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Cyprus: Central bank “leaker” saved us from bankruptcy

27 January, 2013

Opinion by Fiona Mullen, Director, Sapienta Economics Ltd

Whether he or she is based in Frankfurt or Nicosia, the person who alerted the opposition Democratic Rally (DISY) to the imminent collapse of the banking system should rewarded with a Makarios-sized statue on Kennedy Avenue, not a knock on the door by police.
Imagine you are that official last November. You have witnessed the growing frustration of the European Central Bank (ECB) with the leadership in Cyprus.
You know that Cyprus Popular Bank (CPB/Laiki) is only able to survive because the ECB allows the Central Bank of Cyprus to pump EUR 9 bln to EUR 10 bln in Emergency Liquidity Assistance (ELA) every month as the bank cannot raise liquidity anywhere else.
You have been in central bank circles long enough to know what it means if that tap gets switch off: Laiki goes bust, the other banks follow and in the worst case scenario, they have to bring in the army to maintain order as Cypriots realise that their substantial savings have disappeared overnight.
The Finance Minister has tried and failed to explain this to the President. The Central Bank Governor has done the same. He is on the phone to journalists begging them not to report that Laiki is leaking deposits fast (subsequent data show that in fact it lost more money to other Cypriot banks in earlier months than it did in November, so he did have a point).
The journalists give the Governor the benefit of the doubt. But the President does not. He is not listening. He does not get it. Or perhaps he does but he thinks it is better for communist AKEL that the capitalist banks collapse.
So what do you do? You fight fire with fire. If a technocrat cannot persuade the president, perhaps a politician can.
You get in touch with the opposition. If you are clever, you did this in person, not on the phone or email. You tell them that the ECB has planned to turn off the ELA taps on 20 January.
DISY’s response is swift. According to Politis newspaper, DISY leader Nicos Anastasiades sends a letter to the President on 16 November, telling him he will be held not only politically but criminally responsible for the collapse of the economy.
After the 13 fatalities of the Mari blast, it is a threat big enough to make even the AKEL Central Committee quake.
Three days later, the day Anastasiades was due to go public, the President gives his in-principle assent to the troika demands. It is not quite the signature desired but it is enough to get the ECB to withdraw its threat.
Meanwhile, the semi-government organisations promise to hand over enough money for the government to make it through until after the election so that the current president does not have to sign.
Thanks to you the Cyprus economy has been saved … except that the German opposition now says it will not support a bailout. This time, you might want to advise the new president to break with tradition and head straight for Berlin instead of the traditional first trip to Athens.