THE PREVIOUS government’s economic policy was wide off the mark, leading to devastating consequences for the country, said former finance minister Michalis Sarris yesterday before the committee of inquiry looking into Cyprus’ near financial collapse.
The delay by Demetris Christofias’ government in commencing substantive negotiations on a loan agreement with the troika proved disastrous for the economy, said Sarris who served as finance minister under the late Tassos Papadopoulos and in the first five weeks of President Nicos Anastasiades’ government.
Sarris took part in both Eurogroup meetings in March which resulted in the first ever “bail-in” in the eurozone, effectively using bank depositors’ money to wind down Laiki and restructure Bank of Cyprus.
During his testimony, Sarris outlined the mistakes of the previous government, referring to Christofias’ increase in spending on social and other benefits and overzealous protection of the rights and benefits of highly-paid public employees.
He also discussed his brief stint in charge of Laiki Bank in 2012 and his removal from the bank.
Responding to a series of questions by committee chair Giorgos Pikis, Sarris went over the details of the crucial events as they unfolded at the first Eurogroup meeting on March 15, as well as the lead up to them, going as far back as 2008 when Cyprus joined the euro and Papadopoulos handed a fiscal surplus to the Christofias government.
Cyprus’ healthy financial indicators meant the country entered the eurozone in a strong position and was able to neutralise intentions, mainly from Germany, to use euro entry as a pressure point for a solution of the Cyprus problem.
However, the former World Bank director said the clouds of the global financial crisis were already forming in 2008, and measures should have been taken to prepare for that.
“We could have made adjustments (but) we didn’t,” he said.
When the time came for real negotiation in Brussels, the “Damocles’ sword” was visibly hanging over the island, seriously restricting Cyprus’ negotiating position.
Despite desperate efforts, “we had lost all credibility, and even when we told them we’re prepared to fast for ten years to pay our debts, they did not believe us”.
So by the time March, 2013, arrived Cyprus’ credibility was below zero, and the European appetite to make a victim of Cyprus huge.
Sarris argued that the government had three opportunities to negotiate a better bailout agreement with dignity: before May 2011 when Cyprus was locked out of international markets; in July 2011 after Mari and in October 2011 following the massive losses sustained by the Greek sovereign debt haircut.
Instead of seeking the help of Cyprus’ EU partners after the Mari explosion, the government chose to borrow €2.5 billion from Russia.
“The Russian loan allowed us to continue, with (state) expenditure being greater than revenue, and to avoid structural changes.”
The former minister described the following developments as the worst that could have happened to Cyprus.
“Instead of going to the European Stability Mechanism immediately with a programme, we continued for another 18 months with the wrong economic policy.”
Asked where the government should have taken action, Sarris said social spending doubled between 2008 and 2010 from €1.5 billion to €3 billion. And this from a state which already provided help to the most needy and “could not be accused of being ruthless before 2008”.
This untargeted social spending led to a lot of public money being wasted, he argued.
When growth rates slowed and state revenue dropped, measures should have been taken to rationalise public spending on social benefits, the public payroll and hiring in the public sector.
“We protected the high earners of today and sacrificed jobs for tomorrow. We created 50,000 unemployed so as not to reduce wages in state and semi-state organisations. That’s what we succeeded in doing in 2012.”
Regarding the Greek debt haircut, Sarris argued the government could have requested special arrangements like the Greek banks did, which received €50 billion for their recapitalisation.
Cyprus could have asked for €3 billion since 50 per cent of its banks’ operations were in Greece.
Regarding his turn at the helm of Laiki from December 2011 to August 2012, Sarris said he stepped down when central bank governor Panicos Demetriades let him know the bank’s new shareholder, the state, wanted to see a change in leadership.
In a letter to Saris, Demetriades told Sarris that his comments on the need to adjust the country’s economic policy were damaging to Cyprus.
Asked about press reports that his departure had something to do with refusing to lend Omonia football club €2 million, Sarris said he would have done the same with any team.
Regarding his comments made on March 4, that a haircut on deposits wass a stupid idea, Sarris said he continues to believe that.
On the Eurogroup negotiations, Sarris said Cyprus moved dangerously by delaying the start of substantive negotiations on a loan agreement, leaving it so close to the German elections in September 2013.
Providing assistance to southern European countries is a big issue for the German opposition which tries to present German Chancellor Angela Merkel as “soft on the southerners” and ready to easily give away German taxpayers’ money to those countries.
Instead of acting on the pressing issues, the previous government was fighting battles that had no relevance to the needs of Cyprus, he said, a likely reference to Christofias’ pledge to preserve the cost of living allowance and 13th salaries.
As German elections loomed, the German position towards Cyprus hardened, he said, with German Finance Minister Wolfgang Schaueble with whom he met repeatedly saying he would never want to be in Sarris’ position.
By the time real negotiations got started, the IMF and Germany were convinced about the need for a depositors’ bail-in.
Sarris said the Cypriot delegation was shocked when they heard EU Commissioner Olli Rehn propose a haircut of 3 per cent on insured deposits, 7 per cent for deposits up to €500,000 and 9 per cent for over that figure.
EU officials have strongly hinted in the aftermath of the Eurogroup meeting that this was a Cypriot proposal but Sarris insisted yesterday that Cyprus was the only country highlighting that deposits under €100,000 were meant to be guaranteed.
Sarris said Schaueble told him the new Cypriot government had two choices: it could lump a €17 billion debt on the next generations of Cypriots and tax the children and grandchildren of today’s citizens of Cyprus to pay off this debt; or the non-Cypriots could lose some money, mainly the rich depositors who “had a good time” in the last 10-15 years in Cyprus.
Sarris said it was crystal clear in the Germans’ mind that it was politically and economically correct to have a solution which includes Cypriot depositors.
According to the former minister, the European Central Bank had already decided that if the Cypriots refused a bail-in, the island’s two biggest banks would be closed down.
Asked if the Cypriot delegation, during the late night Eurogroup meetings last March, referred to the haircut as being a violation of the human rights of depositors, Sarris said this was raised, particularly with reference to the right to property.
EU citizens have been asked in the past to pay for the mistakes of governments’ bad economic policies, in the form of violating contracts, pensions and salaries.
However, in Cyprus, it became an issue of personal property, raising the issue of EU principles and human rights.
According to Sarris, the Europeans took this into consideration but in their own way, focusing on what they considered the fairest way to share the burden of the crisis and avoid the complete destruction of the Cypriot economy.
He argued that the parliament’s rejection of the first proposal by the Eurogroup was wrong as it led to the closure of Laiki and to capital controls.
Sarris told the panel, “the only euro you have which are equal to German euros are the ones in your pockets. All the rest are in doubt.”
Sarris at the inquiry yesterday (Christos Theodorides)