A sensible Plan B for Cyprus

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* But it’s in the hands of Merkel, not Anastasiades *

By Fiona Mullen

The Cypriots have spoken. And the answer will keep being no. So the ball is now back in the EU leaders' court.
At home Cyprus faces three choices:
1) Default this week: go back to the Cyprus pound, impose capital controls, close the Green Line.
2) Default in two years: impose 50% losses only on uninsured deposits over EUR 100,000 and lose all international business (one option Anastasiades on Saturday).
3) Fall into the arms of Russia by giving her the gas, the banks and the state institutions.
If the EU wants to avoid any of these scenarios, it has another option, namely to dump the IMF. Let me explain why this is a perfectly sensible and now highly desirable option for Germany.
The primary reason why Germany’s Chancellor Angela Merkel has insisted on including the IMF in eurozone bailouts is to keep the eurozone together. Merkel calculated that having a tough IMF at the table would guarantee that the EU taxpayer would get his money back.
For a while, the interests of Germany and the IMF converged. Be tough, act as a deterrent to other potential bailout countries, get your money back.
But that started to change, around the time that the people realised the IMF got its “fiscal multipliers”, and therefore forecasts for Greece, terribly wrong.
Now we economists always get our forecasts wrong. Goodness knows why people still keep paying us to produce them.
But the price of the IMF bad call was to send Greece into a much deeper depression than the IMF had forecast, with related social consequences that have unpredictable consequences for the stability of the European Union.
Now move to Cyprus, where the IMF insisted on a very fast adjustment programme (check here http://www.moi.gov.cy/moi/pio/pio.nsf/releases_en/releases_en?OpenForm for a good explanation by the Ministry of Finance’s Andreas Charalambous), rather than going for what Charalambous described as a normal, orthodox, structural adjustment programme.
On the basis of this fast adjustment, the IMF expected a further decline in property prices of 50%. See my January issue for how sales prices (not the hedonic Central Bank index) have fallen around a cumulative 40% since their peak in mid-2008, so around 10% per year. So to assume another 50% on top of that is a pretty pessimistic scenario.
This is why there was so much argument about whether the banks needed EUR 6 bln or EUR 10 bln. But with the IMF dictating the terms, it was pinned at EUR 10 bln—EUR 4 bln higher than it might have been.
And yet the IMF put in only EUR 1 bln to the Cyprus bailout package. The net result: having the IMF cost EU taxpayers up to EUR 3 bln more.
Then someone decided that a big portion of the (IMF-estimated) EUR 17.5 bln had to be found by Cyprus, a country with a GDP of EUR 18 bln, a net negative international investment position of EUR 14 bln, and which had already promised a structural fiscal adjustment of some 7% of GDP last year.
We know what happened next (if you don’t, read the FT Brussels blog here http://blogs.ft.com/brusselsblog/2013/03/the-cyprus-bailout-blame-game-begins/) but suffice it to say that the goalposts kept moving on Anastasiades and he had to accept either option 1 above, option 2 above, or a milder haircut on everyone.
Then the eurozone erupted and, I believe, the interests of Germany and the IMF have now diverged.
As we know from the Asian crisis onwards, the IMF’s mantra is for fast adjustment or bust and damn the consequences.
It has no mandate for cuddly things like social cohesion or global peace. That’s a World Bank/UN Secretariat job.
But in the blood-soiled territory of Europe, EU leaders do have an interest in such things.
There are two more reasons to give Cyprus the benefit of the doubt on the amount required.
First, it was on its way to achieving primary balance this year before this fiasco. Once you achieve primary balance, you can pay your debt back without external assistance. Second, it has an estimated 200 years of domestic natural gas supply offshore.
Yes, I am the first to admit that it will take a long time to monetise this gas. But when it comes, it will be significant, around EUR 1 bln per year for a country that raises only EUR 7 bln in budgetary revenue each year.
So dear northern EU leaders, if you don’t want to cut the umbilical cord with the south and thereby create a North European Union of only five (see previous blog http://www.financialmirror.com/blog-details.php?nid=1018), it’s time to cut the ties with the IMF.
Give Cyprus a sensible and humane period to pay its debt back, link it to GDP or gas if you have to and give Cypriots their banks back!