By Protesilaos Stavrou on November 29, 2011

Cyprus is on the edge of the cliff

The Republic of Cyprus is facing the increasing threat of coming to the need of a bailout as its economy continues to deteriorate. The malignancies of the Cyprus economy are indeed numerous and are found both in private and public sector.

Cypriot banks suffer from their exposure to debt-ridden Greece, creating a major source of uncertainty regarding their capacity to withstand the mounting pressures. Given the sheer size of the country's banking sector, that is seven times bigger than the GDP of the country; negative expectations about the viability of the broader economy and the state's finances, have naturally been shaped. The 50% haircut that will be imposed on private holders of Greek debt, will have a significant impact on Cypriot banks, who will be forced to raise their Core Tier 1 capital, to withstand the shock and to meet the capital ratio criteria as those were set in the October 26 Euro summit under the bank recapitalizations programme. In practice banks are forced to reduce the amount of liquidity they supply in their attempt to deleverage, as they are in desperate need of 3.6 billion euro until June 30, 2012. For the economic size of Cyprus that is a huge amount of capital if we consider that the GDP is roughly lower than 20 billion euro. This process of bank deleveraging to meet the needs will affect the real economy, as low liquidity amid anemic growth, is hindering business activity.

Reduced liquidity is also part of the government's doings (indirectly at least). The government has been drawing funds out of the internal market to finance its needs since international borrowing costs have long now been at exorbitant rates. Last Friday the rates for 10-year bonds were above 10%, a forbiddingly high borrowing cost. Though this has successfully bought time for the government (that was not used anyhow productively) and saved it from falling a victim to international market speculation, it has had the effect of depriving the economy of much needed liquidity and has pushed up interest rates, making things even worse for the market.

Though it would be quite easy to put the blame on the "reckless" investments of Cyprus' banks, I uphold that the problem is much broader and has to do with a series of structural problems and policy failures. The flaws of the economy of Cyprus are indeed numerous, while the state functions along anachronistic, counter-productive lines. The number of public servants in Cyprus is approximately 53.000 that absorbs around 30% of the total government's spending. Public servants enjoy some of the greatest benefits and high salaries across Europe that are disproportional to their productivity. Though one could be tempted to argue that this is not a problem since they take the money and they spend it, thus stimulating the economy; this conclusion would have been pure fallacy from beginning to end. What matters is not the recycling of the money on the same goods and services, but ultimately what an economy as a whole produces. After all if the logic of people spending money without really being productive was correct, then it would also hold logically true for 60% of workers, or 99%. At that point it is clear that such views are a bunch of nonsense.

Cyprus has a significant portion of the working force in unproductive activities, while much of the country's budget is spent in a highly wasteful manner, when it could either be used to invest in education, improve infrastructure, decrease taxes, or used in other areas of policy that would facilitate business activity, producing real growth. After all according to Eurostat, Cyprus is among the European states with the lowest expected real growth levels in 2012 (0%) and in 2013 (0.7%). These bleak numbers do not come up coincidentally. They are one of the side-effects of not investing in ways to improve the competitiveness and productivity of the real economy.

Competitiveness is something the economy is in desperate need of, yet it seems that this will not come any time soon, again thanks to decades of bad government policies. With its legislation and the incentives it produced, the government managed to give birth to quite strong labor unions, that are now reluctant to give up the generous benefits they got in the period of the "fat cows", prior to the Great Recession. For instance unions of public servants are reluctant to accept a two-year freeze of their lucrative wages, effectively forcing the government to resort to tax policies, so as to raise the funds it requires, since any cuts in the public sector will meet staunch resistance. Plans are now being made to increase taxation on the productive parts of the society, as labor unions are asking for "business" to contribute.

What needs to be said is that "business" is already the largest contributor to government funds, since public servants do not even pay for their pensions. Even if they did though, the rationale of absorbing money out of the productive segments of the economy is indeed ill thought. Increasing taxes amid a recession has always been a self-defeating policy and Cyprus will not be an exception. Higher taxes will only depress growth even further, effectively pushing the country deeper into the hole. Increased taxation amid feeble growth also has a negative on employment. Higher tax costs put even more pressure on employers to release their employees, thus increasing unemployment. And of course the cost of unemployment is paid by the state's budget, in the form of unemployment benefits. Understandably this not the effective way to cut deficits and reduce debts.

There are a series of other issues that could be pointed out within the context of this article, yet the above are enough to depict the environment of uncertainty and big trouble Cyprus finds itself in. Years of government failures, of bad policies and unproductive spending has brought Europe's South-Eastern Mediterranean state on the edge of the cliff where the slightest of imbalances will push the country into a bailout mechanism.

It would be unfair to put the blame of the situation in any group of workers, or on any sector of the economy, either that is public servants, or banks, or "business" in general. The ultimate blame must be put on the government, since it created all this mess, with its ill advised, counter-productive policies. After all as the great Cynic philosopher, Diogenes of Sinope once said, "Why not whip the teacher when the pupil misbehaves?".

President Demetris Christofias is now called to fix the errors of all the administrations that took power the last decades, including his own. Given the structure of the broader issue and the direction his government's policies have taken, I doubt he can do much, or if done I fear it will not be enough.

