By Alexander Apostolides on June 15, 2010

The most dangerous and silly move by the Cypriot government

In one fell swoop, the government has managed to undermine the economy and our standing in international credit rating agencies. The government has moved the jurisdiction of the national debt out of the central bank, which is independent, and into the ministry of economics, which is not.

This is exactly the type of thing that led to the mess in Greece. The appointment of Dr. Orphanides as the director of the central bank was an inspired choice that affirmed the independence of the central bank from the government for the first time. This independence upheld the standing our our banking system at times when real political pressure was placed on the Bank by the government to accommodate a looser regulatory framework for banks (remember the pressure applied to the Central bank of Cyprus by the Minister of Economics in order for the Central Bank to give in to Marfin's demands for it not to move out of Cyprus?).

Yet the government now is sick and tired of having an independent authority challenging its decision and has devised a scheme to remove the handling of debt from the central bank. Once under the jurisdiction of the ministry of economics it is easier to place political pressure on the ministry than the bank. It a very short step from being able to place pressure to trying to fiddle the books - once the debt servicing is removed from an independent authority and it goes to a political authority where you boss is a politician the incentive to massage the figures is very large.

This decision takes us back 20 years. This government has now completely lost my confidence in being able to handle the economy of Cyprus - rather than tackling the issues that have led to a structurally unsound economy, the government is browbeating the defenders of sound monetary principles. Alas, I get the feeling that more poor decisions are on their way...

4 comments:

  1. It took you some time to lose confidence:)

    I wholeheartedly agree with your post.

    However since I am always trying to see the contra argument, the other side of the coin, is there a source telling us what is happening in other EU countries or other advances economies for that matter? Who manages the debt there?

    And another thing: managing or handling debt is a curious concept. I mean debt is created when you spend more than what you produce, (or when you want to create conditions which will ultimately increase production).

    So I guess managing the debt means something like moving your loans form Bank of Cyprus to Laiki, or converting the Euro loans to Dollar loans?

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  2. I gave this government quite a lot of credit and after 2 years that credit run out. What worries me is that this an intentional undermining of the one institution that does not behave like an "imikratikos" - i.e do what the government tells them to do.
    Debt and monetary policy is given to independent actors because the incentive to use them are so big - and almost all ECB countries follow the principle that the Central Bank is the nations banker and thus it has to be responsible to the debt.

    Instead of fixing structural problems (non-functioning government sectors, over reliance on construction, not enough R&D ) we attack the one institution that is trustworthy.

    Orphanides was recently interviewed for the Dow Jones, such is the esteem markets and regulators have towards him, and we undermine the institution he heads to suit our short term need to fiddle the books. For a "progressive" government this is a definite step to the dark ages.

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  3. I got to agree with you Alexander. This came as no surprise at all since this is not the first time that this government has tried to put under its control the central bank and undermine Mr Oprhanides who was even considered for a position of such high esteem as the President of the European central bank. And this is how they view other institutions who are not economical in nature but are somewhat independent.

    What I wonder, is why did you give them credit ? Akel is a communist party after all. A communist-capitalist party but that means that they are immature capitalists with backward and naive ideas as far as economy is concerned. Economy was never their strong point.

    What did you expect ?

    PS- excuse my English, another Cypriot here as it's obvious. Love your blog and I am disappointed how most other blogs that have something to do with politics ignore economic subjects that have more gravity that the subjects they often focus upon. But this is a syptom of Cypriot politics in general. What happened right now, what we are talking about, is probably among the most important and bigger disasters of the year, yet it will be relatively ignored.

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  4. Υπάρχουν καπια καλά blog για οικονομικά θέματα π.χ. (http://givegoodeconomicsachance.blogspot.com/) αλλά είναι αλήθεια ότι υπάρχει παρα πολύ σαβούρα σε πολίτικα θέματα. Δεν λέω ότι οι πολιτικοί μας πρέπει να είναι όλοι οικονομολόγοι, αλλά να ρωτούν και κανένα ειδικό πριν να κάνουν αποφάσεις.

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