By Michalis Zaouras on July 02, 2015

A Greek Drama! Not at a good time for Cyprus.

The recent developments in Greece could not have come at a worse time for Cyprus. The economy seems to have started stabilizing after two years of painful adjustments accepted as a part of the bail in agreement with the Troika. The country has at last removed capital controls, even though deposits are still declining.

 Needless to say, that the main reason (and if not the most important) of Cyprus recent financial crisis was triggered by Cypriot banks' exposure to Greece. So, the question now is what will be the impact of the new Greek crisis on Cyprus? The Minister of Finance and the president of Cyprus Central Bank stated that tools and mechanisms are in place that will be used if needed. They have also pointed out that Cypriot banks were required to hedge themselves from those risks.

It is, indeed, a fact that Cypriot banks have reduced their exposure on Greece, even though it is not clear (data are hard to get) what level of exposure remains. But I think the most worrying scenario is what will happen to Greek subsidiaries in Cyprus if their main group in Greece becomes insolvent (a scenario which becomes more likely day by day because of the current bank runs and possibly a further increase on non performing loans).  These banks hold 16% of the deposits in Cyprus (7.74 bn Euro), which might seem small at once (and not systemic to Cyprus). However, we need to have in mind that the size of the financial sector is extremely large relative to the Cypriot economy. When we take that in consideration then this number corresponds to 44% of GDP!

Greek banks remaining solvent is still the most likely scenario (for now at least). But I strongly believe that the threats to the Cypriot economy are real, whether this comes from Greek banks' subsidiaries or negative externalities from a deeper recession in Greece or even contagion. I also believe that the timing is, unfortunately, extremely bad for Cyprus. The few positive signs of recovery can easily be reversed.

By charis michail on February 26, 2014

Dear all,

We have recently started a new Cyprus-themed collaboration with the reputable independent economic blog Macropolis. We post articles every month, concernig the economic situation in the island
These are our articles so far.

Cyprus in 2014: Looking Ahead
Why tax evasion threatens to become endemic due to how Cyprus was bailed out
The Cyprus bailout is different, and not only due to the bail-in
Cooperatives on Cyprus: Why they were treated differently to banks

Freddie Mac, European Central Bank and Cyprus Cooperative Sector: One Story of too many tales?

A not unambiguous story of state guarantees

Their exists a weird symmetry in the world today. Policy shifts are being increasingly emulated globally and analyses on local institutions can be attempted because of the common denominator under single global converging force that is globalisation.

In this specific, we will examine a staggering underlyingfactor that provides a solid narrative for the explanation of the US subprime mortgages institution crisis, the European two-speed Optimum Currency Area experiment failure and the Cyprus Co-operative institutions High Non Performing  Loans.

We can obviously not compare these three organizations in terms of scale, global ramificaticatons and complexity. However this sort of narrative allows me to connect them in a very causal and scale lineary way when moving from the general to specific.

All three institutions are shared entities on one crucial aspect which seems to permeate most of the “developed world” and its a very dangerous remnant of the Keynesian past that the market seems to have embraced. That crucial leg of the modern economy, is the state guarantees to market involved semi-state entities; and as we will argue it is the white shiny elephant in the room of moral hazard. Its a showcase of how wrong conventional wisdom can produce unintended consequences when political compromise forces organizations to move from statehood to markethood and the implicit systemic risks that it can cause.

Fannie May and Freddie Mac were government sponsored enterprize that were set up in the 1930s by US president  Franklin Delano Roosevelt amidst the Great Depression to support the collapsing mortgage market by creating a liquid secondary market through the securitizaton of mortgage loans guaranteed by the state thus ensuring more favourable low-interest, long term (30yr) mortgage  payments to the middle class. When this industry was privatized, the explicit guarantees were lifted but implicitly investors realised their different state of this enterprize, which teamed with intenselobbying strategy to keep them from adhering to more stringent liquidity regulation, kept the market growing than it would be possible under full private constrains. When the big investment firms in Wall street created the structured bonds, the circle was complete were the incentives were there for all participants to expand the market beyond its natural limit, thus creating a truly massive bubble, that has been the catalyst in the recent crisis.

A somewhat similar story occured in Europe when banks and investors assumed an implicit guarantees, that norhern surplus countries would guarantee the debt overreach of southern countries in the expanding European Monetary Union, which partially flattened and normalised bond prices in European market and indeed interest rates in the Banking sector, but opened the floodgates for a massive overstretch both in government and private debt in what Hayek would probably call, malinvestments.

