THE TROIKA is back on Tuesday, for the three-monthly review of the assistance programme. This will be the second review, Cyprus winning the international lenders’ kudos after the first, for its adherence to the implementation of what had been agreed in the MoU. It was a positive review for which President Anastasiades was praised last week in Brussels by Chancellor Merkel and leading Commission officials.
The first report also identified a number of risks to the full implementation of the programme such as the continued low confidence in the banks and risks of lower than expected revenue from privatisations, not to mention the negative effects of the poor economic outlook. Although some progress has been made in the banking sector – the restructuring of the co-op banks is almost complete and the Bank of Cyprus now has a board and from early November, will also have a CEO – the ongoing clash between the president and the governor of the Central Bank has helped keep confidence in the banks at rock-bottom.
However, it would be simplistic to blame low confidence on this row, as the causes go much deeper and will require much more than a public reconciliation between president and governor to put right. But the feud will not make a good impression, especially once the heads of the troika delegation hear that the governor had been questioned by police on Friday, on the orders of the attorney-general’s office. The European Commission and the ECB consider central bank governors untouchable and their representatives are certain to take a disapproving view of the situation.
But there are much more important issues to deal with. How can the continuous outflow of money from the banks, which is putting the whole sector at risk, be stopped? As things are, only a public, unconditional commitment by the ECB to support the banking sector would restore some public trust and shore up the banks, but it does not seem on the cards. The split of the Bank of Cyprus into a good bank and a bad bank is certain to be discussed as will the troika’s demand to speed up foreclosure procedures. Both issues are certain to spark strong political opposition by parties acting simultaneously as the defenders of house-owners and big developers, but the government will not be able to sit on the fence, as it has been doing with regard to other controversial issues.
For instance, everyone is still behaving as if the privatisation of semi-governmental organisation can be prevented. The government claims that the state will maintain a controlling interest, in an attempt to keep both the troika and the political parties that are dogmatically opposed to the sale of the SGOs, happy. But with the troika expressing concerns that the revenue from privatisations (target of €1.4 billion) will be less than expected, what are the chances the target can be met if the state keeps the majority of the shares? The government will not be able to stay on the fence much longer.
The national health scheme, which is meant to be introduced in two years’ time, could also cause some friction because the government has decided, without consulting the troika, to incorporate private health insurance in the scheme. It is doubtful it will be able to persuade the troika technocrats, who invariably allow numbers to do the talking, of the benefits of a mixed system, because private insurance is very costly for small populations. There is nothing wrong with the two sides having the debate.
What is more likely to cause concern among the lenders is the very slow pace of structural reform. Cyprus is nowhere near implementing the EU cross-border directive for patients to receive the healthcare, for the cost they would pay in their own country, anywhere in the Union. This is not entirely the fault of the government as every initiative for structural reform encounters the obstructionism of senior civil servants or the unions. “Even if direct instructions are given, nothing seems to be done,” remarked a source at the finance ministry which is responsible for implementing structural changes. The government can still not transfer civil servants from one ministry to another, a basic part of the structural change.
It would appear that after the first review, which said the government had claimed ownership of the programme, we have been slipping back to the old ways of doing things – civil servants preventing change, political parties engaging in the old populism and the government unwilling to act decisively. The troika needs to shake things up over the next fortnight because we seem to be reverting to our old ways.
