Go to Publicity
«Back to news

News

19.01.2014 - 21: 01

Cypriot crisis - a consequence of a number of serious errors

Michalis Sarris shared his opinion about past events that is happening now, and that waiting for Cyprus in the near future.

- Why, in your opinion, should start talking about the economic recovery of the Republic of Cyprus?

- The cornerstone is the return of confidence in Cyprus. March events undermined the country's banking system, investment and consumer spending declined, long-term relationships between banks and their customers were severed. This is a serious problem, and first of all we need to restore confidence in the country. It is also necessary to continue to fulfill the terms of agreements reached with our creditors. Some successes already exist, mainly in matters of reducing government spending and controlling the budget. However, the most difficult thing is to carry out serious reforms, "restart" the economy. On this way, we will encounter enough obstacles. As it seems to me, people are not ready for the sake of economic recovery to experience deprivation, albeit short-term. Unfortunately, after a large number of errors, it is impossible to go directly to economic growth. Why?

- What, in your opinion, was the biggest mistake?

- First of all, we allowed an inadmissible growth of the budget deficit, without looking at the serious crisis in the euro area and the rest of the world. We were repeatedly warned about the upcoming difficulties, but the deficit and public debt increased too quickly, banks gave out indiscriminate loans, and subsequently the government could no longer help. This situation no one will envy. In recent years, the volume of commercial loans in Cyprus has grown to very large. At 10% growth of the economy (in nominal terms), the credit mass increased by 25%. This should not be, especially if the funds are used to finance a limited number of industries, including construction. A typical loan format in Cyprus is based on the value of real estate pledging. And if the value of this property falls, big problems begin.

Another reason for the crisis in Cyprus was the entry into the eurozone. The country was ready for it, and received a number of important benefits, but we did not take up his duties with sufficient seriousness. After joining any monetary union, it is necessary to closely monitor its competitiveness, fiscal policy ...

In addition, and in the euro area had a number of "architectural" errors. For example, the lack of a uniform for all countries fiscal policy and centralized control over their competitiveness. And so, as soon as any problems, this alliance was powerless. Decisions made, for example, "haircut" of government debt of Greece, became catastrophic.

Greece debt write-offs

- Speaking of Greece - was there at that time an alternative way to solve her problem?

- It was possible to provide more direct financial assistance to the immediate right. If this was not done. Do not argue, such a move would be difficult. After all, it more successful countries in the eurozone would have to convince their taxpayers of the need to help those who are still accused of misguided policies. In any case, the decision to write off Greek debt was wrong. As confiscation of deposits in Cypriot banks ...

Is Germany to blame?

- It is not clear why it is considered as if the taxpayers would have to pay for the mistakes of the weaker countries. After all, it was a question of lending, which means that countries with weak economies sooner or later would have paid their debts on loans.

- Do not forget that the risk in lending to these countries is always high. No one can guarantee that the debt will eventually be paid. Of course, Germany - not a bank, but only her budget was in surplus, and in such situations, only the country with a surplus in the state to give credit.

- Why does everyone accuse Germany of what happened in Cyprus? Do you also share this view?

- I would not say so. As I have already noted, the eurozone countries, especially in southern Europe, made some mistakes, and then problems arose within the whole Union. In this situation, Germany would reduce the surplus by stimulating consumer demand by raising wages, increasing the volume of imports. However, blaming Germany in the Cyprus problem only because of the fact that its economy is doing well, unfair.

- Why problems have arisen in the southern countries of Europe?

- Undoubtedly, the difference between countries is largely due to the traditions of discipline, both in the economy and in politics. For example, Sweden went on a special path - to earn a surplus in good times, so that in difficult periods to spend the accumulated funds. In the southern countries of Europe, on the contrary - every time it was possible to raise additional funds due to, for example, tax increases, they were quickly wasted. Differences between northern and southern nations are partly determined by the political system of countries, the way politicians realize and fulfill their duties for the sake of the public good.

Save or invest in the growth of the economy?

- Some believe that the need to stimulate economic growth, increasing consumption, others - that it is best to cut their spending, a few years to moderate policy, and thus create the conditions for growth. Which of the points of view you practice?

- This argument seems to me useless. When you spend money that you do not have, you sooner or later have to cut costs. I do not see an alternative. In such a situation, any country must first go through the consolidation in the tax-budget sphere, and only then can we talk about any economic growth. For example, in the case of Cyprus there is a big debate about privatization. Why is Cyprus so unique that port facilities, telecommunications and electricity should be controlled by the government? In other countries, the private sector is involved, and the quality of services there is higher, and their cost is lower. Of course, privatization will increase the number of unemployed: state-owned companies have hired too many employees for years. But the work of this huge staff needs to be paid somehow.

Consequently, companies raise prices for their services. And that is what prevents our economy grow. For restructuring in this area requires a certain political commitment and awareness of the need for change.

Unions

- That is, first of all, it should be a political decision? As in the days of Margaret Thatcher when she was actively involved in the fight against unions and minimizes costs to help the market. In your opinion, will it follow that example Cyprus? Will I eventually influence of trade unions?