Cyprus is on the edge of the cliff | Protesilaos Stavrou

By Protesilaos Stavrou on November 27, 2011

Explaining the last failed auction of German sovereign bonds

Image Source: Der Spiegel
In the midst of all the discussions around the ECB monetizing debts and the European Commission putting forward the proposal for the adoption of eurobonds, a very important event occurred in Germany, one that sends a clear message about the expectations of international investors regarding the fate of the euro and the future of Germany without it. On November 23 the German government attempted to raise fresh funding by holding an auction for 10-year sovereign bonds at just under 2 percent. The auction failed spectacularly as the Germans wanted to issue 6 billion euros of 10-year bunds but managed to sell only 3.64 billion.

Some might have seen this as a very bad sign regarding the fiscal finances of Germany and its ability to borrow at low interest rates. I for once, do not see it as such. I do not see the failed auction in Germany as a parallel to the run on Italian bonds were investors clearly consider Italy as insolvent. The way I interpret this, is that investors are now considering two things (i) either the collapse of the euro as a whole, (ii) or the reconstitution of a new Deutschmark or a new euro resembling the German currency that might as well encompass some of the countries that are similar to Germany, or whose industrial sectors have practically merged with the German one. In either case they expect that their bonds that will be denominated in euros will lose value, since the euro itself will be losing value under both scenaria.

If the euro collapses or Germany returns back to its national currency, it is well expected that investors will rush to buy the new German currency, thus leading to a sharp evaluation of it, with respect to all other European currencies and even vis a vis a potential notional "euro" that will be used a benchmark to facilitate the transition from the single currency to the national ones. The effect of this increase in the value of the new Deutschmark is that the debt (bonds) issued in euro will effectively become cheaper. Germany will be in the very advantageous position of paying old debts at a lower price without ever needing to impose any haircuts. Good for Germany, bad for investors who do not want to see their money being lost in a currency depreciation. Investors aware of this dynamic prefer to wait for the new German currency to come into being before investing their money in German bonds.

The confidence in the German economy has not been lost (something that holds true for many other eurozone member-states). All that happened was that investors realized that the possibility of the collapse of the Euro has increased dramatically. We shouldn't of course rush to produce definite conclusions about the future of either Germany or the euro, yet the structural flaws of the single currency have shown in several occasion that once a dynamic begins it can only gain momentum.

Explaining the last failed auction of German sovereign bonds | Protesilaos Stavrou

By Protesilaos Stavrou on November 23, 2011

The Eurobonds of Barroso will do more harm than good

In his last speech in front of the European Parliament, the President of the European Commission, Jose Manuel Barroso, promised to bring plans for eurobonds. For what he called "stability bonds". These eurobonds will be jointly issued and separately guaranteed by all euro member-states. In addition they will be accompanied by a series of institutional reforms, transferring more power to European institutions, while offering the ability to the Commission to impose penalties on states that fail to comply with the budget rules. Among these penalties will be the imposition of sanctions, the suspension of community funding and even the temporary withdrawal of voting rights.

The latest proposal of Barroso is already presented, by various interest groups, as the ultimate panacea to the maladies of the eurozone, without anyone questioning the economic and political implications of it and without any criticism being made on the failure to condemn the narrow-sighted budget rules themselves, that have proven to be insufficient and in combination with the structural flaws of the euro, function as a straitjacket for many countries.

A careful examination of what Barroso actually spoke of, proves that the "stability" bonds will produce adverse effects, effectively leading to instability and deterioration. After all the "Stability" and "Growth" Pact, the package of budget rules Barroso and the rest speak of, has apparently contributed to the current instability and recession. The mere label of a proposal cannot alter its substance. Both politically and economically, the Barroso proposal will only succeed, if implemented, in adding more pressure to the unraveling euro edifice.

Economic pespective:

From an economic perspective the Barroso eurobonds have certain degenerative features. They envisage the pooling of the debts of every eurozone member-state. In practice this means to bring together the debts of states like Greece and combine them with those of states like Germany, to produce a single bond that will yield a weighted average interest rate. This rate will be higher than what Germany currently enjoys and lower than what Greece could afford under the given conditions. In theory this might appear as an act of solidarity by European partners, who are willing to assist each other. Reality is quite different though since if countries like Germany who use their excellent credit rating and ability to borrow cheaply, to contribute to bodies like the EFSF, the region's bail out fund, suddenly face increasing borrowing costs, this extra cost will be rolled over to everything related to these states, effectively counter-balancing whatever benefits deficit states could enjoy. In other words, reaching an average by bringing at a worse position the healthier parts of the eurozone, is not a prudent policy as it will effectively make every state worse off, by reducing whatever surpluses may exist.

Also considering that higher borrowing costs for core eurozone countries will further deteriorate their public finances, one might easily conclude that the pressures on their credit rating will increase effectively leading to eventual downgrades. Such downgrades for countries like Germany and France who are the main pillars of the EFSF and other funds, will imply that all dependent bodies will lose credibility, thus their guarantees will lose value, leading to an erosion of confidence by the markets. To cut the long story short, credit rating downgrades of the eurozone's core countries, could mean that whatever is currently in place might implode due to increased market pressures, bringing down with it the whole plan to rescue the euro.

In addition, these bonds will be jointly issued by all states, but "separately guaranteed". Practically speaking countries like Greece, Ireland, Portugal, Italy, Spain and others will be providing guarantees to their selves. So investors will basically be asked to buy German guarantees at a risk that is considerably higher than German Bunds. As far as I know, no investor would act in such an irrational manner. Assuming that these eurobonds will exist in parallel with national bonds, investors will simply ignore them and buy the much safer German sovereign bonds instead. Moreover if we imagine that these eurobonds will substitute all national bonds, then we can expect that investors will prefer to draw their capital outside the eurozone, to neighboring non-Euro countries like the UK, instead of being forced to invest against their interests, in dubious papers, guaranteed by several bankrupt or semi-bankrupt states.

