When politicians meddle with economics
Where is common sense? The madness of ignoring basic market economics
The Cyprus government, under pressure from the Eurogroup and the IMF to de-leverage its relatively oversized banking sector, sold the interests of the Greek branches of the two main Cypriot banks to Pireaus Bank of Greece “with the most beneficial terms under the circumstances and with an important benefit for the Cypriot side.” Euro zone finance ministers had excluded the Greek branches of Cypriot banks from the deposit levy they intended to impose on Cyprus, on condition that those units would be transferred to Greek banks. The sale included 300 branches and their portfolio of about 15 Billion Euro of deposits (8% of Greek banking deposits) and about €20 Billion of loans (10% of loans in Greece) –exceeding Cyprus’ annual GDP of €18 billion. The sale follows moves that sunk in €1.8 Billion of Cypriot tax payers money last year and another €8 Billion of European liquidity funds since then.
Piraeus shares closed up 20% over the day, rising from €0.193 to €0.233 per share. At 1.143 million shares and a market cap of €265 Million (Bloomberg, 23 March) the 20% one day increase amounts to more than €50 Million one-day bonus to shareholders of Pireaus Bank. Actually, this is a lower bound. Just 2 days earlier, on March 20, Piraeus shares stood at a one-year low of € 0.17 per share, representing a 37% increase in 2 days or over a €100 Million bonus. The annualized return might make the Guiness records. All this in the name of “saving” the Cyprus economy by having to close a trivial (really!) €6 Billion gap. As an incentive to “accept” this bonus, Cyprus is supposed to pay Piraeus Bank €717 Million. The €817 Million amount could have been used to help close the gap.
The madness is not limited to the perspective of the Cyprus economy and its inept political leadership. It goes all the way to the EU political level. Yesterday, more wealth was lost in Europe and the global financial markets than the trivial €6 Billion needed to rescue Cyprus from economic collapse. Multiples would have been lost each day if a solution is not found over the weekend. According to Bloomberg, stocks were heading for their biggest weekly decline in four months. The Stoxx Europe 600 Index fell to its worst level since November. The Emerging markets index reached a three-month low. A gauge of European bank credit risk climbed. The cost of insuring against a default of European bank debt rose to a highest level since mid-November. German business confidence also declined. UK gas prices jumped to a seven-year high. The world could have shifted into a panic state with unimaginable consequences for a mere €6 Billion!!!
In Cyprus Parliament last night harsh measures were passed to satisfy the European lenders and end the crisis. But at moments, despite reassurances by all politicians to the contrary that at this crucial moment, when the nation walked at the edge of the precipice, the nation’s interest would be put above all, political egos rose again above national interest.The leaders of the two main opposing parties disagreed over phrasing of words (even though the arguments were repeated four times in front of a national TV audience) concerning an amendment the communist party wanted to attach about the fund benefits affected by the restructuring of Laiki bank. And even though all agreed that parliament would handle this issue in the near future, the amendment was taken off and then put back on, risking the future of the nation (by a few votes if the communist party had chosen to oppose rather than abstain) as a result of a peacock-type fight of words among the two political leaders while the nation was hanging in the balance.
On another level, the Russians would have lost €2 Billion if the initial bank deposit haircut proposed in the Eurogroup had gone through (finally opposed unanimously in the Cyprus parliament), but were unwilling to contribute even that amount during week-long talks with the Cyprus Finance Minister (when his presence would have been more useful in Cyprus during these hectic days of agony whether the nation would come up with an economically acceptable solution or face collapse). Greece, following its traditional solidarity to Cyprus, was happy to ensure that the proposed Cyprus bank deposit haircut would not apply to the branches in Greece. And that the Greek branches of the Cypriot banks would be taken over by Greek interests to “shield Greece and safeguard all deposits held in Cypriot-owned banks”.
This is happening despite the fact that the cause of the near-collapse of the Cyprus economy can be traced back to Eurozone politicians’ earlier decision to enforce the Greek-debt haircut to Cypriot banks without any compensation or safeguard, forcing €4.5 Billion in losses and triggering the series of events that came to nearly threaten the global financial system. In that case as well, EU politicians were negotiating among themselves (having the interest of the German or French banks at heart) whether the size of the Greek haircut should have been 20% or something else and constantly revising the size of the haircut causing confusion and instability in the financial markets –when the precise size of the proper haircut (at 40 or 50%) could already be read in the marketplace. Another foolish and futile attempt at the highest level of the EU political hierarchy to impose politics on market economics.
The latest repeat of EU political elite ignoring basic market economics, was the incomprehensible decision by the group of EU Finance ministers to force a haircut on insured bank deposits in Cyprus, that shook the confidence in the EU banking system and the entire Euro project. That was followed by an unprecedented series of denials and finger-pointing at everyone else. Regardless of who conceived or initiated such an economically unsound and catastrophic idea, the mere fact that over a dozen ministers of Finance approved this and were ready to force it on a small Eurozone country is sheer madness!
And this circus of politicians masked as grand economists in both Cyprus and the EU flirts with the absurd. While the heroic Cypriot parliamentarians voted unanimously (and properly so, given the absurdity of the EU politicians) against the bank deposit haircut, in the last days they were happy to impose even more severe haircuts with a sight of relief. At the same time, the EU politicians, in another reversal, were giving signals that that would not be now acceptable. Hence the winding down of Laiki Bank and more extreme haircuts imposed on Bank of Cyprus deposits.
If national governments or EU politicians are intent to impose confiscation measures in the name of the national (or supernational) interest, at least they should attempt to provide fair compensation in exchange. Fair compensation is set in the market place, not via some arbitrary exchange with near-worthless paper certificates.
Coincidentally, Natanyahu apologizes to Turkey … and a gas pipeline will likely run through Turkey. Some do get the economics right!
Lenos Trigeorgis holds a PhD (DBA) from Harvard University and is the Bank of Cyprus Chair Professor of Finance at the University of Cyprus and President of the Real Options Group. He has been a Visiting Professor of Finance at the London Business School. He is the author of Real Options (MIT Press, 1996), Strategic Investment (Princeton University Press, 2004) and Competitive Strategy (MIT Press, 2011).