Our third pillar of this scaling down narrative is a local state guaranteed institution, Cyprus’s Cooperative Banks. These highly local scaled down organisations came into being in the 1930s and where highly specific to the agriculture sectors as opposed to the novel local banking sector that was emerging at the time.After the 1974 war both the Monetary Financial Institutions and the Cooperative Banks blew up, but where the banks increased their market penetration and expanded in related fields like their worldwide counterparts, the Cooperative movement, spurred by the loss of its traditional field, agriculture, expanded in markets outside its competencies like housing, business, student and consumer loans for, for the lack of better term, subprime borrowers. As with the stories above it rested on direct and direct guarantees by government agencies, established in the 80s, like the Organization for the Equal Distribution of Burden and the Housing Finance Organization, that focused on low repayment-low interest loans for specific segments of the population.

The stated purpose and intentions behind these guarantees are not morally questionable. For example, the two US agencies guaranteed long term, fixed mortgages that were well above market rates. Even  the much more contested, recent subprime housing lending has opened the door  for otherwise marginalised, disenfranchised and discriminated by the financial system, black and poor communities to engage in formal financial activities that are partly responsible for an improvement in racial inequality in the USA or the ability of  underdeveloped countries of south and east of European Union to access funds necessary for growth and development of their economies, the Cooperative institution allowed for low income, refugees to send their children to study, get a decent house and live in relative sync with the rest of the population, than they would otherwise be able to. So in all three cases the phenomenical normalization of risk,backed by the government, improved the livelihoods of millions.

Starting 2008 risks that were amassing in all three institutions exploded and brougt them to the brink of collapse, only to be saved by their state gurantees,thus systemitizing the risk  . When the housing bubble finally burst in the US and the refinancing was no longer viable the non-repayment experienced a spike, the likes of which were considered impossible by market pundits.This led to the cease of tradability of financial instruments as the value of these where based principally on expectations and not foundations. Which led to the global liquidity crunch.

In Europe the overleveraged and heavy involved banks to the US market started consolidating their portfolios and started re-evaluating and cutting back their expectations for vulnerable countries with high debt ratios, thus increasing borrowing rates by just enough to make debt unsustainable in certain countries. In Cyprus, an economy based primarily on retail and government and to a lesser degree tourism was particularly hit by the liquidity stagnation which had profound effects on the large monetary institutions, due to direct involvement in overseas investments, but is turning devastating to the Cooperative movement, where consumer liquidity is a paramount factor in their loan portfolio and led to Non-Performing loans of up to 90%.

However,  you may ask, wouldn’t all these three institutions be bount to be saved by the state because they became so systemic that any other option would be terrifying even to contemplate?

This argument goes right in the heart of the problem. Yes, these state guaranteed institutions did become too importand to be left to fail. The problem is the reason they were allowed to become so huge. One of the major empeirical advantages of having a capitalistic organisation is that businesses need to adhere to solid societal principles that keeps them in check. By removing their need to compete and constraint their ambitions governments are in effect removing the very think that keeps the animal spirit in check, shareholder pressure and competition. This fact, has implicitly enforced the incentive of private participants to assume exorbitant risks, thus negating the sobering risk assessment that unguaranteed market forces seem to induce.

The second analytical step takes us to the need to clearly identify the business whether the benign societal benefits should be kept clearly under the auspices of either the market or the state. This means, creating a new organisation when a transition from state to market is decided so that no illusions remains in the eyes of a prospective investor.

The consequences of spreading surplus risk in the macroscale of nations and international relationships creats tensions and conflicts within and between countries.

The conclusion we reach is clear, we have to judge and decide what parts of the economy we feel should be privatized and then truly set them free and parts of what we considered of national interest, be kept under state control.

This ideologically induced quasi market institution just does not seem to work. The market fallacy that the risk was valued at its correct price was correct in a way. The states assume and pay out these risks. However, this creates a much more potent risk. The risk of war.

By Haris

By Alexander Apostolides on December 20, 2013

Introducing a new Author: Haris on Bullshit Jobs

One of the more intuitive articles on labor markets i have read lately deals with  Bullshit Jobs that was recently in the Economist.

The article pays importance to the magnitude and significance written of the work of  anthropologist David Graeber article of the same name.

In it Graeber presents the economic argument of increasing industrial productivity of the 1930s whereby it was thought that technology would linearly substitute most menial jobs with the far more capable machinery so totally that a new system of economics would need to be enacted; one where laborers work less hours and gain more leisure and money in order for the system to not collapse.

Clearly this favorable scenario didn't materialize. But why? Well the author argues that what happened was a global surge in bureaucratic administrative structures because increasing globalization has occurred. This required a lot more white collar workers constantly slaving in their cubicles to get all the different regulatory and organisational frameworks for every single product --> And many of them just create work with no meaning for others down the line i.e. a bullshit job. 

