Guest Post from Marios Zachariadis: Fairness and Sustainability for Cyprus

Marios Zachariadis is an economist at the University of Cyprus.  Here is his guest post:

Fairness and Sustainability for Cyprus

The Cypriot economy is being shocked via numerous channels. First, the loss of working capital by Cypriot businesses: 40%-90% of their deposits over 100,000 euro held at the two main banks. The second is a liquidity shock due to the remaining deposits in these banks being frozen for months. Overall, 90%-100% of deposits above 100,000 have either been confiscated or frozen in the two banks. The third channel relates to a significant loss of confidence in the banking system. The last two shock channels are amplified by unprecedented internal and external capital controls forced upon Cyprus. The fourth channel relates to the loss of a good part of a major sector i.e. banking, finance and related services. The fifth relates to the adverse wealth effect on a number of households and professionals who saw most of their wealth in the form of savings disappear overnight. One last adverse shock has also been in place for a while as Cyprus implemented austerity measures several months before the recent agreement for a Memorandum of Understanding (MoU) with the Troika. Moreover, the current rescue plan’s obvious non-sustainability makes it rational for households and firms to expect more austerity, which affects current consumption and investment plans.

The overall likely outcome is a double-digit dip in GDP growth for 2013 with positive growth rates out of reach for several years thereafter. This might explain why the IMF refrained from publishing forecasts for Cyprus in its most recent World Economic outlook as these would either contradict optimistic Troika forecasts in Cyprus MoU or look bad down the road.

What can be done to remedy the situation? It goes without saying that Cyprus needs to implement measures agreed in the MoU in a timely manner, and do more to implement growth-enhancing reforms by fixing structural problems that pre-existed before the arrival of these shocks. But this will not suffice. The burden undertaken by Cypriots is unsustainable. It has become so large due to the indecisiveness of the previous government but also because of the intrinsic unfairness of the solution imposed.

Why is the magnitude of this burden unfair and as a result unsustainable? To begin with, one simply needs to ask the question: Why were the deposits at the branches of the two Cypriot banks in Greece excluded from haircuts? These amounted to about 15 billion euro of deposits as compared to 26 billion in the same two banks in Cyprus (Dixon 2013), which suggests that about a third of the haircut, i.e. up to three billion euro, could have come from depositors of these banks in Greece. One might understand why the banking system in Greece and the Eurozone should be protected in this manner. After all, the will of the ECB and the Commission to avoid any direct contagion risk was evident in their insistence that Cyprus sold its bank branches in Greece, or the Troika would not agree to a bailout. But Cypriot depositors and taxpayers cannot afford to offer insurance that costs them a couple or more billion at such heavy discount.

One can also understand that the Central Bank of Cyprus and the Eurosystem could not just realize a loss by selling inadequate collateral of a bad Cypriot bank (LAIKI) that the ECB appears to have funded via Emergency Liquidity Assistance (ELA) for a long time after it was apparently insolvent, without impairing ECB’s ability to keep doing the same for other Eurozone banks. Xiouros (2013) argues that ELA has claims only against the collateral so what was done to avoid a loss could be illegal. On the other hand, realizing such a loss would amount to illegal monetary financing and would have exposed the ECB, undermining its ability to help troubled banks just a few months before the German elections. Thus, the need to push the envelope by adding the ELA of a bank that was shut down (LAIKI) to the balance sheet of another private bank (BoC). The ELA that was used for liquidity of LAIKI depositors in Greece should not permanently burden another private bank. It would even be preferable to have this loss placed on the government’s shoulders.

In that case, it would become obvious that Cyprus needs debt restructuring, either Private (PSI) or Official Sector Involvement (OSI), which the European Commission is also trying to avoid for political reasons e.g. PSI for Greece supposedly a unique event (Gulati and Buchheit, 2013) and OSI a forbidden word before German elections. It should, however, become clear to Europe that if there is no PSI so as to insure the euro zone from contagion, there will have to be OSI later.

In the absence of a Marshall-type plan in the form of targeted EU transfers of 2-3 billion euro and some form of retroactive application of the Banking Union or PSI/OSI for Cyprus, we are looking at a Great Depression disaster. Cyprus’ hope is that, if anything, by resolving the moral hazard issue this bail-in precedent makes Banking Union more likely. In that case, Cyprus needs and deserves some sort of retroactive implementation of the Banking Union for part of its ELA burden. These numbers should be understood in the context of a country with a GDP of less than 18 billion euro that, driven by its bankers and politicians short-sightedness, has already contributed to Greece’s rescue program a quarter of its GDP (4.5 billion) due to the European political decision for a PSI for Greece in 2011.


Dixon Hugo, April 2013, Bad Resolutions, Reuters Breaking Views

Gulati, Mitu and Lee C. Buchheit , March 20 2013, Walking back from Cyprus, VOX EU article

IMF World Economic Outlook, April 2013

Xiouros Costas April 2013, Handling of the Emergency Liquidity Assistance of Laiki Bank in the Bailout Package of Cyprus, SSRN

48 replies on “Guest Post from Marios Zachariadis: Fairness and Sustainability for Cyprus”

Remember : Our government welcomed this. Welcomed….. Riiiiggggt.

