THE PRELIMINARY report of the International Monetary Fund (IMF) Consultation Mission to Cyprus is far from being regarded as the panacea for Cyprus’ economy.
Economist Costas Apostolides did not mince his words: “What the IMF has to say is totally irrelevant. They are driven by dogma – the monetarist theory – more than anything else.”
Certainly, the IMF is known for its austerity programmes rather than growth programmes, and critics will also point out that it has got things badly wrong in the past. So when the overriding concern during the current crisis is to prevent the economy from slowing to a standstill or even tipping into recession, its recommendations for sweeping cuts are not well-regarded.
Apostolides said that “in the middle of a recession, you don’t worry about balancing the budget, especially in Cyprus, where we are significantly below the Maastricht criteria” which place specific limits on levels of public debt and government spending. “You need to worry about getting the economy going, getting people to work”, he added, concluding: “What the government needs to do is get the private sector moving, in order to avoid the first peacetime recession in Cyprus.”
Marfin Popular Bank economist Yiannis Tirkides also thinks that the IMF’s ranking of the risks to the economy is wrong.
The preliminary IMF report presented government spending in the form of the public sector payroll, social benefits and CoLA (the automatic wage-indexing mechanism) as being the biggest risk. It also emphasised the banking sector’s exposure in the form of a high concentration of property-related loans. Finally, the IMF mission said that the banks’ liquidity risk should still cause concern, since a sudden need to raise capital in today’s very volatile world markets would be extremely difficult.
Tirkides said that he would place the risks highlighted by the IMF in reverse order: liquidity risk, property risk then government risk.
He thinks that Cyprus’ banking sector is in good shape overall regarding liquidity risk: “We’ve already been doing what we need to do. We have been very conservative on provisioning over the last two years – our own capital ratios of 10-11 per cent demonstrate this.”
As for exposure to the property market, Tirkides said that “if the property market collapsed by 30 per cent or more in a year, then we would have a problem, but this is unlikely for a number of reasons.” The main reason is that “the domestic property market has built-in inertia composed of slow foreclosure and a slow title deeds process, so there are no real shocks – market adjustments come very slowly, as is happening now”.