Since investors will prefer to either invest outside the eurozone or simply ignore eurobonds, European policy-makers will have only succeeded in digging a hole in the water. And as if that would not be enough, the further erosion of confidence will lead to increased capital flight, effectively reducing liquidity to dangerously low levels, whereby either defaults will occur, or the European Central Bank will have to monetize tons of debt. The latter should not be seen as a solution nonetheless, since such an action will lead to inflationary pressures, which in the midst of a recession are really bad news. A stagnant economy, with rising prices is the most anti-social situation one can find himself in. Finally such inflationary policies will meet the reasonable objection of Germany who will either veto them or prefer to exit the euro rather than living with an undesirably high level of inflation, for an extended period of time. In either case that will be a fatal blow to the Euro.

Political Perspective:

The economic implications of Barroso's eurobonds would have been enough to kill his proposal at birth. Yet the argument against such eurobonds is further reinforced by the calamitous political ramifications.

For such eurobonds to be issued, EU Treaty modifications are required. These are time-consuming and will have to pass by 27 parliaments or referenda to be ratified. Considering that many states are reluctant to give away a greater share of their sovereignty, while others would rather repatriate powers, the process of changing the Treaties asking for the transfer of considerable economic sovereignty to an unelected bureau (the European Commission), or its relevant agencies, will be a Herculean task. Plus it raises a question of principle: Can the EU act in a non-democratic way, just for the purpose of attempting to solve the crisis?

Given the existing democratic deficit at the European level, whereby only the European Parliament is a democratically legitimate institution, an issue of democratic principle will be raised. A call to increase the power of European institutions would only be well received, if drastic democratizing reforms were to occur in parallel. Since the democratic deficit is not likely to be reduced, there will be popular objection to the proposed Treaty changes. Considering how hardly-pressed European citizens are, it would be very unwise from the side of European institutions to show a negative image of a detached bureaucracy with excessive powers, imposing disproportional penalties to all "profligate" states, which in fact are the victims of a global crisis and the systemic malignancies of the euro architecture.

The eruption of nationalism cannot possibly be ruled out under such circumstances. The revival of the ghost of nationalism in Europe will certainly be ill news for the common future of the european peoples. Should that be the final outcome, the road to disintegration is the most likely path the EU will follow.


In a two part interview I took from Dutch econometrician Thomas Colignatus, a few weeks ago, I asked him what he thinks about eurobonds. He said that "Eurobonds kill the market signals about national budgets. One would rather keep those." This is indeed another spot on observation about the negative aspects of eurobonds.

I am convinced that many of Barroso's advisors or even himself are aware of the negative implications of his "stability" bonds. So why is he putting forward such a proposal? I believe the answer is rather simple. Barroso is a politician and like any other individual in that position he serves his own political interest, which is to maintain good relations with the other political powers in Europe. He is aware that soon there will be elections in France and a year later in Germany that might bring to governance socialist parties. He therefore acts proactively to align himself with a "leftist" proposal, so as to improve his position vis a vis those parties who espouse the idea of eurobonds (whether they will actually push for its implementation is a wholly different issue).

Eurobonds, in the manner Barroso describes them will produce adverse effects. They will put even more pressure to the already hardly-pressed architecture of the single currency. Judging from the economic and political dimensions of the matter, one might reach the conclusion that such "stability" bonds will plant the final nail to the coffin of the single European currency.

The Eurobonds of Barroso will do more harm than good | Protesilaos Stavrou

By Alexander Apostolides on November 21, 2011

Another Excellent Article on the economic travesty of Unions in Cyprus

I personally respect the work of three journalists working in two different fields: Stefanos Evripidou on social and issues, Antonis Polydorou on political issues, and Michalis Persianis on economic issues.

Michalis has been a breath of fresh air since he appeared on the scene with his online comments on and his deeper analysis on the sunday edition of the paper. His knowledge is not just on economics but also in many other fields, allowing a very spherical approach and understanding of our problems.

For example, he has been consistently calling for a Medium term Budget plan for over three years, but unfortunately no one listened to him and now we need to release in a hurry as it has been demanded by the European Union.

In the following article which you can see here in print or read it in his excellent blog, Michalis points out that the ideological division of the organised workers and of the cruel bourgeoisie does not hold when 91.8% of business in Cyprus is classed as SMEs (Small and medium size enterprises), while leaders of unions such as Pasidy take home a greater pay than most entrepreneurs.

Michalis is a breath of fresh air in the economic discussions that take place in printed media - I just hope that he is listened to more often. The article as published in Kathimerini is below:

Ημερομηνία: 20.11.2011 | 14:06
Τα φετίχ της «εργατικής» αριστοκρατίας
Του Μιχάλη Περσιάνη
Ένα από τα πιο αναπάντεχα φαινόμενα που βασάνισαν τον Λένιν, ήταν η στήριξη που παρείχαν τα οργανωμένα σύνολα που μετείχαν στη Δεύτερη Διεθνή, στις εκάστοτε κυβερνήσεις τους κατά τη διάρκεια του Α΄ Παγκοσμίου Πολέμου. Αντί οι προλετάριοι να στηρίξουν την εργατιά, στήριξαν τα έθνη, δηλαδή –κατά τον Λένιν– το κεφάλαιο. Φυσικά, ο Λένιν δεν ήταν κανένα τυχαίο κεφάλι και η εξήγηση ήταν απλή.