“Why were the deposits at the branches of the two Cypriot banks in Greece excluded from haircuts? These amounted to about 15 billion euro of deposits as compared to 26 billion in the same two banks in Cyprus (Dixon 2013)”

Straightforward theft from the Cypriot people, to pay off depositors in Greek banks. All mandated by the Troika, particularly the ECB.
Forget about taking a case to the ECJ. There is now no rule of law in the EZ, as far as weaker nations are concerned.
This was an act of war against the people of Cyprus.
The sooner the EZ is broken up the better.

@ Marios

Thank you for your clear exposition. What has happened and is still happening in Cyprus seems horrendous, commiserations, I wonder when it will be our turn.

Bofinger (a German “wise man”) has suggested that it was wrong to target depositors. This was a decision by the Cypriot government to bail out BOC. It should have imposed a wealth tax on Cypriots to pay for it. A wealth tax by definition would not have hit Greek citizens so I can see the logic of the Greek branches being excluded.

Other observations that I have made is that Cyprus chose this course itself. Unlike the situation here in Ireland where the ECB seemed to be very keen that Anglo should be bailed out, it would appear to me that they would have been rather indifferent if Cyprus had chosen to let its banking system completely collapse.

Another observation which I have made is that according to that infamous ECB report the average Cypriot household had 10 times the net wealth of the average German household. So the scope for a wealth tax seems to exist.

Thanks. But there are several misperceptions or inaccuracies in the comment: Certainly not the decision of the Cypriot govt to hit depositors! However, they did go along with a proposal of the European Commission (and even preferred) hitting insured depositors together with uninsured ones (see 1st Eurogroup) to limit the damage to the economy as they perceived it. Bofinger suggested it was wrong to target insured depositors at the time. Finally, the haircut did not happen because the Cyprus govt preferred bailing out BoC (the largest systemic bank). It would have happened even if both BOC and LAIKI banks were resolved. This is because, in the absence of European transfers or banking union, there was no way the govt could afford paying for the 100K insurance guarantee without a haircut on uninsured depositors. The 100K guarantee alone would amount to a sum much above 15 billion for the two banks alone!

@ Marios

The Cypriot government had the option to let the banks fail and let the deposit guarantee fund be divied out amongst the insured depositors, costing the Cypriot government nothing, but causing great hardship to depositors, insured and uninsured alike. The hawks in this blog argue that this should have happened to our banks. This is capitalism. The banks go bust, let them and let all their stakeholders take the inevitable consequences.

The difference between Ireland and Cyprus is that in Cyprus’ case the optimal solution was almost entirely for them to find. The ECB would probably have let the Cyprus government walk away from its banking system if it so chose. In Ireland’s case the argument goes that the ECB took a very keen interest in making sure all depositors and senior bondholders of our bust banks were protected by the Irish taxpayer. Personally, I think our own government had the same desire and they were right.

In summary, Cyprus seems to have a lesser case than Ireland for complaint against the ECB/IMF/EU. There was a limit to the official support that would be forthcoming, based on very optimistic scenarios of sustainability, but there was no insistence on bailing out either depositors or bondholders, that was a Cypriot choice.

@ Marios Zachariadis

Thanks very much for the guest post.

Some thoughts:

Euro-exit: this is going to be a hot topic for you for years. How can you have a debate which is passionate, informed and productive? At this end there has been, and still is such a debate, but at times it has become more shouty and dismissive of other positions than it might be. As the range of possible outcomes from a euro-exit is anything from; really quite beneficial to; Armageddon on toast, you can see why people get worked up. Also there are political, international, practical issues all of which need thought and action. But this issue will be live for years now.

For myself, I note that the eurozone is currently a currency trap, but it is certainly not merely an economic issue and, as a nation, deciding to be in or out is not just a number crunching decision.

If the Eurozone is to survive, and even expand and deepen as planned, how can it be made a more than a top-down structure fetishising certain figures (debt to GDP) over others (unemployment)? President Michael D Higgins made a good speech on this recently.

On this blog, David O’Donnell influenced by Habermas is very good.

Parallel Currencies: A few countries have toyed with this. I’ve noticed the Brixton Pound (nonEZ) in the UK and something in Greece. As you are early in your process, perhaps this is one your country could have a serious look at early otherwise it will keep bobbing up now and then and never really come to anything.

As you point out, Cyprus has a lot of reasonable grievance with the international community and yet many Cypriots are pointing inwards as to the ‘real culprits’ as being from within the nation itself. This has and is happening in Ireland too. It runs the gamut from ‘it’s all our fault’, possibly something to do with our national characteristics, to, it is all conspiracy by powerful outside forces, in your case: to take all the gas. This is also compounded by the extent to which it is a financial crisis caused by the recklessness (and denial of the recklessness) of the banking system. A Minsky moment in a FIRE economy. Personally, as a pop-psychology thing, I think people don’t like to feel helpless and would rather blame themselves (was it something I did?), than be mass victims of a power-play they could not influence.

You will get used to certain people always hammering their own version of events: and use that partial version to further their own take on what needs to be done.

If it is affordable, perhaps a conference would be useful with delegates from Portugal, Spain, Greece to help you get on top of what to expect.

