Presentation of a talk given at University of Luxembourg. The Cyprus crisis is one of the most complex in the Eurozone, although in absolute terms the problem is insignificant. Inflows of foreign deposits in excess of 700% the island’s GDP allowed a «perfect crisis» to form and contagion from Greece destroyed overnight 23.6% of the GDP. Rescue efforts were (mis)guided by a confluence of European and local politics, conflicting analyses of the problems, and forbearance from the supervisors. Bank depositors were bailed-in, making international headlines. We will argue that the bail-in is a viable solution to banking crises but with potential significant adverse effects. http://wwwen.uni.lu/universite/actualites/evenements/grande_conference_how_to_sink_an_island_mixing_politics_and_economics_in_the_cyprus_crisis

1. Stavros
A.
ZENIOS
University
of
Cyprus
Senior
Fellow,
The
Wharton
School,
USA
Grande
Conference,
University
of
Luxembourg,
March
2013
How to sink an Island.
Mixing politics and economics in the Cyprus crisis

2. Μεταξύ
Σοφίας
και
Αμαθίας
¤
We
were
wronged
¤
We
were
wrong

3. 0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Unemployment in Cyprus

4. 0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Corporate, non financial Households Financial Government
The Cyprus debt crisis dissected

5. 0 100 200 300 400 500 600 700
Ireland
Greece
Cyprus
Cyprus -post Greek PSI
Mature economies
Households NFC FINANCIAL Govt
Is Cyprus like Greece or Ireland?

6. 0
5000
10000
15000
20000
25000
30000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Debtorincomeineuros
Income Debt
Household debt vs income

7. 0.00
0.50
1.00
1.50
2.00
2.50
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Debt/Taxes
Government debt 71% GDP

8. -20
-15
-10
-5
0
5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Current account balance %GDP
Can we get export led growth?

9. Competitiveness
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 2011 2012
Ireland UK Cyprus Spain

10. 0
10
20
30
40
50
60
70
80
90
100
Short run crisis
Financing aging
population
Adjusting primary
account balance
EC Cyprus Fiscal Sustainability Report

11. 11
Source ECB.
2009 data, include bank assets in their foreign operations. στοιχεία αυτά είναι για το 2009 και περιλαµβάνουν το
ενεργητικό των ντόπιων τραπεζών στο εξωτερικό.
0%
500%
1000%
1500%
2000%
2500%
Κυπρος Ελλαδα Ιρλανδια Λουξεμβουργο Μαλτα Ολλανδια Ηνωμενο
Βασιλειο
ΣΥΝΟΛΟΕΝΕΡΓΗΤΙΚΟΥ(%ΤΟΥΑΕΠ)
Ξενα Υποκαταστηματα Ξενες Θυγατρικες Ντοπιες Τραπεζες
Cyprus tipping point:
the banking sector

12. 0.0
5,000.0
10,000.0
15,000.0
20,000.0
25,000.0
30,000.0
35,000.0
40,000.0
45,000.0
50,000.0
2007
2008
2009
2010
2011
2012
2013
Millioneuro
Domestic Total non-residents
Hot money

13. Enter politics:
“Injecting uncertainty”

14. We
were
wronged:
Impact
of
Greek
PSI
on
Eurozone
countries
!! Cyprus! Greece! Germany! Belgium! France! Portugal!
! ! ! ! ! ! !
%!GDP! 23.03% 11.65! 0.14! 0.56! 0.25! 0.25!
!
!
Source:!EBA!and!author’s!calculations.!EBA!data!available!at!
http://www.eba.europa.eu/documents/10180/15935/CY006.pdf!
!

15. We
were
wronged:
ad
hoc
bail-­‐in
5.8
billion
bank
deposits
¤ Directive 2014/59 issued in 2014.
¤ Article 44 -scope of bail-in:
¤ Exempts covered deposits
¤ Accrued salary
¤ Pension benefits
¤ Liabilities arising from the provision of goods or services that are critical to
the daily functioning of the creditor.
¤ Capital controls
Cyprus bail-in detrimental to notion of common currency.

