Europe did not cause the crisis in Cyprus

2013-04-05

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The kind of default reaction of many Cypriot opinion molders and citizens to the latest decisions on the country’s macroeconomic adjustment programme, has been to put the brunt of the blame for Cyprus’ economic demise on “Europe” in general; often drawing insights from valid facts such as the systemic features of the eurocrisis, stemming from the flawed architectural design of the Economic and Monetary Union (EMU), to the inadequate modus operandi and suboptimal decision-making processes of the inter-governmental platforms of the European Council and the informal Eurogroup. It is indeed true that the European level leaves much to be desired on several fronts that need not be enumerated herein, yet an over-emphasis on the shortcomings of the EU/Eurozone in conjunction with a meticulous downplay of the responsibilities of the symbiotic Cypriot political and plutocratic establishment, can only end up becoming, perhaps indadvertedly, an infamous apologetic to the egregious malpractices of both public and private key actors prior to the events that have taken place over the last months/years.

It is one thing to recognize the contribution of systemic parameters to the ongoing economic duress and another to effectively place the cart before the horse in presuming these factors to be the very primary causes of the crisis, while dismissing with slight contempt and cavalier smugness whatever internal malignancies, political and economic, there existed under or above the surface. Put bluntly, it is both an uninformed opinion and a preposterous proposition to assert that the Cypriot economy was destroyed overnight by the Eurogroup, or “the Germans”, or “Merkel” or whichever phantomality a profoundly europhobic and ultra-conservative tissue of unexamined shibboleths may give rise to, implicitly propounding the absurd theory that the crisis manifested itself out of thin air, without any structural and persistent flaws underlying the conditions that have now been laid bare. Hence, while it is desirable to criticize the various facets of the EU for their weaknesses or inadequacies, it nonetheless is of utmost importance to identify and expose the specificities of the Cypriot case, for the sake of being just and precise and, a fortiriori, for finally bringing forth the reformative meta-political action that Cyprus is in desperate need of, at least in the humble opinion of the present author in his capacity as a non-conformist.

This kind of approach, of recognizing the villain in an external source, can be understandable and tolerable when people labor under the influence of exuberant emotionalism. Nevertheless, once the dust sets after a period where emergency decision are taken, sensible and sober thinking must take their place center stage, in order to avoid any degradation of the political climate to the kind of toxic politics we witness in Greece and elsewhere where democracy is either at risk or practically non-existent. As such, the patriotic palaver that often embellishes such views, if it is to be standardized, shall transform the initial over-reaction into a subconscious sense of victimization; a kind of sentiment that already is predominant in the recent history of Cyprus, Greece and the broader region, and which can only impregnate the self-destructive “we-they” polarization in which the sprectalized perception of the “we” is presumed as the innocent victim while the otherness of the “they” as the incarnation of pure malevolence that seeks to grind all of “us” under its evil heel.

To be clear, there probably is nothing untoward with patriotism per se; however it often happens that under the veneer of such seemingly innocent feelings there lurks a xenophobia that provides the substratum to all ethnicist pronouncements. Moreover, the nationalism underlying this hermeneutic patina, provides a convenient mechanism for the externalization of all domestic problems, in a manner that preempts or renders obsolete any critical assessment of the misdeeds of the political class, the flunkies it maintains, as well as the plutocratic interests that are woven together with the stratagems of the state apparatus and its power elite.

Whatever the sentiments for la patrie may be, what practically begs to be examined is the identification of the homeland with the domestic mega-banks. For many, the downsizing of the Augean Stable that was the Cypriot financial system has been perceived as a direct attack on the “homeland”. Towards that end, either the Eurogroup or Greece in particular, due to its debt restructuring that inflicted severe loses on two Cypriot banks, are forced to bear the brunt of the barbs of local do-gooders or demagogues. The arguments along these lines are two-fold:

• the Europeans did not offer “us” a blank check in recapitalizing our banks via direct bail-outs and therefore they are to blame for the collapse of “our” banks,
• the Private Sector Involvement (PSI) that brought about the restructuring of the Greek sovereign debt is the sole reason “our” otherwise resolute banking sector suffered all these loses that evolved into the black holes we are now called to fill in.

Such statements are specious for they ignore the long process that brought the two major Cypriot banks, Bank of Cyprus and Laiki, to their present predicament. As I have already noted before, we must never lose sight of the fact that the formation of the hypertrophied banking system of Cyprus was a conscious, strategic decision of domestic governments and was explicitly or implicitly supported by all political parties hitherto, underpinned by the illusory and megalomaniac narrative that Cyprus would assert itself as an omnipotent financial center in the Eastern Mediterranean and, presumably, the broader region. In other words, the evidently unsustainable financialization of the Cypriot economy through the unbridled aggrandizement of the banking system, was endorsed and systematically facilitated by politicians for several years prior to the crisis and, in fact, before the accession of the Republic of Cyprus to the European Union. Such political reveries, of instituting the financial services as the pillar of the economy, blithely neglected the economic and environmental constraints, resulting into certain bubbles that would eventually burst under their own pressure and not because “suddenly” a group of European politicians congregating some EU institution took the decision to chop down the Cypriot banks.