- I think the first trade unions have played an important role in actively defending the rights of the working population. However, at some point, they got carried away and went too far. This is particularly noticeable in the public sector, in the banking sector and state-owned enterprises, where a lot of people work very little time in exchange for a lot of money. And the rest of the economy should pay for it. Well, when we can afford it. But now the situation is different and needs global change.

Privatization

- So, you are a supporter of privatization. What else needs to be done to stimulate economic growth in Cyprus?

- We need to help young entrepreneurs start their own business. Someone will not stand, but some will succeed. In addition, we must encourage the population to receive education in those areas that will develop in the near future, for example, in the energy sector. It is necessary to change the educational system in order to prevent the discrepancy of qualification with the requirements of the market. We have a lot of graduates, but not in the areas that are in demand now. Unfortunately, for some time we will have to cope with the outflow of specialists abroad: many young people after graduating from university will prefer to work for several years in other countries. Nevertheless, in the future these measures will help to reduce the level of unemployment.

- Now small and medium business is dying out, the shops are closed, people are losing their jobs ... What is your economic forecast for Cyprus for the next three months?

- It seems to me, not only the next few months, but the next two years will be very difficult for Cyprus. To some extent, the unfavorable financial situation in the country is to blame for this. In addition, individual industries were oversaturated. Over time, successful enterprises will rise to their feet again. For those who fail to overcome difficulties, it makes sense to try yourself in another field. Again, everything will depend on how soon we will restore confidence in the banking system, how quickly investors will again believe that Cyprus is the best place for investment. It remains for us to wait and watch. After all, an important role is played by the psychological factor. But one can be predicted with certainty: we are facing a long difficult period before the country comes out of the crisis.

Brussels and Moscow - what really happened?

- In the Cypriot press covered a variety of versions of the events of March in Brussels and then in Moscow. Tell us in a nutshell, what happened in reality.

- The conversation was difficult because at the time of the events in Brussels has been it does not matter who is in power. Confidence to Cyprus as a state to plummet. We have expressed our willingness to fiscal consolidation. We asked for a stay of a few years to cut spending and restore their earlier loans. But in return, we are given to understand that until the problems were relatively small, we did not take these measures and did not show the necessary political determination. Now, when the situation got out of control, why Europe should believe us?

The International Monetary Fund and the strong power of Germany were firmly convinced of the correctness of such a decision - to give Cyprus only a small loan, and the remaining funds to be collected from those who in the last 20 years lived on a broad scale. We were also inclined to see that Cyprus got rid of the Greek part of its banking sector. And they did the right thing. But no one takes such steps in a matter of days! We tried to do this ourselves for several months, but did not find the required support. In any case, it is unfair that the future generations of Cypriot taxpayers pay for the current mistakes in this amount.

In turn, the Russian side made it clear that after a loan of 2,5 billion euros in November 2011, we expected active economic measures that would allow us to return to the financial markets and gradually pay off the debt. Instead, Cyprus again appeals to Russia for financial help ... When I went to Moscow, I understood that we were facing difficult negotiations. The chances of obtaining additional help from Russia were minimal. Especially considering that Europe hinted to Russia not to interfere in the "intra-family" European problems. However, one who does not dare to try, will never know the outcome of the game.

The situation with the Russian exacerbated the fact that the EU has actively addressed the topic of money laundering in Cyprus Russian oligarchs. Therefore, the support of the Russian Federation would be perceived not only as a support for the poor Cypriots, but also as an aid secured compatriots, leading your business in Cyprus. Today such criticism in Russia and abroad perceived much more serious than a few years ago. And Russia, this image was useless. I can understand it.

- You really tried to resign on his way to Moscow?

- No. This is the conjecture of the press. Everything was completely different. Agreeing to take the post of Minister of Finance, I knew from the beginning that my mission would be very difficult. 14 March we had a reasonable solution. We proposed the confiscation of deposits in the amount of 6,75% and 9,9% in all banks in Cyprus, without exception (including cooperative banks, Hellenic Bank, Bank of Cyprus, Russian Commercial Bank, etc.). It would not be easy, but this option was better than what happened in the end. I did everything I could, defended what I thought was right. But we did not follow this scheme, and I did not see any reason to stay in office. In addition, I did not belong to the political party that won the elections, as it was last time, under the government of Thassos Papadopoulos. This time I came to the ministry as a technocrat, not as a colleague. When making decisions, I was guided by economic, not political considerations. And when I thought that the time had come for the government to take responsibility for the next steps, I resigned. "Haircut" for all banks. Is this fair?

- So, you have supported the idea of ​​a small "haircut" for all investors. Many believe that it is unfair for such successful banks, such as, Barclays Bank and the Russian Commercial Bank. Indeed, in contrast to the Laiki Bank and Bank of Cyprus, they followed all the rules, worked efficiently, why do they have to pay for the mistakes of others?

- When one or another bank is part of the overall banking system of the country and the situation in the same bank has a significant influence on the situation in other banks, we have to make sacrifices. Unless after sampling "haircut" to control the outflow of capital has become easier?

- Is it possible that in the case of a global "haircut" troubled banks would continue to operate at a loss, would not be ready for a radical restructuring, and as a result very soon there would be a need for another confiscation?

