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How long is the long-run?

How can the government carry out the necessary reforms if its coalition is weak and its main supporters are those who are most heavily indebted in a country that went bust because of too much debt?

WHENEVER economists talk, they always mention the terms ‘short-run’ and the ‘long–run’. Typically, good or bad things happen in the short-run, whilst in the long-run somehow magically all things are fixed or become balanced again.

One could argue that the long-run is just a series of consecutive short-runs, which makes our assumption that in the long run everything will be OK nothing more than our mind’s way of providing us with a positive outcome in a world filled with uncertainty and turbulence. This also explains why economists are great at rationalising things after they have happened; only telling us when the storm has past that the ocean is flat again. Cynics of course will remember that Keynes said that the long run doesn’t matter, because by then we are all dead.

Thinking about these things is more than pure semantics; when trying to make an assessment of the current situation in Cyprus, it’s easy to get trapped thinking about just the short-run or just the long-run. Those wanting to paint a gloomy picture focus on the uncertainty regarding the survival of the (new) Bank of Cyprus, the lack of action by the government, and the on-going feud between the Central Bank, government, and political parties. Those wanting to put a positive spin focus on the long-run, pointing to the gas finds on the sea boarder with Israel, on the positive signs regarding the tourism industry, and on Cypriots coming together at times of adversity. Reality is somewhere between the two.

“F” for progress
“A” for filibustering

There are two things that need to happen by the end of the year; the stabilisation of Bank of Cyprus and the review of Cyprus’ adherence to the bail-out/bail-in terms. It is difficult to see how the bank can be stabilised without maintaining capital controls, even if the ECB provides unlimited support. People are scared because there is no stability in the country, so if they have a chance to take their money out they will take it. It’s a simple case where ones actions make sense for themselves, but if all act in the same manner the system collapses hurting all of us. As for the government, it gets an “F” for progress and an “A” in filibustering.

The problem of the Cyprus government is one of de jure and de facto decision making. De jure designates what the law says, while de facto designates what happens in practice. The de jure situation is that the President runs the country with the support of the parliament in the interests of the people, and that in this case the President comes from a pro-capitalist/ reform party. The de facto situation is that the biggest companies in Cyprus are in the construction sector and are heavily indebted. In parliament the government has a slim majority of one vote, with this majority coming from a coalition of three parties.

How can the government carry out structural reforms if its parliamentary coalition is weak and its main supporters are the ones who are most heavily indebted in a country which went bust because of too much debt? The answer is simple; it will be forced to, just like in Greece, Portugal, Spain and Ireland. The government will try to convince the Troika that it’s trying to carry out reforms; the Troika will say that it’s not; things will come to a head; and the one with the money will win. Thus, whilst we expect economic conditions to worsen and unemployment to rise to 20-23% by the year end, it is likely that reforms will only begin to materialise in 2014. By then, the pain will be much more to bear, causing the inevitable public sector pay cuts, banking sector dismissals, and tax hikes, to be much more than currently needed.

Cypriots still think that they are standing on the edge of the pool, dipping their toes in the water and wincing. In reality, they are wearing lead boots at the bottom at the deep end of the pool. And, the waiting is becoming intolerable as populist politicians refuse to do what they were voted for; to make decisions.

Pavlos Loizou
Managing Partner | Real Estate Advisory
Leaf Research

Readers' comments

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  • Steve says:

    @Costas, Oddjob & Gavin

    All good points and yet the locals don’t get it. The only strategic importance of Cyprus in the last two hundred years has been protection of British interests in the Suez canal and now that’s no big deal. All that’s left here militarily is giving the Russians a new Mediterranean base when Assad in Syria is overthrown. The role of the British Sovereign bases is relegated to providing a rest stop for British troops on the way home from Afghanistan so they unwind and don’t go home and beat their wives up. Malta always has been the strategic icing on the cake and you don’t see them cosying up to the Russians and the Greeks.

    Why do we still see signs like “Cyprus is Greek”? Why did Cyprus allow the Greeks to escape the consequences of the bale-in, when even old ladies’ savings in Cyprus got the cut? Why did Greece, if it cared anything for Cyprus, refuse the British offers in the last 100 years, two of them, to take over the island. Because they don’t want it, that’s why.