As for the injudicious allusions to the PSI, it certainly is true that severe accounting losses were written on the books of Bank of Cyprus and Laiki. What is nonetheless omitted from the opinions on this front, is that in 2009, when Greece was entering into the period of sustained market pressure that eventually led to its first bailout, the two Cypriot banks speculated heavily against the Greek state, by buying massive amounts of Greek sovereign bonds at yields that would bring about generous returns, for their assumption was that Greece would eventually receive unlimited financial support from its European partners to pay back in full all of its debt obligations. Put succinctly, the Cypriot banks exercised casino practices and should therefore be held fully accountable for expanding their portfolio holdings of Greek bonds when it was readily apparent that Greece was heading full speed to an international bail-out programme, where debt restructuring could never be ruled out as a possibility, proclamations to the contrary notwithstanding. Consequently, to blame Greece or the EU for the loses the Cypriot banks incurred from their frivolous investments in the sovereign bonds markets is rather weird, to say the least.

In addition, the EU is being depicted as a foe for not having agreed to the direct recapitalization of the Cypriot banks via the European Stability Mechanism (ESM), as if European taxpayers should foot the bill that reckless bankers bring upon them. The ESM has been established with the objective to provide a final fiscal backstop, which is something that has been made crystal clear with the introduction of the Outright Monetary Transactions (OMT) of the European Central Bank that have as their prerequisite an involvement of the ESM, in a troika-style setting that entails strict conditionality clauses. In other words, the ESM is not a cornucopia whose raison d’être is to sustain profligate bankers nor to provide pampers to misguided politicians; but a permanent mechanism that has been concocted to standardize the bail-out procedure of sovereigns, which was one of the institutional flaws in the original design of the EMU.

Carrying the argument further, one needs to bear in mind that a major factor to the economic downfall was the incompetence of the previous government of Mr. Christofias (I don’t call them “communists” because they were/are not) to proceed with preemptive measures that would have mittigated or at least ameliorated the shock of the crisis. Instead of that, we had the former Minister of Finance at the early stages of the eurocrisis, Mr. Stavrakis, parading before the local media with confidence to deliver ex cathedra injunctions against anyone who questioned the foundations of the Cypriot economy, making the unrealistic, if not pitiful, claim that Cyprus would not be affected by the eurocrisis, courtesy of its “robust” financial system.

Next, when such fantasies could no longer be maintained by anyone who had a modicum of self respect, the Central Bank of Cyprus took the lead in the inane “extend and pretend” tactic, by propping up a zombie bank, Laiki, with Emergency Liquidity Assistance (ELA) that amounted to some €9 billion euro (GDP of Cyprus is approximately €18 billion), despite the fact that this entity was clearly insolvent. This imprudent infusion of liquidity created the kind of bottomless pit in which good money must now be poured into and which has exacerbated the loses related to the restructuring of the Bank of Cyprus and the breakup of Laiki. As for the politicians who were supposed to pass legislation on the orderly resolution of Laiki, instead of hiding the problem under the carpet of their ignorance, all that needs to be said is that those who voted for them should ask clear explanations before venturing to exhibit their personal bravura in indignant statements against “Europe”.

It certainly is easy to go along with the europhobic trend, to adopt the nationalistic tenets of reasoning and to proceed with attributing all faults to “the others”, especially when there seems to be an element of truth at the basis of such grotesque lies. Besides, apart from being politically safer, it is a convenient way to absolve oneself of all moral and political responsibility from the otherwise dubious practices that were the norm in domestic politics and daily “business”. Alas, to proceed thus is to deny the truth before ones own eyes and, even worse, to subconsciously object in advance to any benign reform. Personally I cannot represent anyone else other than myself, but as far as I am concerned, the crisis in Cyprus was not caused by “Europe”, but by a complex cobweb of factors whose source is primarily domestic and which ultimately relates to a long-lasting tolerance of mischief, cronyism and corruption.

If only the people in south Cyprus were more critical of their own state of affairs…

Picture source

UPDATE April 5 at 17:06 CET—Following my arguments on the responsibility of the Cypriot banks, I recommend reading two leaked reports that the Cyprus Mail has published on the reckless investment behavior of the two Cypriot bega-bsnks, Bank of Cyprus and Laiki.