Your MoU, as you point out, is nuts. But I have hopes that Cyprus is going in to a bailout at a point where the whole austerity-will-restore-confidence-and-thus-growth idea is being pushed back. Because it is wrong. I posted this a little while back, but I think it is worth a read.

“Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis”

Henry Farrell, George Washington University
John Quiggin, University of Queensland

You point out: “In the absence of a Marshall-type plan in the form of targeted EU transfers of 2-3 billion euro and some form of retroactive application of the Banking Union or PSI/OSI for Cyprus, we are looking at a Great Depression disaster.”

I note that the Commission, in a bit of an attempt to no longer be such villains are looking to get the Structural Funds moving quickly. I think there is traction for Cyprus there. The smallness of Cyprus’s economy may be an advantage.

In the bailouts so far I think the initial terms were impossible/savage which were then later eased with a post-hoc justification of, well, they (whoever they are) wouldn’t have done the necessary if we hadn’t started tough. In the case of Cyprus I think that point might be worked on to come more quickly.

It would also be very useful for the Cypriot side to put as much conditionality as possible into the MoU.

On another level as tourism is so important for Cyprus any initiatives in this area would be very important. Have a look at ‘The Gathering’ for the Irish crack at this. I’m ambivalent about it, but I understand it. Any chance of the French lending you the Venus de Milo for a year as a symbolic gesture of solidarity?

Anything that can be done for people to take back agency, socially and personally, should be taken on.

Also, as this will be a rolling thing, any appetite for a namawinelake type initiative?

George Soros seems to be against the destruction of Europe, so you might want to ask Philip Lane how you can get practical support for Cyprus’s economic engagement with the key issues.

Finally, this from blogger Rothbard has an air of ‘no, really’? But I reckon is worth a follow up – you can add it to WW2 reparations as an avenue to explore.

The more you read of Cyprus the more it looks as if has been bombed back to the Stone Age by the EZ. Small countries on the periphery of the zone should be fearful.


I live in East Germany, with a median household worth of 20 k.
To imagine that just one single cent goes via OSI from here to rich Cyprus, is just completely absurd.

Take your rich, criminal, and russians to the cleaner, and you have plenty of money to finance your turn around. This is also the recommendation of Bofinger and the 2nd of the 5 “wise men”.

You should be extraordinarily grateful for the huge and extremely generous credit, the AAA states have given to you. Dont screw it up. We wouldnt like that.

You didnt read the article did you before biliously spewing all over the keyboard?

Oh, and was that a threat at the end? Once again, germany is winning all the battles but losing the war – this time at least its only on austerity.

Tja Francis…und als Ostdeutschland mit Begrüßungsgeld begrüßt worden ist…da hat sich keiner Gedanken gemacht.

The 15% 1 million exodus happened before formal reunification.
We did not go around with a hat to ask our neighbors to contribute.
We swallowed the cost of 100 % GDP. We bought social peace and stability, and built social capital.

Just as people here are willing to pay 28 c/kWh, and folks in the US and Canada are angry about 8 c/kWh.

And we were hard on our own people. Too hard? Compared to poland or Czech, not so. Compared to what folks in the GIPSI states now dont think they can endure? Yes.

What is the appropriate measure?

Ze Germans have a long track record of being hard on other people, ask the Gypsies.


Wolfgang Schäuble from 17:29minutes in in this link, then Karl Whelan, Jörg Asmussen, Stephen Donnelly: Stattsgeheimnis Bankenrettung from Tagesspiegel Journalist Harald Schumann

So ….it’s like this…Irish Taxpayers are being very großzügig for our huge extremely generous credit to bondholders, many of them German.

Moin aus Hamburg übrigens.


The payment of “welcome money” ended on 29 December 1989, as it was never intended to be paid out to such large numbers of visitors. This was replaced with an arrangement whereby GDR citizens could exchange 100 M into DM at a ratio of 1:1, with an additional 100 M exchangeable into DM at a ratio of 5:1. This arrangement ended with the economic and currency union in July 1990, when the DM became the sole currency in both German states.

So…even Wiki will tell you it wasn’t a once off, and there was an estimate error even then…oh wait a minute…

Like many others, I lived in West Germany at the time and had the costs of reunion automatically deducted from my wage.

Theme Cyprus filling up the press pages online. Spiegel hasn’t posted it’s synopsis in English yet, but in this just out:
it says that the figure is 10bn not 17bn as reported.

Govt ist drafting legislation over the weekend until banks open Tue, it must sign a Memorandum of Understanding to avail of the funds, a third of which is likely to be provided by the IMF. Strong arm-tactics to make Govt agree to the conditions, oh so familiar.

So it’s 1-0 to wealthy Russian bondholders, with ca. €26bn there.
German economist Hans-Werner-Sinn said in “Welt am Sonntag” that the only systematic relevance Cyprus had was in relation to Russian money-laundering.
OK, so that explains the 2.5bn€ ‘aid’ by Russia at low interest with an extended payment period.

