Post on 04-Jul-2015
description
The Cyprus debt: perfect crisis and a way forward
Stavros A. Zenios University of Cyprus
Senior Fellow the Wharton School, USA
CYPRUS DEBT CRISIS DISSECTED
THE EUROGROUP DEBACLE
A WAY FORWARD
Outline
Vicious cycle sovereign debt-banking
+
debt overhang
of business and households
+
declining competitiveness
A Perfect Crisis
A positive historical note
Time to default for African and Asian countries
31.5 years
Time to default for Latin American countries
38 years
European countries that defaulted at least once since 1800
22.8% of their time in default
1.5 default episodes per half century
THE CYPRUS CRISIS
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
200
250
300
350
400
450
500
120 140 160 180 200 220 240 260
20
10
de
bt
to G
DP
rat
io, %
2000 debt to GDP ratio, %
Germany Cyprus Greece Ireland
THE CYPRUS CRISIS DISSECTED
THE CYPRUS CRISIS DISSECTED
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
Corporate, non financial Households Financial Government
Ireland, Greece, Cyprus
0 100 200 300 400 500 600 700
Ireland
Greece
Cyprus
Cyprus -post Greek PSI
Mature economies
Households NFC FINANCIAL Govt
Ability to service debt
Household debt vs income
0
5000
10000
15000
20000
25000
30000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
De
bt
or
inco
me
in e
uro
s
Income Debt
Government Debt: 71% GDP
0.00
0.50
1.00
1.50
2.00
2.50
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Debt/Taxes
12
Cyprus Tipping Point: the banking sector?
Πηγή: EKT.
Σημείωση: Τα στοιχεία αυτά είναι για το 2009 και πεπιλαμβάνουν το ενεπγετικό των ντόπιων τπαπεδών στο εξωτεπικό.
0%
500%
1000%
1500%
2000%
2500%
Κυπρος Ελλαδα Ιρλανδια Λουξεμβουργο Μαλτα Ολλανδια Ηνωμενο
Βασιλειο
Τ
ΝΟ
ΛΟ
ΕΝ
ΕΡ
ΓΗ
ΣΙΚ
ΟΤ
(%
ΣΟ
Τ Α
ΕΠ
)
Ξενα Υποκαταστηματα Ξενες Θυγατρικες Ντοπιες Τραπεζες
And hot money
0.0
5,000.0
10,000.0
15,000.0
20,000.0
25,000.0
30,000.0
35,000.0
40,000.0
45,000.0
50,000.0
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Mill
ion
eu
ro
Domestic Total non-residents
Cyprus Banking hubris
Can we get export-led growth?
-20
-15
-10
-5
0
5
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Current account balance %GDP
Competitiveness
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 2011 2012
Ireland UK Cyprus Spain
Cyprus Fiscal Sustainability
EC Report 2013-2015
0
10
20
30
40
50
60
70
80
90
100
Short run crisis
Financing aging population
Adjusting primary account balance
The Eurogroup debacle
Enter Heroine: Austerity
5.5% GDP fiscal adjustment
Reforms and privatizations
Over four years
Impact on GDP -1.38%
Bad Politics in the Way of Good Policy
Enter Villain: Bail-in
German Secret Services secret report
Basel Institute of GovernanceAML Index
Cyprus 4.93
Holland 5.03
Germany 5.80
Haircut Russian oligarchs
Who gets a haircut?
68.4 billion (insured) deposits in Jan. 2013
26-30 billion Russian money
What does a haircut look like?
Russian “oligarchs” Eurobankers
Wipe out wealth 30% GDP
Slash business activity 9%-25% GDP
Freeze 70% of domestic lending
Freeze working capital of SMEs
And the GDP?
IMF projections pre-eurogroup -3.5%
IMF projections post-eurogroup -9%
Massive legal problems
Emergency Liquidity Assistance worth 9.2 billion
Extended to an apparently insolvent bank for 1 year
Passed on improperly to a solvent bank
Three court stay orders
What does a haircut look like?
A way forward
Policy options
We need a Collin Powell Doctrine*
Throw superior forces at the problem
Counter-attack multiple problem cells simultaneously
*Remember not to kill the patient!
Policy options
Austerity deleveraging
Structural reforms
Financial Innovations
Partial privatizations
Debt restructuring
European Stability Mechanism
or
Official Sector Involvement
Debt restructuring with GDP-linked bonds
Credit enhanced by natural gas proceeds
“Anyone can count the seeds in an apple, but only God can count the apples in a seed”
Karl Marx “Society poses itself only such problems as it can solve”
John F. Kennedy“Our problems are man-made, therefore they can be solved by men”
Stavros A. Zenios amendment
“Our problems are man-made, therefore they can be solved by women”