How long can Cyprus remain “safe”?
Gone are the days when the International Monetary Fund would be a lender of last resort for the world’s poorest states, most of them dogged by problems of free rule and hampered by spending on arms, ignoring the need for national development and prosperity.
Nowadays, with the IMF having reduced its lending to more than a tenth of what it churned out in more than a decade, the world’s biggest financier is cash-rich and can finally resume its role of maintaining stability in global markets by funding rescue packages for developed economies in Europe and Asia, some of which would never dream of an IMF loan in the past.
It all has to start from somewhere. If the forex sector is suffering because of a collapse in government efforts to maintain a fixed exchange rate, the IMF can now help a state inject more money to prop-up foreign currency reserves. But if the equity crash ought to be dealt with at first, then governments can now reach out for financial aid in order to pump more cash into conglomerates that drive a nation’s economy. Corporate giants, be they industrials, banks or travel companies, are the ones who are hostage to the volatile commodity prices, primarily crude oil and materials for good aimed at exports.
Many emerging economies had improved their state of health, getting their house in order since the crises of the 1990s, building reserves and borrowing in their own currencies.
What Cyprus needs to do is consider that equity crashes are often followed by bubble-like overvaluation, something we lived through in 1999/2000, but continued not to learn from that mistake allowing property prices to rise artificially with the market now turning dry and causing a chain-effect that has spread into the other sectors.
If President Christofias and Finance Minister Stavrakis seem so confident that the island’s bank’s are rock solid, despite the growing fear that foreign funds and Russian investors are seriously contemplating withdrawing their deposits here, then perhaps it is time that the government implemented the last few reforms recommended by the IMF in order to qualify for a low-risk loan for development programmes. Unless of course the present administration continues to resist on issues such as abolition of the COLA automatic wage indexation system and avoid a public riot, at the cost of employers constantly hiking their costs and becoming less competitive by the day, resulting in more layoffs.
The choice is now between a rock and a hard place and whether this administration wants the economy to prosper, with or without international aid.