From 130313

Germany esp. FinMin Schäuble is adamant that bondholders do not take a hit…again. Why?
Well, in the same way that ‘bailout’ money in Ireland can be seen to ultimately fund bondholders, many of them German [eg. Harald Schumann’s recent docu:: Bankenrettung, Staatsgeheimnis, Bank Bailouts State Secret], here in Germany the ‘bailout’ will help local interests.For example: HSH Nordbank is in dificulties and has exposure of 1.6bn€ in Cyprus, mostly in shipping with registrations under Cyprus flag. NordLB has exposure 1.4bn€, possibly more, since that figure is from a stress test in 2011.And so on…….


both tull and dorothy are making good points here.

Given the frequent use of unusual german words here, like “schlussendlich” (seafoid), and german links, I feel free to also give german language links.

markets are closed, I have the strong intention to fade out here, 1: 30 am the latest. I closed all other traffic.

so first at tull (and brian indirectly):

I know my country’s history well.
I saw the pictures of roma and sinti expulsed from the land of “egalite, fraternite, liberte” last summer, somewhat rude, to say the least.

The more I want to point to

that the head or whatever you call it , of Roma and Sinti in Germany do not call for just granting generous asylum, but for the german government to pressure other EU governments to keep to human rights, EU treaties for minorities.

The honest assessment of history, issues. I really admire that. We solve problems by adressing them, fairly, honestly.

Again, we dont want to be the shiny white city on the hill, upper quarter of the character distribution is good enough.


thank you for the schäuble youtube link. What he says is honest and correct.
The same goes for social democrat Asmussen.

What is not so honest and correct, is the arte guy.

Since you did it, it seems that Karl Whelan can now be mentioned here again.

To Francis: please read the article again, but making instead the assumption this is an honest account of what’s happening. My economist opinion/assessment is that even if Cyprus implements all necessary measures as I recommend above, numbers just don’t add up so it will have to default eventually, unless other measures are adopted by the Eurozone as described above. However, Cyprus will face huge non-economic costs in addition to any economic cost if it defaults, which is mainly why it should try its best to stay in the eurozone (which, again, will not suffice without external help). For example, defaulting will worsen even more its relations with its only potential allies in Europe, creating problems in its territorial dispute with Turkey, and in Cyprus ability to use its natural gas reserves, if proven, down the road. Finally, keep in mind that via all the channels I describe above, Cyprus has given more help as share of its GDP to Greece than any other country, including Germany. If you like, Cyprus (and its taxpayers) have been the Germany of Southern Europe in terms of its contributions to the Eurozone’s stability in one way on another.


With respect, I would not waste my time or thoughts engaging with Francis.

As I work in private industry, I understand and empathize with all businesses that have had funds confiscated or frozen.
Although I am not an economist, I think the shock to the Cyprus economy will be greater than many anticipate. Krugman, as I understand it, has guesstimated a 20% fall in GDP. [Personally I think it will be worse than that.]

The IMF as you point out have declined to forecast. They know what is likely to happen and they should be compelled, if that is possible, to put figures on the destruction they have caused. Naturally they do not want to, hoping that the passage of time will allow them to pin the blame for the collapse on other factors.

On the link posted by John Gallagher above, I am surprised that such weight is given to the fact that ELA is ‘preferential’ in the argument against a euro exit. The presentation goes on to spell out very negative consequences for Cyprus, if you were to leave the euro.
But these consequences are predicated on a viciously hostile institutional response form the EZ and all countries within it. Some countries and Germany in particular may want to go that route, but I doubt that the majority would agree to vindictive actions.

The treatment of Cyprus by the European powers and their institutions will go done in history as a very shameful act.
Now the EIB want to throw a 100million fund just to pretend that the new Europe is not all bad.
You should reject it and leave the EZ. The very first ‘creditor’ you should burn is the ECB.


Good post. re the link

I had seem that posted before on this site but cannot remember by who.
Who is Charles Hugh Smith? Is he credible?
If the figures are correct, then the Russian hot money was just propaganda.
The real issue was to wait for EZ large bank deposits to be paid back, mostly through ELA, then pull the plug.

This is exactly what happened in Ireland. from recollection there were huge bank bond maturities in Sept 2010 (almost 50 billion). These were paid back with ELA/ECB money. Then Ireland was ‘bailed out’.

The other interesting take is that some EZ banks are very much in the loop as far as the official decision making process is concerned. Perhaps they even influence the timing of ‘events’.

@Gavin,their is an academic paper-link above-“lets face it Cyprus can not leave the euro”,by one Mario’s colleagues.

To Gavin Kostick: thank you. all your advice is welcome. I do think Cyprus best bet is to implement in a timely fashion, making sure that when numbers do not add up the blame goes to those that deserve it. The idea would be to get early and relatively sizeable help while implementing the MoU to the letter. Not much else to do. The other route is default and exit related to Joseph Ryan’s comment above. But that would really be a “7th shock” which’ll also haircut severely (loss of value of savings via devaluation) middle income households and small businesses that did not get hurt, and which will not do much in an economy that depends on imports of energy and every other input that goes into production. In Cyprus case, a devaluation would work like a oil price hike shock.

@ Joseph, John, Marios

I’m afraid the Charles Hugh Smith blog looks flaky (which doesn’t mean he’s wrong). The key chart is from mdbriefing so it might be worth chasing up there. Be interesting if it were true and went mainstream.

