By Michalis Zaouras on September 30, 2009

Difficult times need risky people, or is it the other way around?

One year ago, if I remember well, Bank of Cyprus acquired a Russian bank pledging most of its assets. Other examples would be Bank of America acquiring Merrill Lynch, JP Morgan Chase acquiring Bear Sterns and Washington Mutual and Lloyds TSB acquiring HBOS. While the last of these cases needed government intervention to survive the turmoil. In all cases huge amounts of money have been used, in a time that money liquidity is the most important for a business to survive.

So why would anyone risk the sovereignty of its organization by taking aggressive decisions in a risky and highly volatile environment. A short answer would be that the government has guaranteed, as in the case of Lloyds TSB, the bad debts inherited by the acquisition. The problem, even if you have been given some guarantees, is that if you are not solid enough to overcome a negative shock then you shouldn’t have taken the risk from the first place. At the end of the day, Lloyds TSB needed bail out from government, resulting in deterioration both of managers’ prestige and company’s competitiveness.

Another explanation would be that managers are not maximizing profits but maximize personal interest, for example they might care more for prestige and fame. This could also be a result of the no alignment of stockholders interest with managers, a well known problem called moral hazard. So the manager might choose to acquire another firm because the biggest the company you manage the more prestigious for the manager. But this leads to a new question, since government officials know about the problem of motives alignment then why offering the guarantees in the first place?

Concluding, giving away money and promises would not solve the problem. When we set a policy we, the economists, should also take in consideration alignment of interests, as well as the efficiency. Difficult times need not risky people and hasty decisions, need well constructed programs and efficient allocation of resources. The structure of decision making and firms’ competition philosophy should also be reexamined because what we have learned from the crises is that risky people will create difficult times.

By Alexander Apostolides on September 22, 2009

The economic aspects of a solution in Cyprus

Yesterday i attended a series of talks on the economic aspects of the Cyprus problem. The speakers were Mr. Basilliou, the chief G/C negotiator on European maters, Mr. Sarris, the chief G/C negotiator on Economic maters and A person form the European Commission (finance section) whom i unfortunately do not remember his name.
I left highly troubled due to three things – i do stress that below are my own conclusions of the speeches, and not the positions of the speakers themselves.
1) The EU has a Schizophrenic approach to the solution. One the one hand it does not want to get involved at all, despite the fact that a solution needs to fit (or even alter) the laws and regulations of the European Union. So it is left on the G/C side to argue that there can not be an prevention of people and capital crossing the borders of the constituent republics of a future federal Cyprus, despite the fact it is actually the EU than demands such a rule. Most worrying is the fact that the EU is thinking that Cyprus could finance rebuilding and a solution by just breaking the growth and stability pact for a maximum of 4 years. That is sheer lunacy – the construction of roads and a common electricity network, let alone making Famagusta fit for human habitation, will lead to prolonged and sustained budget deficits that could not and should not be restricted.
2) The Turkish Cypriot negotiation seems to suffer from the fact that the T/C have only the faintest idea on how the EU works. The lack of entry negotiations by the T/C mean that some demands are quite simply not realistic within an EU framework. Thus it is a fact that the EU will not accept constituent states to make any representation directly to the EU – it opens up an very ugly precedent. Thus the federal state needs to work correctly as the EU will only interloculate with federal instruments. Like wise arguing for two financial regulatory authorities, or for separate rules for Turkish institutions, goes contrary to the basic tenants of the EU and it is futile and destructive to argue for them since they will not be accepted by the EU.
3) In game theory terms, the negotiations are difficult because the actors have completely different aims: The EU, Turkey and G/C + T/C find it difficult to find common ground since their aims are parallel to each other – they simply do not connect.
I expect a long and frustrating negotiation process, that can only be aided with the EU actually becoming an actor and explaining to all what can and cannot be accepted.

By Alexander Apostolides on September 07, 2009

Bad news, but better than what we where expecting

The statistical office of Cyprus has just released the 2nd quarter GDP estimate for 2009. The results are better than the flash (i.e. incomplete) estimate, with the fall in constant terms being less than expected at -0.7%. The positive news is that the "new powerhouse industries" of international finance and services sector is still growing, albeit at a slower rate.

Although the results could be worse they are still bad:
1) Q3 is traditionally the strongest in terms of output growth containing the majority of the summer tourist season - indication show that it will be much worse than q2.
2) this is estimates in constant price terms - yet prices fell by -1.1%. Thus in constant prices (i.e. in the way it affects people's lives) the drop is much more significant.
3) It is clear that the sector hit (Tourism, Construction, Transport, restaurants) have a much higher share of total employment that the sectors that are still growing - thus further lay-offs will be expected.

By Alexander Apostolides on September 06, 2009

New paper just out: Economic history of Cyprus 1921-1938

Just thought you might be interested in a paper i presented in the Central Bank of Cyprus. It focuses on some of the key findings of my research.
My research is on the Economic history of Cyprus.Here i estimated income of Cyprus for the period 1921-1938.
The main focal points are:
1) The Great Depression was a catastrophe for Cyprus - the lack of protective tariff barriers and the incidence of serious drought meant that the Depression wiped out 10 years of growth. The recovery was also slow and only possible due to the emergence of the mining sector
2) The depression hurt the farmers particularly hard, causing a credit crunch, breaking the traditional source of credit to the farmer: this was not restored until the re-establishment of the co-op sector on a correct basis.
3) The Great depression was the greatest catalyst for the breakdown of communication between the British colonialists and the Greek-Cypriots. They were political tensions before, but they were brought to the head by the government's inability to alleviate the effect of the depression.