responsibility to it is a cheap shot that is part of the political process but it is not something that should feature in academic work.
Disclaimer: I am not an economist and I claim no expertise in economics. I urge you to read the article yourselves to form your own opinion and avoid any unintentional misrepresentation of Professor Orphanides’ argument by me.
Credit: The picture was published in the Cyprus-Mail.