Cyprus can leave the Euro. It would be a massive jump and a big majority would want to be behind it and prepared for very large changes. It’s not all about the numbers. It’s up to the Cypriots to decide if they should.

My point is more that it would be actually useful to lay out a map and a set of options of what this might look like otherwise you will have an endless cycle of heat without much light.

To Mario: perhaps you could also have a word with your colleagues in Greece/Spain/Portugal/Ireland who have had direct experience in negotiating with the Troika?

If the issue is energy then you might be grinding things out for a few years until the gas comes on line. I’d invite the plucky Norwegians (yes, very dissimilar case) over to talk about how they exploited and managed their resources.

The Icelanders put emphasis on social unity and have had a go at a creative response.

It’s the area I work in (and my company has presented some work in Reykjavik). Fancy a three-island festival of arts and society?

@Gavin,first thing here just being funny,but Iceland:)
“Because it was an emergency situation, a temporary, drastic solution was needed – Icelandic capital controls. It has now been five years, and the Icelandic authorities are openly discussing keeping the capital controls for decades to come. The controls have been holding back Iceland’s economic recovery, causing Iceland to become relatively poorer every day.”



I emailed you but have no response! :-(( I presume my yahoo address got filtered into your spam. Go have a peek. I need an actress!

btw, all, I went to Richard II in the Peacock last night – first time its been staged in 70 years in Ireland! Thoroughly recommend. [He’s not the one with the hump. Nor the Lionheart. Very camp in fact, which the text permits. ] It’s got the This sceptered Isle speech. Great stuff.


Das Pendeln zwischen Irland_Deutschland for over 30 years…it just makes you think. The most hostile environment though was definitely Ireland…and I’m Irish!

Germany is a much more benign environment than most people imagine.

It feels like home, and it is. Spring in Hamburg: Beautiful.

mario, dorothy, john,

I will respond with a few more words tomorrow.

trying to explain an increasingly hard stand here.

john, on the greek war claims. It is an interesting question, how they want to bring this forward. I had discussions about that about 2 years ago.

The major line of thought is, that they do not accept the 1990 2+4 treaty, “instead of a peace treaty”, for Greece, and declare the reopening of hostilities ……

That would become some interesting situation, given that most of their weapons were donated by us.

@francis,regards as always,it was too lighten the mood on here,oh i understand your stance and different opinions are always welcomed.The view stateside on Cyprus not too different than yours,just expressed a little more diplomatically.

@Brian Lucey

“You didnt read the article did you before biliously spewing all over the keyboard?”

Best thing I’ve read all day…. made me laugh anyway…..

but then, to put it in perspective, I’ve been reading life policy terms and conditions all day and trying to think of a positive marketing message out of them….. Got und Himmel (or whatever it is the Germans say) do people buying these things actually read the small print and know how much is being taken out of their intial investment over the lifetime of these so-called investments by way of charges, etc? I suspect not.

But getting back to the topic….. surely if the IMF are not prepared to make a forecast, you know it has to be really really bad? I think Cyprus is phuqued myself and it will turn out to be a lot worse than most fear. A shame. I lived there for a while once and loved the place and the people.

@ PR guy, Mario,

I did read the article.

Mario, all

1. No pollyanna talk, no panic either

2. We do know here, what undeserved hardship and deep structural change means

3. Not one cent from me

4. A better future with going separate ways?

1. No Pollyanna talk, no panic either

I am not here to provoke, but to mostly listen and try to understand. So I refrained (near total : – ) from commenting yesterday, and thought how to bring bad news across.

It appears to me, that a lot of people here are still living in their head in the “good old times” of some historically unique long streak of rapid growth and prosperity.

Like Germany in 1976.

Mario, I don’t see it as fruitful for the rest, if I repeat several things I said here. Could you kind of search the posts of the last 2 weeks for my name?

These golden times are gone, forever. The Nordics learned that begin of the 1990ties, Germans around 2000. Now it is your turn

This is not a reason for panic.

On historic, international scales, living standards in Europe are still very high, after 20% or somewhat more cuts.

2. We do know here, what undeserved hardship and deep structural change means

I am not here for whining, just trying to explain a few things

a) Dutchess county

I started working in the NY, US , in deep IBM territory, where in Dutchess County the number of employees went down from 40k to 8k from 1993 to 1996, in a county populated with 260 k people. Unexaggerated house prices had fallen by a factor of 2. Too bad I didn’t understand economics at that time.

The services of my German company were still formidable, so I was driven by a “relocation expert” a.k.a. real estate peddler to the local SS administration, to apply for a SSN. She locked the doors, when we entered the city, and I wondered for a short moment, until she asked me to check the revolver in the glove compartment to be fully loaded.

A few minutes later I understood.
On certain days our Japanese colleagues were asked to stay at home, that nobody gets hurt.

But seven years later the county was back at 2.3% unemployment, and I would have made a killing if I would have taken one of the offers from my Russian landlord, to buy the apartment.

Some former “business partner” was either really lying on his death bed, or stiffed me successfully out of about half years work. At some point I just didn’t want to know anymore.

b) Eastern Germany

I did meet a few days ago an old colleague doing volunteer work, collecting garbage along the Elbe here.

