The Cyprus debt: perfect crisis and a way forward

Stavros A. Zenios University of Cyprus

Senior Fellow the Wharton School, USA

CYPRUS DEBT CRISIS DISSECTED

THE EUROGROUP DEBACLE

A WAY FORWARD

Outline

Vicious cycle sovereign debt-banking

+

debt overhang

of business and households

+

declining competitiveness

A Perfect Crisis

A positive historical note

Time to default for African and Asian countries

31.5 years

Time to default for Latin American countries

38 years

European countries that defaulted at least once since 1800

22.8% of their time in default

1.5 default episodes per half century

THE CYPRUS CRISIS

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

200

250

300

350

400

450

500

120 140 160 180 200 220 240 260

20

10

de

bt

to G

DP

rat

io, %

2000 debt to GDP ratio, %

Germany Cyprus Greece Ireland

THE CYPRUS CRISIS DISSECTED

THE CYPRUS CRISIS DISSECTED

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Corporate, non financial Households Financial Government

Ireland, Greece, Cyprus

0 100 200 300 400 500 600 700

Ireland

Greece

Cyprus

Cyprus -post Greek PSI

Mature economies

Households NFC FINANCIAL Govt

Ability to service debt

Household debt vs income

0

5000

10000

15000

20000

25000

30000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

De

bt

or

inco

me

in e

uro

s

Income Debt

Government Debt: 71% GDP

0.00

0.50

1.00

1.50

2.00

2.50

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Debt/Taxes

12

Cyprus Tipping Point: the banking sector?

Πηγή: EKT.

Σημείωση: Τα στοιχεία αυτά είναι για το 2009 και πεπιλαμβάνουν το ενεπγετικό των ντόπιων τπαπεδών στο εξωτεπικό.

0%

500%

1000%

1500%

2000%

2500%

Κυπρος Ελλαδα Ιρλανδια Λουξεμβουργο Μαλτα Ολλανδια Ηνωμενο

Βασιλειο

Τ

ΝΟ

ΛΟ

ΕΝ

ΕΡ

ΓΗ

ΣΙΚ

ΟΤ

(%

ΣΟ

Τ Α

ΕΠ

)

Ξενα Υποκαταστηματα Ξενες Θυγατρικες Ντοπιες Τραπεζες

And hot money

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

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Mill

ion

eu

ro

Domestic Total non-residents

Cyprus Banking hubris

Can we get export-led growth?

-20

-15

-10

-5

0

5

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Current account balance %GDP

Competitiveness

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 2011 2012

Ireland UK Cyprus Spain

Cyprus Fiscal Sustainability

EC Report 2013-2015

0

10

20

30

40

50

60

70

80

90

100

Short run crisis

Financing aging population

Adjusting primary account balance

The Eurogroup debacle

Enter Heroine: Austerity

5.5% GDP fiscal adjustment

Reforms and privatizations

Over four years

Impact on GDP -1.38%

Bad Politics in the Way of Good Policy

Enter Villain: Bail-in

German Secret Services secret report

Basel Institute of GovernanceAML Index

Cyprus 4.93

Holland 5.03

Germany 5.80

Haircut Russian oligarchs

Who gets a haircut?

68.4 billion (insured) deposits in Jan. 2013

26-30 billion Russian money

What does a haircut look like?

Russian “oligarchs” Eurobankers

Wipe out wealth 30% GDP

Slash business activity 9%-25% GDP

Freeze 70% of domestic lending

Freeze working capital of SMEs

And the GDP?

IMF projections pre-eurogroup -3.5%

IMF projections post-eurogroup -9%

Massive legal problems

Emergency Liquidity Assistance worth 9.2 billion

Extended to an apparently insolvent bank for 1 year

Passed on improperly to a solvent bank

Three court stay orders

What does a haircut look like?

A way forward

Policy options

We need a Collin Powell Doctrine*

Throw superior forces at the problem

Counter-attack multiple problem cells simultaneously

*Remember not to kill the patient!

Policy options

Austerity deleveraging

Structural reforms

Financial Innovations

Partial privatizations

Debt restructuring

European Stability Mechanism

or

Official Sector Involvement

Debt restructuring with GDP-linked bonds

Credit enhanced by natural gas proceeds

“Anyone can count the seeds in an apple, but only God can count the apples in a seed”

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”