Presentation at Columbia University School of International Affairs, April 22, 2013. Full details of the event here https://www.facebook.com/events/249889465155114/

1. The Cyprus debt:
perfect crisis and a way forward
Stavros A. Zenios
University of Cyprus
Senior Fellow the Wharton School, USA

2. Outline
CYPRUS DEBT CRISIS DISSECTED
THE EUROGROUP DEBACLE
A WAY FORWARD

3. A Perfect Crisis
Vicious cycle sovereign debt-banking
+
debt overhang
of business and households
+
declining competitiveness

4. A positive historical note
Time to default for African and Asian countries
 31.5 years
Time to default for Latin American countries
 38 years
European countries that defaulted at least once since 1800
 22.8% of their time in default
 1.5 default episodes per half century

5. THE CYPRUS CRISIS
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

6. THE CYPRUS CRISIS DISSECTED
Germany Cyprus Greece Ireland
500
450
2010 debt to GDP ratio, %
400
350
300
250
200
120 140 160 180 200 220 240 260
2000 debt to GDP ratio, %

7. THE CYPRUS CRISIS DISSECTED
Corporate, non financial Households Financial Government
400.0
350.0
300.0
250.0
200.0
150.0
100.0
50.0
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

8. Ireland, Greece, Cyprus
Households NFC FINANCIAL Govt
Mature economies
Cyprus -post Greek PSI
Cyprus
Greece
Ireland
0 100 200 300 400 500 600 700

9. Ability to service debt

10. Debt or income in euros
10000
15000
20000
25000
30000
5000
0
2000
2001
2002
2003
2004
Income
2005
Debt
2006
2007
2008
2009
Household debt vs income
2010
2011

11. 0.00
0.50
1.00
1.50
2.00
2.50
1995
1996
1997
1998
1999
2000
2001
2002
2003
Debt/Taxes
2004
2005
2006
2007
2008
2009
2010
Government Debt: 71% GDP
2011

12. Cyprus Tipping Point: the banking sector?
2500%
΢ΤΝΟΛΟ ΕΝΕΡΓΗΣΙΚΟΤ (% ΣΟΤ ΑΕΠ)
2000%
1500%
1000%
500%
0%
Κυπρος Ελλαδα Ιρλανδια Λουξεμβουργο Μαλτα Ολλανδια Ηνωμενο
Βασιλειο
Ξενα Υποκαταστηματα Ξενες Θυγατρικες Ντοπιες Τραπεζες
Πηγή: EKT.
12
Σημείωση: Τα στοιχεία αυτά είναι για το 2009 και πεπιλαμβάνουν το ενεπγετικό των ντόπιων τπαπεδών στο εξωτεπικό.

13. And hot money
Domestic Total non-residents
50,000.0
45,000.0
40,000.0
35,000.0
30,000.0
Million euro
25,000.0
20,000.0
15,000.0
10,000.0
5,000.0
0.0
2007
2008
2009
2010
2011
2012
2013

14. Cyprus Banking hubris

15. -20
-15
-10
-5
0
5
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Current account balance %GDP
2007
2008
2009
2010
2011
Can we get export-led growth?
2012

16. Competitiveness
Ireland UK Cyprus Spain
100
90
80
70
60
50
40
2006 2007 2008 2009 2010 2011 2012

17. Cyprus Fiscal Sustainability
EC Report 2013-2015
Short run crisis
100
90
80
70
60
50
40
30
20
10
0
Financing aging population
Adjusting primary account
balance

18. The Eurogroup debacle

19. Enter Heroine: Austerity
 5.5% GDP fiscal adjustment
 Reforms and privatizations
 Over four years
Impact on GDP -1.38%

20. Enter Villain: Bail-in
Bad Politics in the Way
of Good Policy

21. German Secret Services
secret report

22. Basel Institute of Governance
AML Index
Cyprus 4.93
Holland 5.03
Germany 5.80

23. Haircut Russian oligarchs

24. Who gets a haircut?
68.4 billion (insured) deposits in Jan. 2013
26-30 billion Russian money

25. What does a haircut look like?
Russian “oligarchs”  Eurobankers
Wipe out wealth 30% GDP
Slash business activity 9%-25% GDP
Freeze 70% of domestic lending
Freeze working capital of SMEs

26. And the GDP?
IMF projections pre-eurogroup -3.5%
IMF projections post-eurogroup -9%

27. Massive legal problems
Emergency Liquidity Assistance worth 9.2 billion
Extended to an apparently insolvent bank for 1 year
Passed on improperly to a solvent bank
Three court stay orders

28. What does a haircut look like?

29. A way forward

30. Policy options
We need a Collin Powell Doctrine*
Throw superior forces at the problem
Counter-attack multiple problem cells simultaneously
*Remember not to kill the patient!

31. Policy options
Austerity deleveraging
Structural reforms
Financial Innovations
Partial privatizations

32. Debt restructuring
European Stability Mechanism
or
Official Sector Involvement
Debt restructuring with GDP-linked bonds
Credit enhanced by natural gas proceeds

33. “Anyone can count the seeds in an apple,
but only God can count the apples in a seed”
 Karl Marx
“Society poses itself only such problems
as it can solve”
 John F. Kennedy
“Our problems are man-made,
therefore they can be solved by men”
 Stavros A. Zenios amendment
“Our problems are man-made,
therefore they can be solved by women”