Cyprus should dare to act in her own interest

     Once again the Eurostriches have sent a country to the dogs and condemned a polity to an economic ordeal that should be unacceptable in civilised nations. With few reasonable options on the table, to avoid a decade of hardship and a series of humiliating negotiations of which this will surely not be the last, Cyprus should reintroduce its national currency.
    Ironically, it was the haircut imposed on Greek creditors that has dropped Cyprus to its knees and forced her politicians to beg cap-in-hand for someone to save them. The  depositor losses have been caused by the decisions of a handful of people in the Treasury departments of the local banks, and their current position depends largely on their allocation to Greek debt.
    The shortfall that triggered this ‘bail-out’  was a little over 14 billion euros. The Troika offered 10, and demanded Cyprus conjure the remaining four, understanding well that this would have to be snatched from the citizenry.
    As with Ireland, before the crisis Cyprus’s debt-to-GDP – everyone’s favourite arbitrary ratio – was actually lower than the Eurozone average. This is not a story of profligacy combined with blatant falsification of national statistics, the sins for which Greece continues to suffer politically.  Rather it was the economic disaster sparked on the opposite side of the globe that lead to the current woes of the Cypriots.
    It is somewhat unclear, to put it mildly, of the effect of reintroducing a currency. Bank accounts would need to be frozen and overnight converted one-to-one into the new denomination. Safe to say once banks reopened it would crater, leaving depositors poorer in foreign currency terms. The reasons you would reinstate it, namely to pay salaries, build infrastructure, pay for medical and other welfare systems standard in humane nations, would push the currency down even further, and all foreign products would become more expensive.
    The corollary, however, is that everything made in Cyprus would be far cheaper. Admittedly at the cost of efficiency, local industries would thrive and unemployment would drop. Those without a job would find ample new business opportunities as local businesses would have a huge advantage over their foreign competitors. As an added bonus for those of us overseas, we’d be able to holiday in Cyprus and live like kings, which is as good a demonstration as any of how a reinstatement of a sovereign currency would facilitate recovery.
    Like Greece and the other peripherals, Cypriot prices in general need to come down for the economy to be competitive. Wages need to be lower, as does the cost of doing business more generally. With a floating currency this incredibly complicated kind of adjustment happens broadly, instantaneously and effectively.
    Along with their fellow peripherally condemned, Cyprus has instead locked herself into an internal devaluation. Each reduction in wages has to be mandated or, at best, negotiated, job by job, with the simplest way to cut wage bills being to fire workers, with all the corresponding economic and social consequences. Rather than all Cypriot goods becoming cheaper instantaneously and evenly, individual prices will have to be slashed good by good, as the losses sure to occur over the coming months and years force sellers to discount heavily to clear stock. There is nothing smooth, nothing even, nor anything fair about the way this will be done. Save a large pickup in economic activity beyond the island’s shores (not completely unlikely) this will surely take years at best.
    An unfortunate complication is the accepted narrative that the ills of Cyprus are just punishment for their attempt to provide a local haven for black Russian deposits from the mafia, corrupt officials and tax dodgers. The exaggeration of this simplistic vignette allows otherwise policy makers to justify the arbitrary theft of savings with clear consciences.
    And let’s not start on the ridiculous moral hazard argument that is somehow supposed to apply to deposits. It is absolutely bizarre to suggest savers should conduct the kind of difficult and complicated financial analysis that even the best usually get wrong – and for good reason. An illiterate worker or grandparent with poor eyesight should not have to analyse if the 3.5% offered by one bank compensates for the risk of default compared to their competitor offering 3.2%. The consequences of these kinds of decisions, which depend on unknowable sequences of events that are by nature impossible to predict, should not rest on those least able to bear them. It is the role of regulators to ensure capital losses don’t reach so far up the capital structure. When they do, the failure is clearly one of government, and that is where the losses should lie. For reasons shown in previous crises, as well as morally, savers should be protected.
    The case for keeping Greece in the Euro was one of panic conversion – there is no doubt that from the Greek perspective, there were better outcomes possible than the current continuing ordeal. Converting the currency would require capital controls, perhaps border controls and the forced conversion of currency in bank accounts. The Euro-wide panic and disorder this would have caused, particularly when confidence was so shaky, made the decision an easy one.
    But clearly in Cyprus these arguments do not apply. Capital controls have already been introduced. The evaporation of savings has already occurred. And no matter how excited journalists and the politically curious have been of late, the situation is simply too trivial in size to move the needle on a euro-wide basis, and that different rules will apply to larger countries is broadly recognised.
    The hawks in the Eurozone have made it clear that they would prefer to condemn Cyprus to economic torture, rather than pay a price of around 10-15 euros per citizen. This is both their legal right and even fair – there were no illusions as to the lose of sovereignty when Cyprus joined the currency bloc, and the Cypriot Hellenes have certainly taken full advantage of their membership in their festering dispute with the Turks. However, it is in the interests of all Cypriots, who may manage to avert a depression to once more hold their destiny in their own hands and control their currency and monetary policy. While they most certainly will follow through with their current plans, now is the time for Cyprus to act in her own interest. She should reinstate the currency and save her citizens from the maw of Depression.

2 thoughts on “Cyprus should dare to act in her own interest”

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