He is close to 60, bright guy, born in the wrong place at the wrong time. Born in Kansas, or even California, he would be worth several millions.
Before reunification he belonged to the technology elite in the Warsaw pact, building even a 1 Megabit chip, just about 1 year behind the west. He invested in the house he lived in, he was one of the 1 %.

The vast majority of factories in the East closed, and the majority of those close to the border in the West too, because there was suddenly much cheaper labor in Poland and Czech and further to the East. One of the nice things about Poland and Czech coming up so well, with little help from the EU, is that this stabilizes the lower wages in my birth town in the West as well : – )

Reunification came, and his house was claimed by the pre 1945 owner, his company was downsized 90 – 95%. He then worked for a research institute, the American boss had fantastic ideas to turn it into a foundry, they even had some kind of deal with Intel, just that all became unraveled in 1998, when it became clear that this was just a pipe dream, and the very most employees had to be let go.

He then joined Qimonda, after a few years this went also haywire.
The layoffs started in spring 2008, in summer it became clear that a 1/3, the “backend” had to go, and more, the people working there, traveled to Portugal to transfer their jobs to the Portuguese colleagues.

We went completely bankrupt early 2009, because the prime minister refused to sign off an emergency loan. That did cost me some 9 month wages too.

The folks who traveled to Portugal 6 month earlier, did not even get their travel expenses, because the liquidator explained, if he makes an exception, other creditors could and would sue him, and the mere existence of such a lawsuit would take his 90 people liquidator company out of business, too.

Some people also had gone to Merkel, since this was at that time the last leading edge semi company/factory in Europe, and talked about “strategic importance”. Her answer was similar to “Ford to City: Drop Dead”

Now what is important about some off shore banks in Cyprus? We have way too many of those, and too many steel mills, and car factories too.

But if we wouldn’t have signed some waivers, it would have been probably the end of the parent company, and the area here would have been back to 30 % deeply structural unemployment of highly qualified people (PhDs), in Europe.

He then went on to work for a photovoltaic company, which went bankrupt last summer, because we subsidize the sale of the electricity, but not the jobs, which have gone now to China.

I said this to some people 4 years ago, but Bosch, a 400 k people company sank some 2 or 3 billions into that area too. So, can I blame my colleague for being stupid? No.

I could fill pages here with other examples, where the reaper went through the social fabric of regions, my hometown include, a cleaning lady with an engineering degree, who worked for me, after being through 3 bankruptcies, and went on to a career as chamber maid in Switzerland, how the 280 year old business of some relatives died, after the iron curtain came down, with no fault on their own. Etc.

I remember, when I said in fall 2009, that I believe from now on we will have wage raises with and slightly above inflation that a close relative looked at me with hollow eyes, as if I would have smoked something. He couldn’t remember when he got his last nominal raise.

We do not whine around here, but we do know what deep structural change is.

3. Not one cent from me


Cyprus is in the present Situation, because your country followed bad strategies, this tax evasive financial centers, as so many others as well.
The Laiki guy for Greece made some bad decisions in fall 2008, when this crisis was becoming very clear, your politicians were malleable to pressure or just corrupt, your central bank was sleeping at the helm, the governance issues in the greek takeover were known.

The typical situation with 3 or more elements failing. But this not my problem. Yours. You have to live with the consequences of what your government decided.

As I learned yesterday from John, some folks still try to make me responsible for what (WWII) not even my grandfathers had a chance to influence.

We recently read with interest, e.g. table 4.1 that the
median household worth here around is just 21 k here in East Germany, and 267 k in Cyprus.

I kindly suggest, that you get the money for your turn around, where it is, with your rich, and also from those who are most interested in keeping Cyprus going.

The whole notion, that a poor innocent German renter should contribute one cent to bail out spoilt rich brat Cyprus millionaires, who benefitted greatly from the support for tax evasion and Russian money,

this is so completely absurd.

There are a lot of a lot more deserving people here, for any spare money we have.

I think what your country needs, is some very serious overhaul of large parts of your politics, business, character education in the schools and universities.

We can give advice on prison apprenticeships and some other stuff : – ).

People have to make decision, when to sell a house, to accept substantial wage cuts or not, recently the metal workers at Opel in Bochum told GM : “F… you”. And a 5 k people factory, 80 years old, will be closed.

4. A better future with going separate ways?

The closer we look, the more the people here believe, that Core Europe would be better off, without the criminal fringe, and these endless attempts to finger our wallets.

My understanding is, that you have to become delinquent on ELA or other obligations, which would then trigger your expulsion from the Euro.

As you have read, one can get used to bankruptcies. Why don’t you just do it, and get it over with?

Francis, I understand you suffered thus bitter. I also understand how an East German might feel about Russians who occupied your country not that long ago and sympathize. However, to be fair, you’d have to think about the main question paused by the article. Why weren’t deposits in the Cypriot bank branches in Greece haircut? I do offer an answer: to protect Greece and the Eurozone (that invested that many billions there) from contagion. My point is that Cyprus cannot afford to insure Greece and you from contagion. Not fair not sustainable. There are other arguments in the article, but this one really deserves your attention if you are a fair reader that wants to understand. As for Cyprus exiting the EU, there are economic and non-economic reasons (Turkey being a very demanding neighbor) that make this even worse. This does not mean EU should place an unfair burden on Cyprus just to make an example to others or to make bitter voters feel better. (Instead, Productivity wage gap closing down in Germany could help lower down bitterness levels the right way.)

