Cypriot President Christofias dug in his heels. On Greek TV. Not behind closed doors with the Troika, the austerity gang from the European Commission, the IMF, and the ECB that have performed such miracles in Greece. But as Cyprus veers toward bankruptcy, his game of playing the Russians against the Troika has fallen apart, banks are in worse condition than imagined, and the bailout amounts jumped again. How can a tiny country get in so much trouble in such a short time?
The real-estate and construction bubble, fed by corruption and abetted by banks, burst two years ago. Home sales and prices have collapsed. Some 130,000 homeowners (in a country of 840,000 souls) are tangled up in a nationwide title-deed scandal. The Troika estimated that 50,000 homes would be dumped on the market—though only 4,876 homes were sold during the first nine months of the year! Losses have gutted banks. Unemployment has reached record levels. And the construction industry, once a major employer, is being annihilated.
The index of building contracts, after a two-year downhill slide, has reached the lowest point in its history, and “activity is expected to continue dropping,” lamented the Federation of Associations of Building Contractors (OSEOK). Contractors are going out of business. Over the last four months, the morass has deepened. And now there are only enough pending construction projects for seven months, and after that, there are no projects.
Locked out from the financial markets since early summer 2011, Cyprus was bailed out by Russia last November with a €2.5 billion loan. In June, as the banks began to topple under a mountain of Greek debt and rotting mortgages, Cyprus asked for a bailout. The Troika took a look and figured €6 billion for the banks and €4 billion for the government. €10 billion in total. Alas, in August, Central Bank Governor Panicos Demetriades told parliament that the banks alone would need €12 billion! And the rumor consensus has settled on €15 billion for both the banks and the government.
Then Russian Finance Minister Anton Siluanov spilled the beans last week: Cyprus would indeed seek a €15 billion bailout from the Troika, and an additional €5 billion from Russia, for a total of €20 billion. A vertigo-inducing 107% of GDP.
But he cautioned that Russia and the Troika would need to coordinate the loans—thus throwing a monkey wrench into Christofias’ efforts to use the negotiations with Russia as a lever against the Troika to get a better deal and more lenient conditions.
Conditions that the Troika had already spelled out in a memorandum. Which was promptly leaked. It included measures that would make Cyprus a more efficient and competitive economy. Cypriots have seen how well that has worked in Greece. So, a whack at the bloated public sector: privatization of state-owned enterprises, a 15% cut in the public payroll by the end of 2013, a 10% cut in benefits, elimination of the automatic Cost of Living Adjustments (CoLA) that index salaries to inflation, and an increase of contributions to pension plans. The CoLA elimination would also hit unionized private sector employees, as would the elimination of the 13th month salary.
“You cannot tell someone they won’t receive a 13th salary. It automatically means you paralyze the market” declared communist President Christofias during the TV interview yesterday. “I can assure you, I will not sign any memorandum which scraps CoLA. The same applies to two or three other measures.” Hence, no privatizations, no public sector payroll reductions…. But he also made some sense: “What happened with the banks was a crime,” he said.
He would, however, try to cooperate with the Troika. “We aren’t just saying ‘no’ to them,” he added. “We are giving them counterproposals.” His cabinet met on Wednesday to finalize them. They focus apparently on a VAT increase, a luxury car tax, sin taxes on cigarettes and alcohol, disincentives for public sector workers to take early retirement, and a 5% wage cut for those earning over €1,500—the mindboggling phenomenon of a government cutting private sector pay plans is something we have already seen in Greece.
Yet, Cyprus has something that Greece and other Eurozone debt-sinners don’t have: lots of Russians with money. The island has become an offshore haven for their businesses, and the money-flows are staggering. For that amazing twist to the bailout story, read…. Bankrupt Cyprus And The Russian Connection.