The economist actually thinks that the technology available for companies is depressing the volume of workers needed which would, possibly, trickle down to the hordes of younger white collar men expecting to get a foot in the labor market emulating their baby boomer fathers and mothers. So maybe bullshit jobs are saving us from a worse existence - mass unemployment.

By Haris

By Alexander Apostolides on December 19, 2013

Looking Ahead: Cyprus in 2014

Cyprus has the habit of grabbing international attention in a global way, only to then be marginalised as a footnote when the immediate crisis seems to have abated. This has been historically true in issues of communal violence and the Annan plan, in what we Cypriots call “the original Cyprus problem”. Sadly for Cyprus, this is also seems to hold true in regards to its financial crisis.

After the March 2013 bailout and the partial bail-in of uninsured deposits in some Cypriot banks, the international attention has moved away from the island. Yet despite the lack of interest internationally, troubles that need international cooperation for resolution remain. Unless more attention is given by the international community in 2014, both the Cyprus problem and the financial crisis are in danger of becoming intractable impediments against Cypriot recovery.

The negotiations of the Cyprus question seem to have hit a snag even before they began. Despite a resurgence of optimism during the summer over a possible breakthrough confidence building measures, which could have included the return of the abandoned city of Varosha and the partial lifting of trade and flight embargoes, the mood has significantly soured since. This breakdown is mostly due to Turkish Cypriot community leader Dervis Eroglu rejecting the use of binding phraseology on sovereignty and nationality in the communique that would launch the new round of negotiations, and the reluctance of the Greek Cypriot government in being bound to a tight deadline for talks that might lead to the strengthening of calls for “normalization” of the EU relationship with the unrecognized TRNC.  The actual timeframe before major elections in capitals that matter is tightening, and thus unless a common communique is agreed upon soon the opportunity to conclude negotiations in 2014 might be lost.

The government of Cyprus has requested that the EU adopt a far more active role in the negotiation process: its aim was not to undermine the role of the United Nations in leading the efforts for a settlement, but to introduce the EU as a neutral arbitrator where basic premises of the European acquis communitaire are threatened. Proposals and solution plans in the past have ignored the non-compatibility with the basic laws and regulations of the EU, and thus the Republic of Cyprus suggested empowering the EU’s role in the negotiations in order to unlock thorny issues in 2014. It must be said that looking at it from Cyprus it seems the EU is currently reluctant to take on this more active role. Despite the aura of pessimism around the possibility of starting negotiations, the Republic of Cyprus has established working groups on six major issues to support the negotiator in the upcoming negotiations.

The ruling system in Cyprus is supremely centred on the President, currently Nicos Anastasiades, who is elected directly by the electorate; thus one must feel great sympathy for the President that has to manage the Cyprus problem while the nation is in the grip of its worst financial crisis. The Cypriot financial crisis is particularly severe due to the delay of taking action from the previous president, Demetris Christofias: Cyprus refused to capitulate to market sentiment for a long time after Greece, Ireland, Portugal and Spain concluded bailout negotiations. The added delay magnified Cypriot banking problems, compounding the problems of Laiki and Bank of Cyprus from non-performing loans in Greece and the severe losses that they were inflicted due to the haircut, or PSI, of Greek government bonds.
The bail-in of the uninsured depositors of Laiki Bank and its merger with Bank of Cyprus (whose uninsured depositors were also partially bailed-in) is generally understood as being a badly botched affair, despite European protestations to the contrary. 

The Cyprus financial system is still in the emergency room: capital controls are still in place and there is an excessive reliance on the European Central Bank’s Emergency Liquidity Assistance (ELA) due to the decision to sell the assets of all Cypriot banks in Greece.  The poor return of this sale resulted in Bank of Cyprus having to pledge its own assets for ELA that Laiki provided to its branches in Greece, leading to a precarious liquidity situation for the new, hugely systemic, Bank of Cyprus.  The financial system cannot recover in Cyprus unless the ECB allows for the ELA to be replaced by more long-term finance; however there seems to be a lack of interest for such accommodation in this stage. Trust cannot be regained in the Cypriot banking system in 2014 if the bank that holds more than 50 percent of loans and deposits is severely exposed to ELA obligations.

Most analysts seem to be optimistic about Cyprus due to the better than expected 2013 results, were GDP is expected to fall  -5.5 to -6.5 percent rather than the expected -8.7 percent of the troika estimate in March. The October business survey also showed a slight increase in sentiment that seems to back up the optimistic view.  Yet, economists remain very pessimistic: the latest projections by the University of Cyprus indicate a -8 percent decline in 2014. The lack of liquidity will result in banks making an intense effort to recover assets in 2014, leading to a much more severe recession than predicted by the memorandum. In the upcoming year the efforts to recover value from non-performing loans will lead to intense political pressure to exclude groups. 