Την είχε, εξάλλου, εντοπίσει και ο Ένγκελς, ο οποίος συχνά έγραφε στον τρόφιμό του, Μαρξ, για τον συντηρητισμό των προλετάριων: Η «εργατική αριστοκρατία» αποτελείται από εκείνους τους προλετάριους που, μέσα από τον συνδικαλισμό, εξασφάλισαν καλύτερους όρους εργασίας και μετατράπηκαν σε μπουρζουαζία.

Αυτή η διαπίστωση οδήγησε τον Λένιν στη θεωρία του για τον ρόλο του ιμπεριαλισμού στη διεθνή καπιταλιστική σκηνή και δη στον Α΄ Παγκόσμιο. Ο ιμπεριαλισμός ήταν μια αθλιότητα που ευθύνεται για μεγάλο ανθρώπινο πόνο, αλλά ο Α΄ Παγκόσμιος μάλλον δεν οφείλεται σε αυτόν. Αυτό, όμως, είναι ένα άλλο θέμα.

Η δημιουργία, όμως, μιας εργατικής «αριστοκρατίας» (των «σκλάβων του σπιτιού», όπως λένε και οι μαύροι των ΗΠΑ), η οποία δεν θέλει να ταράξει τα νερά, δεν είναι πλέον το ουσιαστικό πρόβλημα για την Αριστερά. Σήμερα το πρόβλημα είναι πολύ μεγαλύτερο και εστιάζεται εντός των ίδιων των συντεχνιών.

Εντός της εκάστοτε συντεχνίας, υπάρχουν μεγαλύτερες ανισότητες παρά μεταξύ των «εργαζομένων» και των «εργοδοτών». Αυτός ο διαχωρισμός έχει αλλάξει ριζικά ύφος και, μαζί του, πρέπει να αλλάξει και η προσέγγιση της Αριστεράς.

Εάν η εκμετάλλευση ήταν αναπόσπαστο μέρος του πλούτου κατά τη βικτωριανή εποχή, σήμερα υπάρχει και μια άλλη παράμετρος – η άνοδος των μικρομεσαίων επιχειρήσεων (ΜμΕ). Λόγω των ΜμΕ, ο «πλούτος» είναι αποτέλεσμα σκληρής εργασίας και όχι της εκμετάλλευσης. (Υπάρχουν, φυσικά, εξαιρέσεις).

Αυτό μάλλον οφείλεται στην παγκοσμιοποίηση, παρά εμποδίζεται απ’ αυτήν. Στην Κύπρο, όλες οι επιχειρήσεις, με εξαίρεση 72, είναι ΜμΕ, ενώ το 91,8% των επιχειρήσεων είναι μικρές, οικογενειακές. Αυτός ο πλούτος, «η Κούλα η ράφταινα», όπως συνηθίζει να λέει αυτή η στήλη, μάλλον είναι ήρωες της βιοπάλης, παρά εκμεταλλευτές των εργαζομένων.

Αντίθετα, εντός των ίδιων των συντεχνιών, παρατηρείται μεγάλη ανισότητα. Γράψαμε πολλές φορές πως ο τρόπος με τον οποίο λειτουργούν οι συντεχνίες, αδικεί τα χαμηλόμισθα μέλη τους και ευεργετεί τους υψηλόμισθους. Μάλιστα, αυτή η στήλη διερωτήθηκε –και ακόμα διερωτάται– πώς υπάρχει τόση ανοχή από τα χαμηλόμισθα μέλη των συντεχνιών για την ηγεσία τους.

Ίσως η εξήγηση να βρίσκεται σε μια άλλη μαρξιστική ανάλυση. Ο φετιχισμός των εμπορευμάτων ήταν μία έννοια που ο Μαρξ τράβηξε από τα μεγάλα ρεύματα των ανθρωπολόγων που άνθιζαν στην εποχή του. Τα αντικείμενα, μέσα από τη διαδικασία παραγωγής τους –την εργασία–, αποκτούν μια σχεδόν μεταφυσική ιδιότητα, «σαν να είναι ανεξάρτητα, προικισμένα με δική τους ζωή». Κάτι παρόμοιο έχει συμβεί, φαίνεται, και με τις πολιτικές.

Στην Κύπρο βλέπουμε μια επιμονή των συντεχνιών, ακόμα και της ίδιας της Αριστεράς, σε μια σειρά από πολιτικές που είναι αντιλαϊκές.

Η ΑΤΑ εντείνει την ανισότητα αλλά η κάθε μεταρρύθμισή της αντιμετωπίζεται ως «κουτσούρεμα», ακόμα κι αν το «κουτσούρεμα» αφορά αποκλειστικά και μόνο τους υψηλόμισθους και όχι τις χαμηλές κλίμακες.

Παρομοίως, ως απώλεια των «κεκτημένων» (ένα άλλο φετίχ) αντιμετωπίζεται και η μείωση των επιδομάτων που είναι αφορολόγητα αλλά συντάξιμα. Ένα τρίτο φετίχ είναι και η συνεισφορά των δημοσίων υπαλλήλων για τις δικές τους συντάξεις, μια συνεισφορά που ουσιαστικά κάνουν άλλοι, συνήθως φτωχότεροι.

