Gold Magazine March - April 2013, Issue 24 | Page 56

OPINION

What Lies Ahead?
Expectations are high after the
Presidential Elections

A

t last, the elections are over and the
new Cypriot President, Nicos Anastasiades, has taken office and formed
a government. Expectations are high
and there seems to be a renewed optimism among citizens that a new government, with
fresh and innovative ideas, will resolve sooner rather
than later the numerous problems that the country
faces. Psychology plays a major role in shaping the
future and the first signs are that this has improved,
both inside the country and also in the way that
foreign officials and investors view Cyprus.
However, massive problems remain and the new
government has a very difficult task to accomplish.
First, there has to be a final agreement and signing
of the memorandum, by the end of this month at
the latest. The reason is that it will take some time
for the funds agreed by the Troika to arrive and we
all know that on June 3 €1.4 billion worth of government bonds will have to be repaid. Thus, June 3
can be considered our own “fiscal cliff” and Cyprus
needs to make sure by that time that the funds are
available to honour its obligations, otherwise that
would imply default with all of the negative consequences that such a development entails.
Before arriving at a final agreement, a great deal
of work still needs to be done. First, the government may need to secure a short-term loan, either
from the Europeans or a third party, in order to
have enough funds for its immediate needs before
receiving money from Troika. The government also
needs to prove to the other members of the Europen
Union that it means business by signing the Memorandum as well as taking all the necessary steps to
accomplish the reforms and fiscal/banking adjustments under the agreement. Cyprus also needs to
convince its European partners that they are wrongly
and unfairly accusing the island of being a tax haven
or a money-laundering location. Unfortunately, the
prolonged delay reaching agreement with the Troika
meant that we were caught in the middle of an
election campaign in Germany. One outcome has
been that the German government and politicians
have been extremely harsh on Cyprus in an effort to
prove that they are not willing to use their taxpayers’
money for bailouts of “corrupt” countries.
Furthermore, measures need to be taken that will

We shall emerge
from the crisis
as a much
more solid
and structured
economy, with
more fiscal
discipline and
a healthier
banking sector

By George
Theocharides

make the country’s debt sustainable, so that an end
us put to this damaging discussion about haircuts
either on government debt holders, or on uninsured
depositors in the banking system. First, a meaningful
haircut on government debt holders (which would
substantially lower the debt level) is extremely difficult to achieve given the fact that only a small portion of government debt is owned by foreign private
investors (less than 21% of GDP). Given the fact
that the debt level in the near future could exceed
140% of GDP, such a haircut would not make a
huge difference. Second, a haircut on uninsured
depositors (i.e. deposits above the level of €100,000
that are guaranteed by the Central Bank) could easily cause bank runs and the complete destruction of
the financial and banking sector. The govern ment
therefore needs to find alternative ways to make the
public debt sustainable, so as to avoid the privatisation of profitable state-owned enterprises which is
strongly supported by the Troika. Over and above
the much-anticipated recapitalisation of the local
banks, the government needs to adopt anti-austerity
measures that will promote growth and help solve
what seems to be the country’s biggest problem
– unemployment – by creating new jobs. These
measures could be incentives for the swift recovery
of the crucial construction/lreal estate sector, the
utilisation of government land, the development of
technological parks, the creation of casinos, and the
drastic reduction of bureaucracy in the civil service,
among others. Obviously, the prospects relating to
the recent finds of natural gas in Cyprus’ Exclusive
Economic Zone are one reason to be optimistic
about the country’s future but it will take time to
see the benefits and start earning revenues that will
substantially lower the level of public debt.
Overall, although many obstacles lie ahead, I am
optimistic that, with the right and carefully-thoughtout moves, we can get soon the economy back on
track. I would even say that, in the medium to long
run, the changes that are being forced upon us by
the Troika and the Memorandum will actually make
our economy more resilient. By implementing the
provisions of the Memorandum, we shall emerge
from the crisis as a much more solid and structured
economy, with more fiscal discipline and a healthier
banking sector.

info: George Theocharides is an Associate Professor of Finance at the Cyprus International Institute of Management (CIIM). He is also the Director of the MSc in Finance & Banking.

56 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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07/03/2013 11:53