Who’s to blame for Cyprus’ economic crash?

Here’s Hermes’ comment responding to the views Christophoros Pissarides has expressed in the international media (which I’ve posted on here, here and here) regarding the Cyprus ‘bailout’ deal, which Pissarides regards as outrageous and ignorant:

I understand Pissarides is angry at this stage of the crisis. However, when things being to settle a bit, I hope for the sake of Greek Cypriots and Greeks, that Pissarides will tell the truth. The best friends are the ones that are honest rather than the ones that tell you what you want to hear.

Putting aside for a second the brutality of the IMF, EU and German diktats, the fact that Cyprus developed very lax banking standards (even before the Greek PSI, Laiki was deteriorating fast), was very slow in responding by cutting government expenditure below revenues when it became obvious that the banks were very unhealthy, they did not have the wherewithal to recapitalize its banks; the responsibility of this should not wholly fall onto the German and northern European taxpayer. They were prepared to provide most of the funds but not all of them. Also, why would they really care if Cyprus has many accounting and finance graduates. If Germany suddenly priced itself out of exports markets, and thousands of engineers become unemployable, should Greece and Cyprus be expected to pay for that? The Greek Cypriots orientated its economy a certain way; and in turn, churned out certain skills, but did not get the basics right.

Here’s my response:

You’re missing the point, which is that the punishment being meted out to Cyprus does not fit the crime.  And you’re also insulting the intelligence of Cypriots, since no one – apart perhaps from AKEL – denies that Cypriots got carried away, and wanted to create an Eastern Mediterranean Switzerland without the necessary standards, probity and professionalism. They got greedy, complacent. They put in charge of a liberal economy a bunch of idiotic and unreconstituted communists. Too many Cypriots, with relatively modest incomes, because of an ability to take out easy loans, lived millionaire lifestyles. The saga with Vgenopoulos is a perfect example of how Cypriot bankers and politicians succumbed to greed, leaving good sense at the door when he promised them he could make them even richer, when in fact his intention was to loot Laiki to support his dishonest dealings in Greece and for the enrichment of friends and family.

However, having got themselves into trouble, Cypriots did expect solidarity from the EU, not only because the trouble Cyprus found itself was due in part to the flawed way the euro was constructed and the incompetent way the eurozone crisis has been handled; but also because the EU is supposed to be moving towards a political as well as economic union, in which there are no northern European and southern European taxpayers, just like there is no distinction between taxpayers in NSW and those in Victoria. So Cypriots were entitled to expect reasonable treatment from the EU and not bullying, threats, prejudice, lies (about money laundering) and becoming an unwitting pawn in Germany’s forthcoming elections. And unlike Greece, Cypriots didn’t expect to take the money and carry on as before. They were prepared to make massive changes to their society and economy – which was not as rotten and corrupt as Greece’s (though Pissarides’ talk of impeccable or British standards of probity is optimistic) – but instead of being given this chance to reform their economic system, much of which was in good order, they will see it wrecked, with all the social and human consequences – thirty years of hard work, in which there was continuous growth and full employment – all done in the aftermath of the Turkish invasion, in which hundreds of thousand of people lost everything, becoming destitute overnight, and often worked two-three jobs to get on their feet again – down the drain.

And I would also stress that this is not simply an economic or standards of living issue. Because of the Turkish occupation and Turkey’s continuous threats, against which Cyprus’ only defence has been the legitimacy of the Republic of Cyprus and the strength of its economy, what is at stake is national survival – this is not an exaggeration. Indeed, since we know that the existence of the Republic of Cyprus is a thorn in the sides of powerful players in the region – who have sought for decades, and most recently through the Annan plan, to dismantle the Republic of Cyprus – we are entitled to suspect that what’s going on here is not a simple economic crisis, but a means to diminish the Cypriot state and make it vulnerable to the political and geopolitical machinations of unfriendly powers.

*Above and below are two interviews with Chris Pavlou, until recently vice president of Laiki Bank. The first interview, in English with Faisal Islam from Channel 4 news, describes the browbeating Cyprus was subjected to by the troika and the the corrupt dealings of the Greek units of Laiki, whose losses ended up being covered not by Greek but by Cypriot authorities; while the second interview is in Greek with Fanis Papathanasiou from Greek state TV network NET, in which Pavlou describes Laiki Bank as out of control and a political establishment not fit to reign it in.