Εν τω μεταξύ, ίσως το μεγαλύτερο φετίχ να είναι και η φοροδιαφυγή, η οποία αντιμετωπίζεται ως «εναλλακτικό» της διόρθωσης των προνομίων της «εργατικής αριστοκρατίας». Η λογική των συντεχνιών είναι πως πρέπει να δώσουν χρήματα οι φοροφυγάδες για να μην κοπούν προνόμια από τους πιο εύπορους. Ουσιαστικά, λένε: «Αντί να τα τρώνε οι δικηγόροι και οι γιατροί, πρέπει να τα τρώμε εμείς».

Η φοροδιαφυγή, φυσικά, είναι κλοπή και πρέπει να πατάσσεται, όπως και να ’χει το πράγμα. Αλλά η λογική πως είτε οι Α προνομιούχοι είτε οι Β προνομιούχοι πρέπει να τα φάνε, αγνοεί τα όσα υποφέρει «η Κούλα η ράφταινα» για να πληρώνει όσα δεν πρέπει να κλέβουν οι μεν για να τα τρώνε οι δε.

Εν τω μεταξύ, η οικονομία έχει φτάσει σε σημείο όπου, μελλοντικά, η περικοπή μισθών είναι σχεδόν αναπόφευκτη. Τελικά, οδεύουμε προς μείωση μισθών για όλους, με στόχο να προστατευτούν τα «φετίχ» της Αριστεράς. Χαρακτηριστικό είναι πως, με τις πιο πρόσφατες αποφάσεις, το επίδομα τέκνου αποκόπτεται μόνο κατά 50% για μια οικογένεια με μέσο μηνιαίο εισόδημα 7.500 ευρώ.

Εάν κοβόταν στο 0, και με πιο χαμηλό όριο, θα ήταν πιο δίκαιο, ενώ θα μπορούσε να μας επιτρέψει να αυξήσουμε τη χορηγία των πιο φτωχών και να έχουμε, ταυτόχρονα, και εξοικονομήσεις. Αλλά μπαίνει στη μέση το φετίχ των «κεκτημένων».
Ίσως να ήρθε η ώρα να αξιολογηθούν εκ νέου αυτά τα φετίχ, ιδίως αν αναλογιστεί κανείς πόσο «αντι-αριστερό» είναι το αποτέλεσμα.

Επίσης, ένας αληθινός αριστερός θα τα έβαζε με το κεφάλαιο για να προχωρήσει το ΓεΣΥ. Και πρέπει να εκπονηθεί Μεσοπρόθεσμο Δημοσιονομικό Πλαίσιο (ΜΔΠ).

By Protesilaos Stavrou on November 20, 2011

Why is the eurozone unraveling after the October 26 Summit?

The latest Euro summit was supposed to provide a "comprehensive solution" to the spiraling crisis in the eurozone. Considering the increasing borrowing costs of Italy and Spain, the mounting pressures on the AAA credit rating of France and Austria, the spread of the crisis to Belgium and the failure of the EFSF to raise the desired amount of funds from issuing its own bonds within the process of "levering", no one can possibly argue that the summit was effective anyhow, in at least calming down investors for a short period of time. I was among those who argued from the very beginning that the last summit was a massive failure not only because it did not really produce any definite measures to put a circuit brake to the feedback loops between stressed sovereigns and hardly-pressed banks; but mostly because desperate European elites, found in a desperate situation they had created, produced a series of measures or guidelines that would result in much more problems that they were willing to solve.

The first of these degenerating policies was the further expansion of the scope of the EFSF, the region's bail out fund. Without increasing its actual funds, European leaders gave to this mechanism, which is structured just like the infamous toxic derivatives of Lehman Brothers, an even greater burden effectively assigning to its €250 billion remaining funds the impossible task of covering a €3-4 trillion gap (including bank recapitalizations). I have stated on many occasions my belief that the very structure of the EFSF is toxic, thus from the outset it makes the task of increasing its firepower and scope ever-more degenerative. In the latest summit, European elites came up with the terrible idea of levering up the EFSF, by transforming it into an insurance instrument, which would have the capacity to guarantee the first 20% of the Italian and Spanish debt, to use it in order to issue bonds that would increase its funding capacity from the currently available €250 billion to an estimated €1 trillion. Had the leverage of the EFSF been done by the European Central Bank, the plan could have worked at least in the short-to-medium term. Yet the current setting is disastrous since investors understand that Italy and Spain, by being the third and fourth largest contributors to the EFSF, will effectively be guaranteeing their selves; while also they have the option of investing their money in the much safer German Bunds, so there is no real incentive to buy the bonds of a mechanism that is highly unstable and could easily implode given the amount of pressure it is put on it and the fragile foundations it is established on (the credit ratings of countries who might be downgraded, leading the whole plan to jeopardy) - [for more on the EFSF see Only the ECB can be a bazooka in Europe - EFSF is a tower of cards and The four sources of contagion in the Euro Area].

