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Revisiting the 2013 financial crisis

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The financial crisis that hit Cyprus in March 2013 affected the lives of most families in Cyprus, including mine.

I was very young then, but I understood something was seriously wrong.

Growing up and realising how badly the economy was affected, I wanted to learn more about what really happened in 2013 and how a developed country like Cyprus reached the point of disaster.

Nine years later, I decided to get some answers from someone who lived through these events during that period.

I was given an interview with Michalis Sarris, the Minister of Finance of Cyprus, in 2013, who had been tasked with negotiating a financial rescue package with the Troika (IMF, EC, ECB) of €10 bln.

This interview was an ‘eye-opener’ because I realised how many mistakes we made as a country, government, and people.

The questions that I put forward to Sarris are questions raised by an 18-year-old who thoroughly researched the events between 2008-2013.

I intended to shed light on what happened during that period for those my age so that we do not repeat the same mistakes in the future.

The Sarris interview

Other counties (Spain, Greece, Portugal) asked for financial support from the EU and signed an agreement within three weeks. It took Cyprus two years to sign. Why the delay?

Cyprus was an unwilling partner – it had no sense of urgency.

The government thought that asking for help from the EU and the IMF would have meant it was not doing a good job with the economy.

This mindset was not present in the case of Greece, Spain, or Portugal.

Another unfortunate fact was that the Cyprus President at that time was from the left-wing party (AKEL), and his philosophy and political position were against the requirements of the Troika – for example, the abolition of the cost-of-living adjustment on wages.

Another factor that delayed the signing of the agreement with the EU was that our government received a loan of €2.5 bln from Russia, which took the pressure and sense of urgency away – in the short term.

The delay was fatal for Cyprus because the situation of the banks worsened, and the people lost confidence and started withdrawing their money.

Consequently, the capital requirements of the banks and the non-performing loans increased rapidly.

By the time we were ready to sign an agreement, the situation for the banks and the economy was beyond salvation.

Is it true that Cypriot banks were greatly exposed to Greek debt? How did Greece’s PSI (Private Sector Involvement) in July 2011 affect Cypriot banks? Could the government have prevented it? 

It was a terrible decision by the Cypriot banks to invest so much in Greek bonds because, apart from the fact the Greek economy was not doing well, they should have diversified their risk by not putting all their ‘eggs in one basket’.

The PSI worsened the situation for the Cypriot banks because they lost €4 bln in the haircut of Greek government bonds.

Unfortunately, there was very little cooperation between the Central Bank and the Ministry of Finance at that time.

Therefore, the Cyprus President went to these meetings without the coordinated support of his two major economic advisors.

As a result, our government agreed to a very dramatic PSI when it should have asked that our banks be treated the same way as the Greek banks – because Cyprus had a very large percentage of its portfolio in Greece.

The EU programme to support Greece included €50 bln to compensate Greek banks for their losses.

Later, when I was appointed Chair of Laiki Bank, I tried to ask for support under the special fund set up to recapitalise the Greek banks, but it was too late.

Why did HSBC exit Cyprus in 2008? If HSBC had remained a shareholder, would Laiki have been saved from bankruptcy in 2013?

At the time, HSBC adopted a new policy to concentrate its business in core markets – and Cyprus, for them, was peripheral as they only had 20% of the shares in Laiki.

Moreover, HSBC started to get nervous about Cyprus because there was a rapid growth in deposits, mainly from Russia, too much lending in the real estate development sector and some disagreements between the shareholders and the management of the bank.

It is reasonable to assume that had HSBC stayed, it would have been able to influence Laiki to make better decisions – even though nobody can be sure.

Of course, we now know that Greek investors who subsequently bought the shares of HSBC behaved recklessly, which affected Laiki Bank’s fortunes disastrously.

For historical reasons, the Cooperative Bank in Cyprus was not under the supervision of the Cyprus Central Bank. Yet, it also required a €1.5 bln bailout. So, why did nobody raise the issue at the time?

The Cooperative movement in Cyprus had a romantic aspect; it was known as ‘the people’s bank’ where the owners and the shareholders were farmers and other small businessmen, mostly in rural areas.

Politically it was considered more acceptable to keep this bank out of the supervision of the Central Bank, in retrospect, a big mistake.

Moreover, the Troika trusted the government that it would take the necessary measures to correct any issues – something that, unfortunately, did not happen.

To make things worse, the government did not have the right people in place to overcome the problems.

The Troika suggested to the Cypriot government to privatise the Co-op at a certain point, but there was no political appetite to do this as it was thought that this would make the bank lose its historical identity.

The Cyprus banking sector has downsized significantly. However, depositors still fear saving anything above the €100,000 threshold. Do you feel confidence has been re-instated among Cypriot depositors?

Confidence has surprisingly been re-established quicker than originally thought.

When the haircut of deposits and the closure of a major systemic bank took place, everyone thought this would lead to a long-term loss of confidence in the banking system of Cyprus.

Fortunately, people felt that this was a one-off phenomenon.

Cypriots and foreigners now trust that banks have changed their behaviour and are better capitalised and better supervised.

Why did the EU choose a bail-in for Cyprus instead of a bailout adopted for Greece and Ireland? Were we treated unfairly by our partners because we are a small country?

The idea of a bail-in was considered at the time as something that would be used more frequently in the future. Cyprus was a convenient case to start with the bail-in because it was a very small economy and a very small part of the European banking system.

Consequently, a bail-in would not lead to contagion; it wouldn’t make people in other countries too nervous and wouldn’t result in a loss of confidence.

Cyprus was also chosen because it was a country where the banks had seriously misbehaved, giving out too many loans, which ended up defaulting.

All in all, we were treated unfairly, but this way, we managed to move on quicker out of the crisis instead of having to adopt a long and painful programme, as was the case in Greece.

Our position during the negotiations with the Troika was that Cyprus could have covered the gap of €7 bln through the European Stability Programme and repay its debt of €10 bln. Do you think this was a viable scenario for Cyprus, or would it have ended up defaulting, as Greece did?

Given how well we ended up controlling public spending, Cyprus has shown that it had the fiscal discipline to have also adopted the traditional European Stability Programme.

By 2016, we were able to have a primary budget surplus.

I believe that, even though it would have taken longer to pay back the debt, we would have managed well under the Stability Programme.

Was accepting to lead efforts to recapitalise Laiki in 2012 a mistake? Do you have any regrets about becoming Finance Minister in 2013?

Looking back, I do not have any regrets about accepting to become the Minister of Finance in 2013 or leading the efforts to recapitalise the Cyprus Popular Bank in 2012 because I was doing it for my country – as I did when Cyprus successfully joined the Eurozone.

Perhaps, my only regret was not being able to persuade the Parliament to accept the first agreement that I concluded with the Troika under which all depositors in all banks would have contributed a very small percentage of their deposits of 9.9%.

As a result, the bail-in was inevitable, imposed on Cyprus, and many lost all their deposits.

What was the greatest difficulty you faced as soon as you became Finance Minister, and why did you resign?

The most serious difficulty was that Cyprus had very little credibility when I took over.

Our European partners felt that Cyprus was not a reliable party based on how we handled our affairs in the past. This left us with very little negotiating power.

Cyprus was alone, and nobody was willing to support us – not even Greece.

When the Cyprus Parliament rejected the first agreement I reached with the Troika I described earlier, I decided to resign.

The government at that time wanted to distance itself from the haircut on deposits, it was looking for a ‘scapegoat’, and I was the obvious one.

By Margarita Markidou, Year 6, The English School Nicosia