PRESIDENT Christofias may have agreed to the memorandum of understanding and the legislature put this agreement into force by approving a long list of bills in the last week, but there is still appears a long way to go before the lenders release funds. Approval of the bailout is not just a formality, as some have suggested, but will require a lot more effort and planning on our part to reach this goal, as many complications have surfaced. Nothing could be simple or straightforward when a host of parties, with different interests are part of the decision-making process.
There have been press reports of a dispute between the IMF and the European Commission over who would provide the funds for the bailout, with the former taking the line that it would not contribute to the loan package, in its current form. According to a report, earlier this week, in the German newspaper, Suddeutsche Zeitung, the IMF supported a haircut of the government debt, on the grounds that Cyprus would be unable to pay the interest on the loan, even after the memorandum provisions were implemented.
Finance Minister Vassos Shiarly categorically denied there was such a possibility, insisting the IMF had not made any such reference. The head of the euro group Jean-Claude Juncker also denied the report, saying that “on my part I want to rule out this possibility.” However, Juncker will be stepping down at the end January and behind closed doors, European politicians and technocrats are expressing serious concerns about the sustainability of the debt. On Friday, Chancellor Angela Merkel’s spokesman, pressed to say whether there would be a haircut of the Cyprus debt, said nothing could be ruled out and everything was on the table.
Another hair-cut would be problematic for the euro group, which had insisted the Greek hair-cut was a one-off, as it would shatter its credibility and put additional pressure on the euro. But the fact that it has not been ruled out by the German government should give cause for concern. Even more worrying is the threat of the IMF not to contribute to the bailout package, which Germany considers of critical importance for the obvious reason that it does not want to be burdened with a bigger share of the funding. This dispute complicates things for Cyprus, even though an IMF suggestion that its contribution to the bailout could be funded by Russia has not been ruled out by Moscow. President Putin said on Friday this was a possibility, confirming earlier reports that Russia would be willing to lend money to Cyprus within the framework of an EU bailout.
While this would resolve the issue of IMF funding, which Germany insisted on, we would then have to deal with debt sustainability. Although, everyone is said to be waiting for the Pimco report about the financing needs of the banks, it is considered certain at the Commission and the European Central Bank that even with our best case scenario – banks requiring €9.3 billion – the debt would be unsustainable. An ECB board member, quoted by Reuters of Friday, confirmed this point. “It is already foreseeable that after the final data, the financing need will be so high that the debt level will be very high and unsustainable,” said Joerg Asmussen, adding that measures to achieve a budget surplus and privatisations would then be looked at.
Would President Christofias give his consent to privatisations after insisting that he would never agree to them? And to achieve a budget surplus, even more austerity measures would be required, that it is difficult seeing any Cypriot politician agreeing to. Christofias would be more than happy not to sign a memorandum including privatisations and additional measures, leaving the responsibility to his successor. But would the state have any money to meet its financial obligations by the time the new president is sworn in? What if the debt would be unsustainable even after privatisations and more austerity measures?
This may seem a wild shot, but the only other option is for the Cyprus Central Bank to propose to the troika that the methodology that was used for defining non-performing loans, for so many years, was not changed so abruptly. The abrupt change of methodology has added billions to the banks’ financing needs. We should argue that first the legal framework needed to be put in place and a three- to four-year adjustment period given before the new methodology for calculating NPLs was fully adopted. This would be good, regular practice that would drastically reduce the banks’ financing needs and make the debt sustainable, something which would suit all parties concerned.
We may have left it late, but it is worth a shot, because it is the only way debt sustainability would cease to be an issue.