The second issue is the manner in which the restructuring o the Greek debt will be done. The demand to label the 50% haircut "voluntary", so as to prevent a "credit event" that would trigger the payment of the CDS (Credit Default Swaps) contracts has had a very negative impact on the world economy. It has resulted in the sort of moral hazard, whereby the checks and balances of the global financial system are being violated and undermined by politicians. This has two effects: (i) investors can no longer hedge their investments in the eurozone, by buying CDS, since they have now lost faith in them, implying that they will be much more cautious in providing liquidity to desperate sovereigns, (ii) European elites, succeeded in losing credibility their selves, since there is no guarantee whatsoever that similar "voluntary" haircuts will not be imposed on private investors of Italian, Spanish, Portuguese, Irish and all other debts. In both cases the effect is to reduce much needed liquidity thus making borrowing costs higher. This in conjunction with the lack of automatic stabilizers within the euro area, provide the perfect setting for a "spectacular" run on sovereign bonds that has nothing to stop it (see Nor the ECB nor Technocrats can save Italy).

The third is the bank recapitalizations programme, which is highly problematic and will definitely have the effect of considerably reducing the supply of money in the midst of an overall slowdown in the economy, which suggests that business activity will be deprived of much needed liquidity, in a period were growth is desperately needed. Asking from all eurozone banks to raise their Core Tier 1 capital - and all at the same time - is the sort of fallacy of composition that will lead to a credit crunch until June 30, 2012, when the deadline is (for more see European Bank recapitalizations: An imminent credit crunch).

These are the three main degenerative policies that are already producing more harm than good, to an already hardly pressed eurozone. Yet it seems that the self-destructive propensity of the European leadership is infinite since according to the latest speech of European Commission President, Jose Manuel Barroso, he will soon present plans for "stability bonds" - bonds that will be jointly issued and separately guaranteed by all member-states. From the outset this sounds like complete madness, since it follows the same path of all of the above-mentioned policies, as it will mutualize the system's debt, effectively putting even more pressure to the top ranked states to move downwards, while also these bonds will fall into jeopardy by the mere fact that investors will prefer German Bunds, instead of "stability bonds" that will only lead to further instability.

The inanity of European leaders is unprecedented. The series of self-defeating policies they have come up with these last few years will go down in history as a collection of suicide notes, from a political elite that had no capacity to solve a crisis caused by its own arrogance, errors and consecutive failures to act.

Why is the eurozone unraveling after the October 26 Summit? | Protesilaos Stavrou

By Alexander Apostolides on November 18, 2011

Old comments... But like many other warnings, none listened.....

It was not just me who was warning that things would reach a crisis in Cyprus, but sadly no one listened. I was requested to repost the comments I made previously to the crisis and i take the opportunity to do so in this post.

Here is the Article on "The Economist" warning on the potential problems published on December the 2010. The interview was extensive but looking back the journalist was right to focus on this:

"Alexander Apostolides of the European University of Cyprus laments the lack of urgency. “There is not a feeling that we are on a slippery slope.”

On an non-related issue this is the comment I made and it was published on "The Economist" the real ideological debate within the ECB back in March 2009. This debate between Keynesian and Monetarist principles is now the focus point of the whole EURO project. If the ECB just accepted the principle of last resort or supporting the the EFSF then the Euro crisis would cease to threaten the fragile global economic recovery. Note that if the ECB believes in the ability to influence the real economy then it knows it can provide a solution (even if it is short term in nature). I finish with a quote back in 2009:

"While there might be a definite disagreement on what the monetarist solution is for Europe, both parties within the ECB accept that the ECB holds the answer and fiscal policies of the respective European countries are at best complimentary but at worst unhelpful."
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Bad news for Cypriot Banks in the Greek Stock Market...

From published date 16/11/2011.
Τορπίλισε» το Χρηματιστήριο Αθηνών η Morgan Stanley με τις αλλαγές στο δείκτη MSCI. Ο ξένος οίκος ...έδειξε την έξοδο σε τέσσερις ελληνικές μετοχές διότι η κεφαλαιοποίηση τους έπεσε κάτω από το 1,5 δισ ευρώ. Οι μετοχές που αποχωρούν είναι η Alpha Bank, η EFG Eurobank , η ΔΕΗ και η Τράπεζα Κύπρου.
Η είδηση έριξε στα Τάρταρα τις μετοχές. Η μετοχή της Τράπεζας Κύπρου έπεσε 15,65% διότι οι επενδυτές φοβήθηκαν ότι θα αυξηθεί κατακόρυφα η προσφορά τίτλων τις επόμενες συνεδριάσεις. Σύμφωνα με ασφαλείς πληροφορίες ο αριθμός των μετοχών που κατέχουν τα index Fund ανέρχεται σε 4,2 εκατομμύρια μετοχές ενώ η Morgan Stanley δεσμεύτηκε ότι δεν θα πουλήσει τα 46 εκατ. μετοχές που έχει στα χαρτοφυλάκια της.
Η EFG Eurobank έπεσε 12,35% αφού η προσφορά τις επόμενες ημέρες θα φθάσει τα 14 εκατ. μετοχές. Η Alpha Bank έχασε 11,67% και ο αριθμός των μετοχών που θα βγει στο «σφυρί» φθάνει τα 21 εκατομμύρια. Ο τίτλος της ΔΕΗ σημείωσε τη μικρότερη πτώση κατά 5,86% διότι ο αριθμός των μετοχών που θα αλλάξει χέρια ανέρχεται σε 4,9 εκατομμύρια.
Οι αλλαγές θα πρέπει να ολοκληρωθούν την Τετάρτη 30 Νοεμβρίου 2011.
Σύμφωνα με χρηματιστές για να ολοκληρωθεί η έξοδος των ξένων θεσμικών επενδυτών θα απαιτηθεί χρόνος που φθάνει ακόμη και τις 18 συνεδριάσεις με βάση τον ημερήσιο όγκο που κάνουν οι τέσσερις μετοχές. Πάντως η Εθνική Τράπεζα παραμένει στο δείκτη αλλά αυτό δεν εμπόδισε τους επενδυτές να προχωρήσουν σε πωλήσεις. Η τιμή της είχε απώλειες ύψους 4,30% στο 1,78 ευρώ.
Οι ίδιοι εκτιμούν ότι εξαιτίας των αλλαγών θα εκδηλωθούν πιέσεις στο ελληνικό χρηματιστήριο ενώ οι μετοχές που δεν επηρεάζονται δεν είναι σε θέση να απορροφήσουν τους κλυδωνισμούς που θα προκληθούν στο Χ.Α. Την ίδια στιγμή αναλυτές θεωρούν πλέον βέβαιο ότι ο γενικός δείκτης θα πέσει κάτω από τις 700 μονάδες. Προσθέτουν ότι η στήριξη των 680 μονάδων θεωρείται καθοριστικής σημασίας για την περαιτέρω πορεία της αγοράς. Σύμφωνα με τα στοιχεία της εταιρείας ο γενικός δείκτης έκλεισε με πτώση 2,41% στις 717,93 μονάδες.
Στο σύνολο της αγοράς με κέρδη έκλεισαν 48 μετοχές ,οι 113 με ζημιές και 131 παρέμειναν αμετάβλητες. Ο τζίρος ανήλθε σε 46,8 εκατ. ευρώ.

