Insupp o
T
cyprus
A Cypriot exit from the eurozone would be
“catastrophic”. By Kyproula Papachristodoulou
he future prosperity
of Cyprus depends on
the Cypriots themselves. This might
sound simplistic coming from a man who
used to teach Engineering Economics at
Columbia University
in New York and has
written extensively
on the Greek and Cypriot financial crises.
Nevertheless, George J. Prokopakis believes
that this view is realistic. In this exclusive
interview with Gold, the former management consultant at the Athens Stock
Exchange, who is now Vice President and
Chief Operating Officer of SPEC Business
Consultants S.A., argues that exiting the
eurozone would be catastrophic and that
the Government needs to implement the
bailout agreement and be honest with the
Cypriot people about the lack of “magic
solutions” to the country’s problems.
Gold: What were the alternatives that
the Eurogroup could have considered
regarding the Cypriot bail-out/bail-in?
Were there alternative solutions and, if
so, why were they not pursued?
George Prokopakis: The previous Cypriot
administration let the problem drag on for
some 20 months. What was a manageable
liquidity problem – I would characterize it
as rather minor – in the summer/autumn
of 2011 became an avalanche. The solution had to be drastic, because the problem
It is up to an
“alliance of the
willing” from within
Cyprus to secure a
better future for
the country
had become enormous. The alternatives
were limited to (a) a “Greek-style” package,
which would cover all needs, would transfer the private debt (banks) to the Cypriot
taxpayer and result in a Memorandum with
devastating provisions for the Cypriots,
since the debt would have been unsustainable; and (b) a package that would “send
the bill” to the actual debtors, i.e., the
banks.
Gold: Only two alternatives?
G.P.: Any other alternative would have
worsened the situation. For example, a debt
write-off would have returned as a bigger
problem, since over two thirds of the state
debt was held by Cypriot banks and lenders. Any other solution would require the
financing of the problem under unknown
terms and conditions. Allow me to draw
your attention to the fact that at the time
of the Eurogroup decision, Cypriot banks
had some €75 billion in deposits and
only €1.7 billion in “loans”. Lenders and
investors had had 20 months to get out of
the growing mess. Any bank restructur-
40 Gold the international investment, finance & professional services magazine of cyprus
ing was bound to hit depositors – this was
known to the Cypriot administration since
November 2012 and to the entire world
since late January 2013 (I am referring to
an Economist article and leaked documents
published in the Financial Times).
Gold: Cyprus’ economic growth over
the past years has largely relied on the
financial and professional services sector.
Many analysts are of the opinion that
the “medicine” administered by the Eurogroup, on the recommendation of the
IMF and the ECB, was designed to finish
off rather than cure the patient. What is
your view?
G.P.:. There is no question that the “medicine” administered by the Eurogroup and
the ECB, will affect banking activities in
Cyprus – with all the adverse consequences.
However, the “financial hub” model is still
up in the air. Cyprus has all the know-how,
skill set, institutional and legal framework
developed over a period of some 30 years,
and it is second to none on this part of the
planet. It is up to the Cypriot government
to implement policies that will restore
banking stability and support this industry.
Even after the Eurogroup’s decision, the
country’s corporate tax rate is still the lowest in the eurozone – there is an incentive
for Greek entities, for example, to have a
base in Cyprus (the difference in tax rates
is enormous: 12.5% in Cyprus vs 26%36% in Greece). It is debatable whether the
banking model (high interest on deposits
and higher rates on lending) really helped
the “real economy”. It pumped money into