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Victoria Mindova

After the Cypriot government has unanimously rejected Europe’s proposal to impose a tax on bank deposits to save the financial system of the country, it is now discussing an alternative rescue plan for the local economy.

The first data show that the government will sacrifice one of its biggest banks, namely Laiki Bank, to save two billion euro. It will also throw into the fight the assets of the social security funds in the country. They have about 2.8 billion euro in reserve, which will allow the country to impose a tax on some deposits (1% -2%) significantly lower than set in the original plan in order for it to raise 5.8 billion euro. Against this amount, Cyprus will receive additional financial support of 10 billion euro from Europe and the International Monetary Fund, and the European Central Bank will not stop the liquidity to these Cypriot banks, which will survive after the reform.
 
Economic expert and professor at the University of Athens Panagiotis Petrakis is analysing the recent developments of the financial crisis of Cyprus and making his forecast of the future developments for the readers of GRReporter exclusive.

What do you think about the Cypriot government’s plan B?

The new form of the Cypriot government’s programme of financial support is much more satisfactory than the plan agreed during the meeting of Eurogroup. The new plan may contain certain hard decisions such as the reform of Laiki Bank but it is more acceptable in practice. Of course, we should not forget that it is not yet clear which scenario the government will choose – to sell the bank or to divide it into a "good" and a "bad" part. Another option is to divide it into two parts and sell the healthy part of the assets and liabilities of the financial institution. Whatever the method of reform, the most important thing remains that the government aims to reduce the burden of cuts of deposits, which should be offset.

In other words, Cypriots have achieved their goal of not seriously affecting the deposits of large depositors. Whether this is correct is another matter. The important thing is that they have achieved to some extent their initial aims. The programme will not burden the Cypriot economy so much and now the picture is better than before.

The most serious criticism I can make is that this decision could have been taken a week ago. My question is, "If there had been another solution, why didn’t they find it at the meeting of finance ministers before last Monday?" I think this was due to a rulers’ weakness and the financial system of the country fell victim to it. However, now there is a solution but the damage has been already done.

Banks in Cyprus will remain closed for over a week. How will this affect the local economy?

It is outrageous for the functioning of the market and the economic system as a whole. Once the banks reopen, there certainly will be exports of capital to the north. This will affect not only Cyprus, but also Greece and the European periphery as a whole. The capital will turn to safer markets.

However, do not imagine that this will be a mass movement of capitals; there will be no dramatic change in the situation either. There will be damage, but it will not be tragic. I insist, however, that if the decision had been taken earlier, the problems today would have been much smaller. Apparently, Cyprus had to go through various emotional and rational development stages in order to reach a more mature decision.

To what extent will the developments in Cyprus affect the Greek economy?

The economic relations between Cyprus and Greece are quite close, but they are not so important if we take into account the volume of the Cypriot business involved in the total volume of the Greek economy. What we are seeing now will have some negative effects, but it will have a positive impact as well. Part of the capital in Cyprus will be transferred to Greece, because we should not forget that the Greek financial system is secured by a support mechanism. Greek banks have been recapitalized. Ultimately, there will be a negative effect but it will be insignificant.

The new plan of the Cypriot government to raise 5.8 billion euro includes the capital accumulated in the social security funds of the country. Isn’t there a risk of the people losing their pensions and insurances?

We, the people from the European south are used to losing our savings (he is laughing).

Seriously speaking, I can say that the use of social security funds is a choice between the present and the future. When the government chooses to use the assets accumulated in social security funds, it chooses to restore the balance to some extent now at the expense of future generations. Policymakers often have to choose between the present and the future. There should be a balanced formula that should not harm the two sides too much. In Greece, for example, the present and the future as regards the funds have lost very much. Cyprus can achieve the balance and avoid the Greek situation.

In the world economic history, social security funds have often been used to absorb similar financial shocks. I think there is not a serious threat to pensions and insurances if a moderate pattern is applied.

So, you do not think that the use of the capital of social security funds will have a negative effect?