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By Shavasb Bohdjalian
Certified Investment Advisor and CEO of Eurivex Ltd.
As the negotiations with the Troika representatives start in earnest to decide on the price tag of the bailout that Cyprus will eventually request from EU funds/organisations and the IMF, the nation as a whole should realize that there are two strategies to follow, Ireland or Greece.
If the Irish model is decided, Cyprus will need to come clean with the situation at its banks and reveal once and for all the extent of damage in the books of Bank of Cyprus and Cyprus Popular Bank. The three ills of the two largest banks are: losses sustained on holdings of Greek and (to a lesser extent) Cyprus sovereign debt, non-performing loans in Greece and Cyprus, and liquidity issues in the event of possible flight of deposits out of the two banks.
The price tag for the rescue of the banks will then be added to the financing needs of the Cyprus government until 2014 to reach the bailout amount, which is seen by some analysts at EUR 15 bln. Cyprus will then be asked by the Troika to identify and submit a plan on how it intends to pay the EUR 450 mln annual interest on the EUR 15 bln loan assuming that the interest on the loan will be 3%.
It’s not the Troika that will decide how the money will be saved. This is the task of the government which will submit a precise and complete plan on how it will raise money and put its house in order, but the Troika will comment on the methodology and assumptions used by the government to reach its estimates and targets.
Obviously, Cyprus needs to save the money in order to pay the loan interest and if the Irish model is adopted, then the government will need to scrap 13th salary for civil servants and those employed at semi-governmental organizations like Cyta, EAC and municipalities, scrap the majority of allowances paid to civil servants, proceed with 20% across the board annual pay cuts and perhaps also curtail pensions.
The same pay adjustments will also need to be implemented at the banks and maybe the work-week hours will increase, and other measures taken to bring the civil servants and bank employees closer to the pay and working conditions prevailing in the private sector.
If Cyprus decides to follow the Greek model, then this will mean the submission of a plan with over-ambitious revenue assumptions based on tax hikes and lack of action in curtailing government expenses, which will mean the need for additional measures, missed targets, uncertainty leading to no investment, job losses and more misery.
It’s ironic that Ireland agreed to the EU bailout six months after Greece and having completed and met all its targets, it is on course to return to markets on schedule while Greece has missed to implement 210 out of 300 targets, has not done even one large privatization, has not merged the over 1500 government agencies, has not reduced the number of civil servants and generally during the past two years has done absolutely nothing to correct the situation.
Greek Premier Antonis Samaras said Greece is in depression similar to the 1929 depression that affected the US. Has Mr. Samaras done anything since he came to power? Absolutely not. Instead of delivering results and submitting a concrete plan on how the new government will correct the situation, Samaras is asking for more time, more money and more resources from the EU and IMF.
Under normal circumstances, the government of Cyprus should seize the initiative and use the bailout as the scapegoat to push through a massive revamp of the civil service, cut down on waste, red-tape and force the various departments to increase productivity, cut down expenses and lessen the burden on the state finances.
After all, the government could do all the necessary reforms and blame it on the “Troika” and get away with it by telling the people that it’s either pain now, prosperity later as Ireland and Portugal are showing the way – or misery in small doses which will eventually lead to no salaries and no jobs as in Greece.
I believe the people of Cyprus, who showed remarkable resilience and managed to recover from the Turkish invasion catastrophe of 1974 will choose the Irish model rather than follow the Greek model which only leads to destruction, poverty and misery on a large scale.
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(Eurivex Ltd. is a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nomad for listings on the Emerging Companies Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