@ Marios

You’re getting sucked into argumentativeness: I don’t think it’s the space to be in.

So, though you’d really want some of the much better informed bloggers to have a go, (and you will have thought of much of this already) here’s a stab at:

A plan for Cyprus! (from a kind-of economics POV)

(a) If vote against Bailout (and gov., not simply told to try again):

All hands to pump to work out possible smooth exit. Get one or more highly reliable, calm, economist to lay out two scenarios, one leaving Euro, one not. I gather the advice is, if you’re going to default, default hard. Chuck out Troika and go with IMF solo. Gulp.

(b) Bailout accepted.

Work out short, medium and long-term goals.

Find suitable fellow economist to take on complete, unbiased ongoing coverage online so facts and figures across full spectrum can be simply grasped. See Seamus Coffey at economic incentives, and namawinelake.

Set up moderated economic discussion blog. Watch it doesn’t become nest of vipers, eg (sorry to good people at same).

Accept that there is not a singular technocratic ‘right’ economic answer for everything, so debate and information are key. Reputations will be shredded all over the place and previous works will come back to haunt the authors: but rather than get defensive (R&R unfortunately show the wrong way to do it), Cypriot economists need to take a breath, learn and re-engage.

Get info from countries that are going through bailout process.

Look at how public submissions and debates with politicians can be made, eg

Extend this internationally to be part of larger debate on and off shore.

Engage with current media channels.

Engage public with public events and debates, see, eg Kilkenomics.

* Troika/MoU

Check the quality of your own economists in your department of Finance.

See John McHale of IFAC discussion here:

This is important as you think now that the forecast should be much worse than the Troika will say, but if your Finance goes in and says, yup, we basically agree then it undercuts your position. Now they might honestly agree, but it’s worth a check.

The MoU bailout is a real head-squeezer, but try to remember it’s a multi-platform situation so look for co-negotiations, eg with Structural Funds, or bank related bailout adjustments, to smooth.

Cyprus can either try to not fully implement the MoU (knowing the damage it will do), or do it and look for other related advantages (the Ireland ‘best boy’ strategy). These are political decisions. Personally, I reckon you should go consistently and early for one or the other.

The actual injustice of the process, structuring and outcome of the bailout needs to be communicated at international level, calmly, firmly and consistently, looking for a better resolution.

There’s a bit of the ‘five stages of grief’ about the whole thing and various people and players will be at various stages. I think it’s better to grasp that the world has changed and try to move on.

(Aside: this is not to say that investigations, reports and institutional and personal responsibility/accountability aren’t important: they’re very important in an Augean stables sort of way. Ireland has not scored well on this and it festers).

Identify key strengths for future. Banking/Finance is gone.

I think it’s (a) Tourism and (b) Gas and maybe a bit of (c) FDI. Don’t forget you have immense historic reserves of culture. The image of the country is important. In Ireland check out the international Farmleigh and globalirish initiatives.

You see from the debate above that some now equate Cyprus with ‘feckless spendthrifts’. You’re still Aphrodite’s island and you could use a programme of events to work on that.

One small thing. I think you have a Film Board. The Irish one is doing very well. Let foreign film-makers make films/tv series in Cyprus for low tax as long as they show the country. That’s what NY did in the 80s I think, as part of ‘I heart NY’ and it worked well in improving the image of the city.

I won’t say much on Gas (as I don’t know much) other than other countries and agents will be trying to exploit your weak position as much as possible

A note on ‘reforms’. They can be very hard to understand. Sometimes it just seems to be a euphemism for the neoliberal agenda. The word gets thrown out all over, generating more heat than light. However, I do notice Will Hutton, whom I would fairly much trust, saying:

“The combination of crippling uncertainty about demand prospects along with the deterrent of de facto employment marriage hurts the young most – it is the chief reason that youth unemployment is so high in so many European countries. My proposals will help the demand side, but simultaneously Europeans need to bite the bullet and accept that hiring and firing needs to be easier. This should not be done as a standalone attack on European working-class entitlements, though; it should be part of a reframed social settlement.

“The Danes are leading the way with their “flexicurity” concept. Essentially, the deal is that employment contracts must make redundancy less prohibitively expensive – but because there is more labour market risk, employers and governments create a system of life-long learning, lift unemployment benefit and offer to operate as an employer of last resort.”

In saying the above I’m falling into the usual trap of seeing the world from a top down perspective. Look for where grass roots, public campaigns are emerging and see if they can be engaged with. It’s the citizens themselves that should be helped to find agency and expression. Too much that has gone on in Europe and in the banking sector has been imposed and dis-empowering. This is demoralising.

Finally on the above, ongoing processes and structures work better than one-off initiatives so it’s good to look at how they can be established and maintained. Devolving structures and accountability under agreed parameters can also be very powerful.

Apologies for the temerity in offering unasked for advice but I wouldn’t like you to go away from the website thinking you were being hounded.


I have not suffered, others did, and I, and most of them, am not bitter.

