How to sink an island
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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
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How to sink an island
- 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?
- 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
- 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
- 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