By Alexander Apostolides on November 16, 2011

Forecasts of the Cypriot Economy: Estimate still on Track

Back in the 14th September, I was asked to estimate the GDP of 2011 and 2012 for Cyprus. I was reluctant to do so since I do not consider myself a forecaster, nor do I have a formal model of the Cyprus Economy that is forward looking.

I do however understand national accounts and how they work, and having recently looked at estimates and with help of others revised the Mari disaster, I applied this knowledge to GDP. Yesterday the Government of Cyprus has released the latest quarterly estimates being negative at -0.6. So up to now total growth of GDP is just 0.7%.

I am aware that this is a flash estimate and I am sure once the additional cost of more expensive electricity gets updated the value added will drop and the GDP fall will be even larger (-0.1%/-0.2%)

Unlike the third quarter, which was considered universally poor from most available indicators and anecdotal evidence, there is a less clear picture for the fourth quarter. The SMEs in the construction sector and support services to construction seem to be recovering. Consumers are upgrading and repairing existing houses and cars rather than spending for new ones, providing substantial work for several repair and SME services such as plumbing, carpeting etc. One is unsure how much of such business is actually recorded since it is largely done in the shadow economy to avoid paying VAT.

At the same time the news from the most dynamic contributors of economic growth, such as the banking and the construction of housing are suffering. The need for the financial services sector to raise capital and prepare for exposures to Greece, and perhaps additional losses due collateral damage of the current turbulence of the markets (see the exposure to the receivership of MF Global) will reduce income generation.

I stand by my original predictions of September: Negative growth in 2011 (-0.1%), weak recovery in 2012 (0.8%) and negative per capita growth for both years. Any one willing to bet on a different number?

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By Alexander Apostolides on November 15, 2011

The Euro crisis and democracy

I am troubled by the idea that Politicians are great during the good times, but in bad times one needs to hand out power to technocrats. I think it makes democracy sound like a luxury that prosperous persons can afford, and that politicians (and by proxy those who elected them) are in this way escaping their responsibility of creating the mess in the first place.

Another interesting issue is posted by Protesilaos Stavrou, who has been blogging constantly and with good insight on the economic issues of the Eurozone crisis. He highlights the lack of democracy of the European Central Bank and how this affects the decisions of handing to it the ability to impose both monetary policy (which it has) but also fiscal policy (in the form of control of finances). See the original article here.

ECB and democracy: The traps of debt monetization By Protesilaos Stavrou

Sooner or later the European Central Bank will have to monetize debts to pacify markets, who see the illiquidity of Italy and Spain as an underlying risk that might make their public finances unsustainable within the few years ahead or even sooner, depending on the overall conditions in the Eurozone first and the global economy second. What should be made clear is that the ECB is already buying sovereign bonds from the secondary markets, via its Securities Markets Programme (SMP), though the quantities it purchases are relatively insignificant to shape interest rates and send a clear message to international investors that there is a determined final backstop in the Euro Area. Having already stated on several occasions my belief that the ECB should take a more active role in combating the disintegrating dynamics of the crisis, I now need to point out some issues relating to democracy, transparency and equality with respect to euro member-states, that are often neglected by the vast majority of analysts, for whatever reason that may be.

First of all, the ECB has been given the unique task to issue and control a currency (the euro) without the existence of a counterparty treasury with jurisdiction over the exact same area. The eurozone is a currency union, an area with a single monetary policy (together with all the rest Community acquis), which lacks a unified fiscal policy, or in other words a single authority that would have the power to raise money from its constituent states, by imposing taxes or issuing bonds of its own. Regardless of what was the rationale behind this setting, the gist is that there is a significant institutional gap in the architecture of the euro that makes the management of the crisis ever more challenging. This currently leaves the whole euro with only one policy leg, implying that any efforts to introduce the missing "leg" would either require a cumbersome Treaty change that will take years to be concluded, given the complexity of law-making in the EU and the need for any Treaty change to be ratified by 27 parliaments, making the labor unfeasible within the rigid time frame of the crisis; or alternatively the introduction of ad hoc measures that would give the missing powers to some mechanism that would lack credibility and would most probably be undemocratic, just like the EFSF, or ultimately to assign to the ECB itself the twin task of monetary and fiscal policy.

