The Cyprus financial crisis: finding the guilty ones

07 May, 2014 | Posted By: Jim Leontiades

By Dr. Jim Leontiades
Cyprus International Institute of Management

Who is responsible for the financial crisis? Cypriots have understandably been disappointed, not to mention furious, at the apparent failure of the various investigative committees to bring persons responsible for the financial crisis to justice.
However, the purpose of such investigative commissions is not to convict. As their name implies, their unique competence is their ability to investigate a wide number of issues and thereby shed light on the multiple forces behind a particular event, e.g., the financial crisis.
Persons appearing before these commissions are not on trial. They are asked to provide information by responding to questions. They have neither the assistance of an attorney or the ability to challenge statements through cross examination. These committees are not courts of law. Indeed, they must be careful not to infringe on the judicial process. If the evidence is sufficient they may identify individuals that merit going before a proper judicial procedure to determine guilt or innocence.

Another factor behind the difficulty of finding the guilty is the confusion between those events which are simply associated (but not responsible) for the crisis and those both associated and responsible for it. Many of the events mentioned fall into the former category.
For example, the much talked about issue of money that escaped Cyprus just before the March haircut is clearly a result of the crisis and not responsible for it. Similarly the media focus has been about corruption, property scandals, forgiven loans, reduced payment loans, etc. These are not unique to the Cyprus crisis.
Such events have always been with us and are to be found in many countries, with or without a crisis. There is no doubt that where such actions have broken the law, the persons involved should be brought to justice. But, the crisis would have happened even if this type of law breaking had not. Why is it important to make the distinction between criminal associated with the crisis and criminal activity which contributed to the crisis? There is a saying that those who do not know their history are destined to repeat it.

The fact that the crisis was on a global scale, including North America, Europe, as well as Japan tells us that its cause was not a uniquely Cypriot event with a uniquely “Cypriot “cause”. Europe, and particularly the Eurozone, played a major role. Joining the common currency enabled countries which formerly had difficulty borrowing money from international markets to borrow freely and at much lower interest rates (Greece is a prime example). Furthermore, countries which joined the common currency no longer had to worry about what might happen to their exchange rates as between themselves and other member countries.
By eliminating exchange rates and exchange rate risk between member countries, joining the Euro also lowered the risks of international investment. Cypriot investors, including our banks, found it much easier to expand abroad. Greece was the natural target for such expansion. This eventually exposed Cypriot banks to the great losses associated with the Greek default on government bonds as well as the subsequent sale of their Greek-based assets. This does not to absolve the bankers from bad management decisions related to this expansion, and others.

I agree with the Pikis Commission of Inquiry which found that the evidence pointed to the Christofias government as carrying the primary political responsibility for the crisis. It is true that national debt of Cyprus toward the end of that government’s term of office in 2012 was no greater than the average for other countries within the Eurozone. More important in this connection was the rate of growth of the national debt. This nearly doubled within that government’s term of office.
There were also factors external to Cyprus which bear responsibility. I have no doubt that in future years studies of the crisis will conclude that the, architect of the Cyprus “bail in”, the Eurogroup, was guilty of incompetence, flawed economics and unfair decisions. They clearly have political responsibility for much of the crisis not only in Cyprus but in other Eurozone countries. But don’t expect to see any of the heads of state which make up this group before a court of law.
Undoubtedly, a major contributing factor was the bankruptcy of Laiki and the persons and agencies associated with it. The actions of the European Central Bank should share in this responsibility. If any issue is to be brought to the European Court of justice, I would suggest that the actions of the ECB and the fact that it irresponsibly supplied Laiki with loans greater than 50% of the Cypriot GDP should qualify.
These are only selected highlights. Establishing guilt will unfortunately prove elusive. Which persons and events were responsible – were they criminal or merely the result of incompetence. When does incompetence turn into criminal negligence? I do not envy the judges their task.