Background: delays and denial

Cyprus delays the showdown


Ex-Cypriot President, Demetris Christofias was determined to delay the crisis in 2012 and endlessly sought alternatives to an EU bailout and assistance with the growing banking problem. He was due to step down from the presidency in February 2013 and did everything he could to stop his party, AKEL – the Cypriot communist party - carrying the can for the crisis.


The Cypriot authorities' delay in introducing discretionary measures to reduce the government deficit, and the rising expenditures on the public sector wage bill and social benefits have also exacerbated the existing imbalances.


Occasional Papers 101 | July 2012 Macroeconomic imbalances - Cyprus, European Commission p.3

Christofias dismissed the head of Cyprus central bank, Athanasios Orphanides, in April 2012 after he had openly criticised the goverment.


Asked if he had any regrets since he had become  governor in 2007, Orphanides said:

"I strongly feel personally responsible for failing to convince President Christofias and his economic advisers from the end of 2008 on how badly the economy was deteriorating and the significance of taking immediate measures to fix the situation. I feel personally responsible for failing to convince them of the seriousness of the situation" (Cyprus Mail 3 May 2012).


He was replaced by Panicos Demetriades, a professor of financial economics at Leicester University (FT Hope April 29th 2013).

 The EU presidency and Vasilikos Explosion

Two factors complicated the developing situation in Cyprus. Firstly, the country assumed the six-monthly rotating presidency of the EU in July 2012 and bailing-out the country in the presidency would have been, to say the least, embarrassing. And secondly and  earlier, on 11th July 2011, a massive explosion of confiscated armaments killed thirteen and knocked one of the Republic’s two power stations out of action.


This led to a political crisis that resulted in the resignation of the island's Foreign Minister, Markos Kyprianou. (See FT 28/07/2011, Cyrpus Mail, 10/07/2012).


The arms and explosives - 98 containers in all- had been confiscated from a Cyprus-flagged ship sailing between Iran and Syria following a US tip-off that the ship was breaking international sanctions against Iran. The containers were stacked at Evangelos Florakis Naval base next to the Vasilikos power station. Apparently an internal investigation showed that UN inspections of the cache had been three times delayed by the Cypriot government (FT 03.10.11. and 10.07.2011)


A cabinet-led non-binding enquiry into the incident by a cabinet-appointed lawyer, Polys Polyviou, concluded that the President, Demetris Christofias and his foreign and defence ministers were responsible for the blast. The ministers resigned but the President refused  to accept the findings of the enquiry.


Since then former Foreign Minister, Marcos Kyprianou, former Defence Minister, Costa Papacostas, former National Guard deputy chief Savvas Argyrou, the  fire service chief, Charalambos Charalambous and Andrea Loizides, the commander of the disaster response squad, have been charged with manslaughter and cause of death by negligence. The court proceedings are ongoing (Cyprus Mail, 12 July 2012).


Returning to economic crisis, President Christofias vowed that he would not sell Cyprus’s workers down the river (with their thrice yearly cost of living inbcreases) nor agree to a programme of privatization. So he temporized and sought short-term solutions that kept the show on the road. Eventually with the downgrade of Cyprus bonds to junk status Cyprus was obliged to seek a bailout from the EU (25 June 2012).


Perhaps Christofias’s and AKEL’s calculation was to step aside from government and let the centre-right do the dirty work of restructuring in the hope that AKEL would return to power at the following elections with the new gas fields discovered in the Levant basin in full operation and providing the funds to write off the crisis as someone else’s nightmare (see FT Barber 19th February).


Rehn reflects on the Cyprus bailout


Asked to reflect on the Cyprus bailout on the BBCRadio4 Today programme on 11 April 2013 (minutes 15.00-16.30) Ollie Rehn, EU Commissioner for Economic and Monetary Affairs, said that he had first discussed possible EU assitance with the then Finance Minister of Cyprus in November 2011 a couple of weeks after the second haircut on Greek sovereign bonds that was adversely impacting on Cyprus but 'that was not received very well.' 


Instead the Cypriot government secured a Russian loan of €2.5bn which bought time but 'that time was not used very effectively...they waited for too long.'


Negotiations on a possible bailout began in the sumer of 2012  but these 'did not advance very fast'.


He concluded on the Cyprus case by saying,


'If inevitable decisions are delayed and delayed and again delayed things only get much worse and the people in the end suffer for it'.


This 'delay x 3' was rendered into the anodine but telling phrase in the DSA (see below) of 'unprecedentedly protracted programme discussions'.


Asked if the Cypurs bail in created a new template for EY bailouts Rehn said,


'[The decision] takes on the special characteristics of the Cypriot economy, including the very large banking sector.'


Asked about the state of Luxembourg with its very large bank assets to GDP ratio Rehn replied that Luxembourg banks are both well capitalised and supervised.

The Bailout sequence of events


The sequence of events leading up to the initial agreement of bailout terms in March 2013 is laid out in the EU Debt Sustainability Analysis of 9 April 2013 (see Memorandum page for link):


After unprecedentedly protracted programme discussions, Cyprus and the programme partners reached a provisional staff-level agreement on November 23 on the policy side of a draftMemorandum of Understanding (MoU), but did not conclude the financing side of the economic and financial adjustment programme. In December 2012, the Cypriot Parliamentvoted the large majority of fiscal measures for 2012-14 outlined in the draft MoU, as well as first important steps in relation to fiscal-structural reforms (e.g. pension system, health sector, budgetary framework, welfare benefits, COLA etc p. 3.

The economic situastion prior to the bailout is summed up in  the DSA provisional draft of 9 April 2013 as,


More than a decade of sustained and strong economic expansion in Cyprus came to an end in 2009. Economic activity in Cyprus fell by close to 2%, with weak domestic demand and an adverse external environment weighing strongly on growth. Economic activity recovered in 2010 with real GDP growth of around 1%. In 2011 the Cypriot economy grewby a modest 0.5%, with economic activity seriously affected by the accident in July 2011 that destroyed the Vasilico [sic] power station p. 3.

A local voice: Red lines that were erased in seconds


A fairly typical local voice on the delays and temporising under President Christofias is quoted below,


Cyprus has already wasted precious time under the previous administration and because of the stupidity of all our public and private sector organisations that, throughout the time when Troika representatives were meeting them to discuss the state of the economy and their particular sectors, all they were doing was drawing stupid “red lines” which crumbled and were erased in seconds.


See Shavasb Bohdjalian Certified Investment Advisor and CEO of Eurivex Ltd. Financial Mail.