By George Psyllides
FORMER Central Bank Governor Athanasios Orphanides has charged that AKEL’s deliberate actions in the economy transformed a manageable problem into a catastrophe, as he blamed the former ruling party of launching a coordinated attack on the banking system with the country eventually paying a high cost.
In a working paper he penned at the Massachusetts Institute of Technology where he currently works, Orphanides said to deflect attention from the mismanagement of the economy, “the communist party assaulted the banks.”
“The coordinated assault of the banking system by the communist-controlled government and Central Bank was successful. At a very high cost to the country,” Orphanides said in the paper titled ‘What happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe’.
In the 51-page paper, the former CBC chief outlines the economy’s downward spiral during the Demetris Christofias administration, which raised government expenditure to unsustainable levels.
However, even as late as April 2012, Cyprus could have avoided the catastrophe that followed a year later.
According to Orphanides, a possible solution to the challenge required support from the European Central Bank (ECB).
“If banks could be assured that government debt would remain ECB-eligible collateral, then the government could raise the funds needed through issuance of debt. Banks could finance this debt with liquidity provided by the ECB using the bonds as collateral.”
But to be eligible, Cyprus needed at least one investment-grade rating of sovereign paper.
The Cypriot government debt was barely eligible and one more downgrade would have rendered it ineligible as collateral.
This eligibility rule, however, had been waived for programme countries.
It was possible if Cyprus put in place similar measures without being in a programme.
At a meeting with the Executive Board of the European Central Bank (ECB) in Frankfurt, then finance minister Vassos Shiarly pledged to adopt specific measures before the end of May.
But measures suggested by the ministry were rejected by Christofias and AKEL because they had political cost.
A statement by Shiarly on June 1 indicated his predicament
“During May 2012 I had repeatedly stated my intent to announce consolidation measures before the end of May with the purpose of correcting the deviation of the budget deficit … During a radio interview yesterday the incorrect impression was given that I would have announced these measures within the day. What I said was that during the day I would make an announcement relating to these measures but not the measures themselves. Regarding the proposed measures, even with a small but necessary delay lasting a few days, they will be announced soon.”
Asked about this in a news conference later, Christofias made his intentions clear: “When the President has looked the Cypriot public in the eye many times and has said that no additional fiscal measures will be taken that harm the workers … this President means what he says.”
In retrospect, Orphanides said, it is clear that AKEL never intended to incur the short-term political cost to restore fiscal sustainability.
The party, with the help with the new CBC governor Panicos Demetriades, shifted to the 2013 presidential election and focused on assaulting the banking sector, which they blamed for all Cyprus’ ills.
“In what appeared to be an international campaign towards the defamation of the banking system, the CBC started describing banking in Cyprus as casino banking – suggesting that banks offered high rates to collect international deposits and using the cash to gamble on toxic assets.
“The casino banking description promoted by the Central Bank stuck, and was used effectively against the island later on,” said Orphanides.