Given that a credible Treaty change is practically impossible within the time frame available (what Merkel is saying all the time about changing the treaties is mostly to exert pressure on certain governments to pass the necessary reforms), the only real choice, should full scale monetization be allowed, is to either resort to half-measures undertaken by ad hoc mechanisms, or to give all power to the ECB. In either case we are dealing with an issue of democratic illegitimacy and most probably with the over-concentration of powers to unelected bureaus/bodies/agencies/institutions with basically little to no accountability. The ECB for instance is completely independent and no power can tell it what to do. This derives from Article 130 of the Treaty which states the following:
When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB [European System of Central Banks] and of the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks.
Given this legal framework, the transfer of considerably more powers to an institution that cannot be controlled by anyone, is certainly not a prudent choice. The institutional gaps of the euro make the ECB a supranational entity, not a federal one, like the Fed in the US, which is from a qualitative perspective quite different since the ECB will in fact be above any state and will therefore have the power to impose its own conditions for monetization and discriminate among the states it wishes to support. This might sound overstretched to some, yet there already exists an instance of such coercion back in August, when a letter dated August 5 was sent from the ECB to the Italian government demanding austerity measures to be taken prior to the intervention in the secondary markets that took place during that time. Who can guarantee that similar actions may not be repeated in the future, especially in the case the ECB is asked to perform the dual task of being the treasurer and the issuer of the currency imposing rules and conditions and making discriminations? This democratic deficit is indeed an important issue, one that needs be considered prior to any steps towards such a direction.

On the flip-side, one might argue that the EU as a whole is already suffering from a similar democratic deficit which of course exists from the national level and it increases as we move higher in the institutional hierarchy. For instance the European Commission is unelected, yet the powers it commands are impressive. The point now is not to raise the issue of democracy in the EU, but to add to the discussion the argument which suggests that since Europe already suffers from a structural democratic deficit and since all measures that have been taken so far to combat the crisis are in most cases democratically illegitimate (excessive powers to the monitoring mechanisms in bailed out countries, democratically illegitimate mechanisms such as the EFSF etc.), why not move deeper in to the hole by adopting in full the sort of Faustian policies that are already exercised?

Regardless of where one stands regarding the argument, the point remains the same. We as Europeans are found in a situation where we have restricted our selves by designing a flawed monetary union and we now come to the point where the ECB will, sooner or later, have to monetize debts to prevent the implosion of the whole project. Democratic or not, this seems to be the only path to safety (combined with a series of other measures of course). Given that our leaders have proven to be quite creative when it comes to devising all sorts of complicated plans and bizarre mechanisms, an optimist might suggest that we should expect them to come up with a way to circumvent the democratic issue that has been raised above. Failing to do so in an effective manner, might well lead to unpleasant consequences, suggesting that this issue requires carefully taken decisions, with full agreement by all parties involved. At any rate we are already walking on a very thin diving line between virtue and vice. Alas we brought our selves to this position.

By Alexander Apostolides on November 10, 2011

Lessons from History: Government Wages in Cyprus

In 1931 the British colony of Cyprus was facing a debt crisis. The very serious effects of the great depression, made worse by the worst drought the island had seen in 100 years, led to a lack of funds for the government. The government cut all public works spending, and argued that the situation would get better soon.

Politicians from all communities, discussing in the talking shop (bereft of real power) provided by the authorities (known as the Legislative council) were pointing out that the wished for surplus was not going to materialise, since the same wishful thinking occurred in 1929 and 1930; then the government increased taxation, only to see further deficits and the shrinking of the colony's reserve. They suggested instead:
1) a cut in surplus positions in the government (especially high ranking ones) starting by cancelling the newest appointments and or promotions.
2) A reduction to the COLA (Cost Of Living Allowance) increase (ATA was in Cyprus since 1878!) and performance related increase by 2/3 but not for those with income below 120 pounds
3) Reduction of government scales across the board especially of those who were created after 1914, which operated in a higher scale.

Of course in 1931 the demands were a statement of political intent as wall as an attempt to introduce fiscal austerity to the apparatus of government: The above measures would hurt the British working in Cyprus, forcing some of them to leave and thus weakening the British grip on power in Cyprus.

What is interesting to me however is how modern these demand are in regards to the current problems of Cyprus. ATA - our current COLA adjustment to wages is set to go in hiatus, and there have been calls for it to remain for the lowered income civil servants. At the same time the desire of the majority population to see more public works at the expense of an over-privileged government wage sector is facing resistance by the government itself, which like in 1931 , is worried about the repercussions in its ability to govern.

What is depressing is this is taking place not between a clash of nations but through a clash of vested interests: It is clear that the pay scales of some government appointments have to be re-aligned to the conditions of the demand and supply of the labour market - there simply is no reasons to have an 80% premium for government teachers as it starves the education system of new teachers and distorts the signalling of our graduates.

If history is our guide the results are not encouraging: the government refused to listen and managed to rack up a very large deficit, leading to a outside aid, increased taxation implemented by force and violent riots. Our government's inability/unwillingness to accept the need of similar measures is sadly leading us to the same direction.

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