- Of course, if banks continued to make the same mistakes ... But it is also possible that they would have learned their lesson. By the time they have already recognized the need to reduce operating costs and wages, the change of leadership, etc. By the way, and now we need to be fully confident that the new leadership will be able to manage the Bank of Cyprus more rationally.

Was it possible to save Laiki?

- Can you think of a time when it became clear that the rescue Laiki Bank will not succeed?

- I think it's very difficult to talk about any particular moment. Certainly fatal to the bank were changes at the turn of 2006-2007 years. This period was characterized by a strong expansion in Greece and too large amounts of credit. Then came the cancellation of the Greek national debt ...

Nevertheless, it seems to me that even in 2011 year and the first months of 2012-situation [in Laiki] could be normalized. In that case, if we turned to Europe, admitted that we have a problem, and asked for help with the recapitalization of banks - at that time it was about 3-5 billion euros. In 2012 year, in view of elections in Germany and the rapid growth of banks' losses, to do this it was very difficult.

- Why, then, Laiki Bank has not declared itself bankrupt following the example of banks in other countries? It would not be the most simple and the right decision - to close, sell assets and return the depositors all that is possible?

- This policy works with small banks. In the US, this happens very often. However, if Laiki did so, the Bank of Cyprus would also be doomed. In fact, for Cyprus, Laiki's bankruptcy would entail the need to withdraw from the eurozone. Because the government would have to compensate investors for losses, and there was no money for it. Hence, there would be a need for additional money issue, which, being a member of the eurozone, we are not entitled to conduct. Money would have to be printed in a different currency, which, by the way, would have depreciated very quickly. Such a decision was unacceptable for us. We should have prepared a strong program and sought help from Europe, as Spain and Ireland did. These countries have indicated their willingness to reduce salaries in the public sector, banks, dramatically reduce the cost of social programs. In exchange, they requested direct financial assistance for their banks at the stage when the situation was still under control and it was about 3-4 billion euros. But when you need 10 billion, confiscation of deposits was the only possible way out.

Do Cyprus "three"?

- In your words there is some internal conflict. On the one hand, Cyprus needed a longer period of adjustment and financial assistance from other eurozone countries, and especially Germany, to cope with the situation. On the other, for a serious change in the country needs a political resolution, which in recent years in the country was not. If Europe has responded and gave respite and additional funding, the national debt would continue to grow, and received "easy money" reform again be postponed until better times.

- I think that many Cypriots agree with this point of view and recognize that the Memorandum with the "troika" was the best solution for Cyprus. Indeed, we have always talked about the need for change, but never went from words to deeds. But when someone is ready to lend you money, he expects you to use them correctly. And now average Cypriots believe that everything the government will not do, the "troika" will do for it. And it suits them. They are not happy only with the part of the "troika" program, which provides for the confiscation of their savings. They are not against the reduction of the number of civil servants, market liberalization, better management in banks, etc. All these measures, which the "troika" of creditors insist, in the opinion of the Cypriots, had to be taken a very long time. I, in turn, do not see why Cyprus should not be in the company of countries such as Germany, Finland, Austria, Sweden, the Netherlands. We have a high level of education of the population, a good judicial system, good state institutions. Cyprus would follow their example and not spend the money that it does not. I agree: if we were not forced, we would not have decided for a long time to change. And it is unreasonable to count, for example, on natural gas. We had to start reforms in any case. How to restore confidence in Cyprus?

- You have correctly noted the need to restore trust in Cyprus and its banking system. We know what the problems were at that bank, which had to be closed. However, there is a second bank - Vank of Cyprus, who suffers from a similar "disease." And if in the Hellenic Bank 38% non-performing loans, the BOC is much more. BoC but still no attempt to solve this problem.

- I think this is only partly true. It is clear that the management of the Bank of Cyprus should create a separate department that would deal with non-performing loans, attract foreign experts to its work. Builders [customers of WOS], in whose hands are concentrated large funds and large debts, it is necessary to take measures to attract investors from abroad. But at the same time, remember: if a foreign investor insists that a particular property is worth a billion, when in fact, its price is half that, no one will agree to invest in such a project. It is important to understand that the investor also wants to earn money.

- How long will it take to prepare the legal framework and restructure, to normalize the Bank of Cyprus?

- It is rather a question of mentality rather than legislation. I believe that we need to separate the political decisions of the business. Banking activity is largely determined by politicians. This is wrong. Should be allowed to technocrats to do their job, ask for help from other countries.

- What is the conclusion you can draw our conversation today?

- Cyprus must follow the terms of the agreement with our creditors. It is necessary to try to exceed the expectations of the "troika" in order to get the opportunity to go to new negotiations and ask for additional help for the bank from the emergency financial assistance fund. However, we will not be able to do this if we do not follow the right policy, following the example of Ireland. We really have much to learn from this country. Ireland had huge problems in the banking sector, but it gradually solves them and does not complain. She understands her mistakes and is ready to correct them. This philosophy needs to be preached in Cyprus: we made mistakes, but with the right approach, we can correct them.

A source:

Tags: Economy, crisis, EU, Interview, Banks