Tuesday, May 14, 2013

Whatever happened to Cyprus?

It seems that a few months ago, Cyprus was on the verge of imploding. What happened -- did it implode? Did the Germans relent and let the ECB write a big cheque?

I have no idea. A quick google search revealed these two articles, both of which are interesting, neither of which really catch me up.

Athanasios Orphanides blames it all on the Communists.
What was the role of decisions by Cyprus, decisions by Europe, and other factors in producing the crisis we see now?
A number of factors played a role. The global financial crisis and exposure to Greece made Cyprus vulnerable. But the outcome was determined by decisions taken by the previous government in Cyprus as well as the broader malfunction of the euro area over the past three years.
Two months after Cyprus joined the euro area [in January, 2008], there were presidential elections and the Cypriot public elected as president a communist, Demetris Christofias. The public was convinced he could solve the political problem we had with Turkey and reunify the island. The issue was not economic.
If one thing has become clear over the last five years in Cyprus, it is that the euro area, which is not just a market economy but a currency union with strict rules, is not compatible with a communist government. Why is this important? This government took a country with excellent fiscal finances, a surplus in fiscal accounts, and a banking system that was in excellent health. They started overspending, not only for unproductive government expenditures but also they raised implicit liabilities by raising pension promises, and so forth.
Well, never a bad move to blame communists (except maybe out loud) but you will note Orphanides never mentions the structural problems that an archipelago of currency users has when there is no issuer to back claims between them.

And on the latest plan?

Why, in your view, was the March 16 plan flawed?

The Cyprus parliament had passed a number of laws that influenced the current and future spending and pensions. And they were also in the process of finalizing how they would do privatizations of the semi public companies. So all the standard elements you'd expect in other programmes had been done or were being done.

Why did they attack retail deposits in this manner? This had never before been a requirement of any other programme. And why did the German government insist in the last three days that there should be a bail-in? The only logical explanation I could see is that Angela Merkel's government faces re-election in September of 2013 and the SPD [the Social Democratic party, the principal opposition to Ms Merkel's Christian Democratic Union] has made it an issue: it does not want to support a loan by the German government to Cyprus because, they claim, that would be like bailing out the Russian oligarchs. This is how Cyprus got caught up in the German election...

What will the implications be for Europe and the stabilization of the euro zone?
This is similar to the blunder in Deauville with PSI that injected credit risk into sovereign government debt. The governments have created risk in what before last week were considered perfectly safe deposits. This is going to have a chilling effect on deposits in any bank in a country perceived to be weak. This will mean the cost of funding will increase in the periphery of Europe and as a result, the cost of financing for businesses and households will increase. That will add to the divergences we already have and make the recession in the periphery of Europe deeper than it already is. This is really a disaster for European economic management as a whole.
OK, so it's not all the communists' fault, the Germans are also to blame. History rhyming.

I, however, still do not know, structurally, what happened in Cyprus. This second feed does not help, although it does have pictures of angry Spaniards.

So, did some debt deal go through? Was there any material outcome besides a worsening of living standards in Cyprus, and I assume Greece? International stock markets seem to have been fine, so maybe the ECB wrote a cheque after all?

If anyone can clue me in, I would be obliged.


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