Even with knowing about the costs being a lot higher than thought then, we would still be all for the end of the East West Conflict and Reunification. We now do not spent 7% of GDP on defense anymore, our neighbors to the East are much better off, and we don’t have to worry about some idiot doing stupid things at the border, and hostilities ceasing only after very a substantiaI loss of life, and some property too, of course.

I am a West German, now living in Dresden. We don’t have any problems with the Russians, we do know history. We love our Russian visitors; they have fat wallets and open them freely in exchange for the wares we offer them. We have the menus in Cyrillic, and Putin is welcome at his old workplace as a KGB officer : – ) He speaks German very well, gives German speeches to the Sovereign, the Bundestag, and Merkel and my prime minister Stanislaw speak Russian very well. My former gay foreign minister was pissed a little bit, when they talked in Russian and he didn’t understand a word : – )

What your government and your banks decided, when, for what reason, is not clear to me, and is not my problem. A few billion wrote down for uninsured customers of Greek/Cyprus banks are irrelevant on the European scale. Soffin II stands ready to guarantee 492 billion any time.

Putin was OK with the outcome; he agreed on with your finance minister in Moscow, he signed the loan extension on the very same day.

You did not insure anybody; you didn’t take one for the team.

Your banks gambled and you lost. The quadruple chain of decisions leading up to that are firmly within Cyprus: banker, politicians, central banker Orphanides, your rich bank customers.

After ICESAVE and taking the uninsured customers in Spain to task in Summer 2012, it was clear, that your 4+x% interest rates on short term deposit carried default risk.

I had my stuff distributed over 5 banks in 3 different countries back in 2007.

Your “double-digit dip in GDP growth” is an euphemism of what you and others face now.

Your mean net household wealth of 671 k€ (4 – 10 times (east Germany 67.48 k) what we have) inspired me to a dream last night.
What if we don’t reelect the softie Merkel this fall, but go with the social democratic Störtebeker (=Baltic pirate) Steinbrück ( instead? He was not shy of sending the 7th cavalry to Switzerland either.

Then we agree with the US, UK, and French on sending an expeditionary force to Syria, on the few sea worthy ships and subs we keep active.
When we pass the British bases on Cyprus, we have some accident, tell them that we lost contact to 2 subs, (kinda like Red October) with the last messages talking of some conflict, their friend/foe identification systems sending out garbage and the torpedo tubes seen open.

Since I do not like your central bank, I would come in from the north from a sub, and torch Kennedy Ave 80 first.

Our Sailors remember the glorious good old times of the crusades, and go for some thorough looting of Limassol and Larnaca, before setting sail for Aleppo, or not.

Cyprus is not part of NATO, how much time would be there, before some “peacemakers” interfere?

But then I woke up, it was daylight, and I said, we don’t do these things nowadays anymore, normally : – )

About 400 k households, 671 k Euro wealth / hh, makes 268 b Euro wealth on Cyprus. And you can’t afford to pay your 20 k gambling debt?

Don’t you think it takes a lot of Chuzpe to demand handouts from folks who have 10 times less than you?

I think it would be a crime against honest taxpayers somewhere else to not insist on 100% payment from you.

If not bitter via bad experiences, then just hateful via disposition? In any case, uninformed and still incapable to answer the main question in the article. Finally, do take a look at a number of studies that have torn the ECB household study to pieces.
@Gavin Thanks much for the advice. This is thoughtful and helpful. I will make an effort to incorporate this in my own thinking and also disseminate to colleagues here. Your option B is the way Cyprus appears to be committed to. Will have to diversify but also make the best of the natural gas deposits once and if those become accessible. Regarding MoF estimates, those are just dictated by the Troika as far as I know. Here’s an independent forecast with plenty of downside risks though as the March data have not yet been incorporated fully:


I had asked you to search a little bit around here, what I showed here.

To be for this point more specific for you, please see:

The evidence for the ECB data is overwhelming across the whole honest spectrum, from Piketty over the OECD to the Allianz.

I debunked the numerously cited de Grauwe completely, and stand by my analysis. I know this stuff.

I understand your main point, and I keep telling you, the fair, and the ONLY sustainable way for Europe, is to take the money from your own rich.

But feel free to cite what you think what in your opinion has “torn the ECB household study to pieces”. I dont know of any.

I am very informed, patient, polite.

@ Marios

Thanks for the reply.

I have glanced at your linked paper and that is nasty. It re-emphasises for me that the state, in all its forms, needs to communicate well with the people what is coming, so that the people can make their best decision as to which they can collectively agree is their choice for the near/medium future.

“Regarding MoF estimates, those are just dictated by the Troika as far as I know.”

Yes, but ‘no objection is tacit acceptance’. I would suggest, don’t just hand wave these things away. The hard path of taking the MoU but working a coherent objection means that the your MoF needs to be resourced and supported to stand on its feet: to come into the room again and again and again and show their integrity and superior analysis.

One must really be very stupid and ignorant to believe the rich cypriot poor german

One must be very ignorant to endorse and repeat the propaganda of rich Cypriot poor German.
On the other hand you also miss the argument that the so called ‘flight to quality’ to bunds is subsidizing the German state with very cheap loans – as also your standard of living was subsidized by cheap loans in the eu periphery which enabled consumers to buy ‘Made in Germany’.

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