October 7, 2012
Cyprus crisis getting ugly!
Cyprus' banks are in worse condition than imagined, and the bailout amounts has 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.
It is 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 crisis 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.
But in August, Central Bank Governor Panicos Demetriades told parliament that the banks alone would need €12 billion!
Then Russian Finance Minister Anton Siluanov told 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.
In short, a 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 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 a TV interview.
He would, however, try to cooperate with the Troika. “We aren’t just saying ‘no’ to them,” he added. “We are giving them counterproposals.” They focus apparently on a VAT increase, a luxury car tax, 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.