16. We were wronged:
unfairness of the bail-in
¤ Bailed-in depositors of BOC contributed €3,806mil in cash and
received shares at €1.00 per share.
¤ CPB contributed net assets €425mil and received shares at €0.503.
¤ Capitalization of BOC was €371,95mil and received shares at €20,66.
¤ 81.5% bailed-in depositors, 18.1% ex-CPB, 0.4% BOC shareholders.
¤ 82.7% bailed-in depositors, 9.2% ex-CPB, 8.1% BOC shareholders.
Fail the John Rawles “veil of ignorance” test.

17. What does a haircut look like?

18. We were wronged:
narrative of money laundering

19. Spiegel, 5 November 2012
German Secret Services Secret report

20. Basel Institute of Governance
AML Index
Cyprus 4.93
Holland 5.03
Germany 5.80

21. Financial Action Task Force

22. Narrative of money laundering
It is simply not true!
Fits Noam Chomsky theories.

23. We were wrong
Shadow economy
Political corruption
Cronyism
Politics vs policy

24. Shadow economy
Shadow Economies All over the World
Policy Research Working Paper 5356, The World Bank
Country % GDP
Switzerland 8.5
USA 8.6
Singapore 13
Ireland 12
Italy 21
Greece 24
Cyprus 25
EU-27 18.5

25. Political corruption
¤ GRECO Report of Council of Europe 2011
¤ Transparency in party financing
¤ Eight significant recommendations
¤ Only 2 partially complied by 2013
Don’t get mad, get even.

26. ¤ Petition
¤ 5000 signatures
¤ Public pressure –TV, radio, newspapers, social media
¤ Elections challenge
Approved by Council of Ministers, February 2015.

27. Cronyism
¤ Electoral reform: Horizontal Voting

28. e-petitions

29. We were wrong:
politics over policy
!
!

30. Mid-­‐way
conclusions
¤
We
are
fixing
our
mistakes
¤
EU
InsPtuPons
should
fix
theirs

31. Eurozone
wrongs
GDP
growth

32. Unemployment

33. EU
or
eurozone
problem?

34. And the role of Central Banks

35. Interest
rates
seRng
by
ECB
and
FED

37. European
imbalances

38. European
Dilemma
Impossible
to
meet
Maastricht
rules
without
growth
Impossible
to
have
growth
with
Maastricht
rules

39. Amassed a large external debt that cannot be
repaid no matter what fraction of the country’s
real domestic economic output is appropriated
through austerity measures.
Revenues can only be used to pay external debt
to the extent that they accrue from export
revenues, or if the foreign creditors use payments
to acquire domestic goods and services or
domestic assets.
If this is not the case, then there is an inconsistent
flow of funds with the flow of goods and services.
This inconsistency ultimately leads to default on
external debt or domestic sector bankruptcies
and forced reallocation of resources to the export
sector wit loss of efficiency.

40. Keynes 1920 -explaining the futility
of reparation payments of
Post WWI Germany

41. (Varoufakis ÷ 2) ÷ 2

42. Know thy math!

43. Greece debt under Troika

44. Greece debt under Tsipras-Varoufakis

45. Final
conclusions
Abandon
austerity,
embrace
reforms
€
Fix
it
or
abandon
it
Cyprus
is
not
Greece

46. Karl Marx
Society poses itself only such problems
as it can solve.
John F. Kennedy
Our problems are man-made,
therefore they can be solved by men.
Stavros A. Zenios amendment
Our problems are man-made,
therefore they can be solved by women.

47. Bibliography
–
on
SSRN
Zenios,
S.A.,
The
Cyprus
debt:
Perfect
crisis
and
a
way
forward.
hXp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2233239
Zenios,
S.A.,
Fairness
and
reflexivity
in
the
Cyprus
bail
in
hXp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2409284