Last week we laid out the apparent 'blueprint' from the EU Commission [9] for every other country with a banking system in which non-performing loans are soaring. With Mario Draghi's patsy in place at the Cypriot Central Bank, happy to hand over the nation's gold at the beck-and-call of the EU leaders - despite the Cypriot President's disgust at the 'coercion' of the new deal chiding the central bank for "catching the government by surprise," it now seems, as this Cyprus Mail [10] op-ed explains, that the people of this nation are ready for change - real change, , otherwise, "we may wake up one morning and find the country has completely shut down, crushed under the weight of its mounting, unserviceable debts with no banks, businesses or services able to operate."
Via The Cyprus Mail [10],
Every day seems to bring another piece of bad news regarding the state of economy, which has been in free-fall and has yet to hit the bottom. Since the first Eurogroup meeting of March 15, the situation has become worse by the day and there seems to be no end in sight. We may wake up one morning and find the country has completely shut down, crushed under the weight of its mounting, unserviceable debts with no banks, businesses or services able to operate.
We are not being alarmist, but pragmatic given the way things have veered completely out of control, the government powerless to stop the rut and our EU partners intent on revising their economic forecasts drastically downwards and making more demands of the bankrupt Cyprus state. On Wednesday night it was revealed that Cyprus would need to find another €6 billion to contribute to its bailout, after a ‘debt sustainability analysis’ showed that the financial situation is much worse than originally estimated [9].
Will the Bank of Cyprus’ uninsured depositors take an even bigger hit to cover this amount because it can certainly not be raised through taxes? And how long will it be before we are told that the €13billion we had to contribute to our bailout was not enough and an even bigger amount was required? We still do not know what ‘recommendations’ the anti-money laundering audit being carried out by Moneyval and Deloitte will eventually come up with and how these could adversely impact on the economy. For all we know, a bank may have to seek ECB approval before it opens an account for a foreign company.
The truth is that even after the ESM board of governors formally approves the proposal for a financial assistance facility agreement on April 24, the uncertainty and instability will remain. Friday’s announcement that the “Eurogroup is confident that determined action in line with the reform measures spelled out in the MoU will allow the Cypriot economy to return to a sustainable path based on sound public finances, balanced growth and financial stability,” could at best be described as wishful thinking and, at worst, a joke.
As countless economic analysts have pointed out, the numbers do not add up and the chances of macroeconomic targets being met are almost non-existent. Even the official debt sustainability analysis warned, “there is a non-negligible risk of a cycle of household and corporate defaults propagating through the economy, leading to further banking sector losses, worsening of labour market conditions, stronger than expected fall in house prices and a prolonged loss of business and consumer confidence.”
It happened in other eurozone bailouts and Cyprus will be no different, despite the Eurogroup’s confidence. This is why it is an imperative for the government to be prepared, exploring all options. Perhaps the economy’s interests would be better served if Cyprus exited the eurozone, defaulted on its debts and re-adopted the Cyprus pound. The government has taken a dogmatic stand against such a move, citing all the obvious negative effects, but the option needs to be explored and studied in-depth by experts.
The government should either hire a top consultancy firm or put together a team of economists, market analysts, technocrats, etc to carry out studies of the short- and medium-term effects of leaving the euro. The effects of staying in the euro and agreeing to a second and third bailout must also be studied. If we returned to the Cyprus pound, we may have recovery and growth sooner, but we may also have rampant inflation and be unable to import essential goods from abroad. Staying in the euro may protect what is left of people’s savings and ensure some economic stability but what good would that be in an economy expected to contract by more than 10 per cent this year?
Only once these options have been comprehensively investigated and reports prepared by experts can there be a proper debate on what must be done and an informed decision taken. The matter cannot be allowed to be resolved through slogans, rabble-rousing and emotional outbursts by populist deputies more interested in their re-election than the good of the country. We are now paying the very high price of this amateurishness and superficiality, with which we have approached issues of vital importance to the country, over the years.
The government needs to be prepared for the debate on leaving the euro that is certain to start as the country sinks deeper and deeper into recession. After all, the experts could conclude Cyprus would be better off out of the eurozone.