Already a law that would require a reduction of business loan interest rates has passed but its implementation is delayed through legal processes by the President as the “request” of the troika. However the very high levels of debt of companies and households in Cyprus will result in very severe reduction on consumption in 2014 as well as a possible new risk to the banking system through a dramatic increase of non-performing loans. 
* Alexander Apostolides is an economic historian at the European University Cyprus. For his analysis of economics and politics in Cyprus and Malta visit:
- See more at:

By Alexander Apostolides on May 03, 2013

How to make sense of the Cyprus bailout and its crisis: An article and analysis aggregator

Latest Update: 19th September 2013

I have been far too quiet while the whole world shifted its attention to the Island of Cyprus. Although this was the change for this blog to shine, my direct and indirect involvement in what has happened in Cyprus since the 15th of March has kept me far too busy to post. This is mostly English articles with some Greek ones. Please paste in the comments section other good articles in English, Greek and even better in other languages.

Below is an attempt to provide articles and sources relating to the Cypriot situation, for people to use as they see fit. I do not intend to keep updating it. So if you find this post a long time after it was written, I suggest look for newer articles and sources.

All this work let to the paper which I wrote here: as it is a work in progress, please use the comment section to correct mistakes. 

Section 1: Documents

A special mention should go to from putting together a list of official documents, relating to the Cyprus bailout, many of  whom are given both in their draft and in their final form in order to allow you to compare. Bravo to whoever is behind that effort.

Troika Memorandum documents and Bail-out amount controversy

Bank Related Documents

Projections on the future of the Cyprus economy

Analysis on the situation of Cyprus:

Pre 15th of March 

Between 15th and 25th of March

Post 25th of March

Current Suggetions for the future of Cyprus

  • Common Call of Cyprus Chamber of Commerce and Cyprus Chamber of Industry of the necessary steps forward 
  • Karl Whelan at Forbes outlining the alternations to the  Bailout the Cyprus government now needs

Articles in the Economist on Cyprus

Cyprus and "CyExit" - Why quitting the Euro is a bad idea only for Cyprus

Multimedia on the Cyprus Crisis

On Cyprus and Wealth of Households controversy

By Michalis Zaouras on April 19, 2013

Banks bail-in a template or not?

EU officials and Member States' representatives (national governments) have been discussing whether a bail-in approach to banks resolution is a template or not. I provide below some evidence that it might be a template after all. In 06/06/2012 the Bank recovery and resolution proposal is clearly suggesting a shift of EU's policy from bail-out to bail-in. To cite:

"What resolution tools will be needed?

(iv) bail in creditors (mechanism to cancel or reduce the liabilities of a failing bank, or to convert debt to equity, as a means of restoring the institution's capital position)."

The proposal also suggest the protection of secured depositors. See below for reference:

Interestingly, the proposal does not exclude a bail-out approach but rather allows a bail-in within a European context. Worryingly, a bail-out can be used in order to safeguard the big banks from failing (too big to fail) in the context of systematic risk while a bail-in approach can be used for smaller non-systematic banks. The problem with such an approach is how you define a big bank (or systematic). Consider the case of Cyprus, Laike-Marfin is definitely a small bank (and non-systematic) in the European context and as a result it can be bailed-in. However, this bank is "big" within Cyprus therefore generating systematic risks within Cyprus (but potentially not within EU). As a result, someone would expect big banks in large economies within EU to be bailed-out while "small" banks in small economies to be bailed-in. So is this a step forward for EU integration or not?

Please note though that the above analysis is based on a proposal. This has not been put as a directive (not yet at least), which means that it is not legalized as a template. Therefore, it is not a template (yet) but it is included in the proposal of Monetary and Fiscal Integration of the EU (and seen as a necessary tool).

Most interestingly I have found an EU discussion paper that proposes the bail-in approach (see below for reference) and suggests that this idea should be tested first. Guess where they have tested the bail-in approach? Hmm... wait a minute I know, Cyprus!

Finally, the above documents suggest that political parties (which take part in the EU Parliament) and the Government  of Cyprus (participating in the initiatives for Monetary and Fiscal Integration) were (or should have been) aware of what the bail-in and bank resolution within that context corresponds to. Therefore, I believe that the blaming game currently taking place in Cyprus is just ridiculous (everyone is responsible, maybe some of them to a lesser degree) and unproductive.  Most importantly, the root of the problem was not how we handled the crisis (though it has amplified the crisis) but rather the failure of the banking sector and the banks overexposure to risky assets.