    Why don’t the Cypriots wake up to reality and start playing fair with their real friends? I don’t know the answer to that one. Overall, that means I don’t understand Cypriots.

  • Gavin Jones says:

    As a grandstand observer of the Cypriot ‘scene’ for almost 50 years, I maintain that we’re witnessing the endgame.

    The West has had its fill of Cyprus and their flirtations. Employing mafia speak, the island got geopolitically ‘whacked’ in 1974 for messing around with both East and West camps and being a member of that illustrious body, the non-aligned movement. It got economically ‘whacked’ earlier this year for its incompetence, banking excesses, government profligacy and general indiscipline.

    The Cypriot political establishment has a history of always making the wrong decisions and the tradition lives on. Their mindset will NEVER change. They will pursue whatever nonsensical policy anyway so the West should call their bluff.
    Russian presence or not, Britain has its bases, Turkey’s in the north and Greece co-operates with Turkey both militarily and economically (it whispers sweet nothings to Cyprus merely for historical reasons).

    If indeed Cyprus pursues a more ‘cosy’ relationship with Russia, when the inter-communal talks which resume in October fail, and fail they will, that will give the green light for recognition of the north (either as a separate state or protectorate status of Turkey or whatever). And that will be that.

  • Spirit of Odd Job Bob says:

    Steve, I think you may have misunderstood.

    The fact that Cyprus is NOT a member of NATO is the very reason why they think they can get away with this suicidal, non-aligned brinkmanship!

    However, how “non-aligned” is a country that has troops from the THREE LARGEST AND MOST POWERFUL NATO ARMIES occupying (legally/ illegally?) her lands?

    Does the leadership really believe that playing the “we can make treaties and offer military presence to whomsoever we like” card (whilst a perfectly normal thing for most countries) will not produce any effect here?

    If Russia came back and said, “We give you €200bn, you give us naval base, da?” would Cyprus say, “Where do you want us to build it?”
    Absolutely not! They would go to the Troika and say, “Look at the offer we got from our friends the Russians, be nice to us or we’ll take our bat and ball away.”

    So it’s a ploy, a simplistic negotiating tactic to try to get a better deal.

    However, it is a tactic of such enormous import that I fear the US, which only 2 weeks ago described Cyprus as “extremely important to us”, will not allow to get anywhere near an advanced stage.

  • Costas Apacket says:

    Steve – the Cypriots keep voting for the usual suspects because they believe that this will preserve their way of life.

    A way of life that they can’t afford and which, in many cases, doesn’t satisfy the laws and standards of the EU or global financial regulations.

    But wait…. the Gas is just around the corner….maybe they can continue in their old ways?

  • Steve says:

    Reading through the postings, a number of comments (on the comments) occurred to me.

    Cyprus and NATO: Cyprus is not a member of NATO, never has been. Turkey is an extremely important NATO member and Turkey blocks the development of closer relations between NATO and EU because?……Cyprus is a member of the EU?

    Solutions through title deeds: I don’t think title deeds resolution will solve the problems of Cyprus. The astonishing and costly breaking of the laws of the EU and Cyprus without fear of retribution, such as the illegal borrowings of bank directors from Cyprus banks of over €4 billion Euros that is lost and apparently not recoverable (while the directors complain about being harassed), has to change or this will become a failed state, too far down the road to ruin for any short or medium-term rescue to be feasible.

    Anastasiades – A white knight? The new government has shown already that it recognises its position is no different from the previous government. It is dependent, as the article says, on supporters whose vested interests got Cyprus into this state in the first place. Mr A is showing himself to be in some ways different from- but no better than- Christofias was. If this government loses its wafer-thin majority, then there will be an election or the next largest party can try to form a government. That is AKEL, the communists who put Cyprus into this mess in the first place. The voters of Cyprus keep voting for trouble and then they are surprised when they get it.

  • Denton Mackrell says:

    Video action replay coming up of Greece’s bailout saga! Anastasiades & co will avoid all unpleasant but essential decisions and actions on the bailout memorandum and terms so that the Troika have to force them. Then they can plead to the public it wasn’t really their decision as they had the Troika gun at their head. Unfortunately, as Pavlos Loizou says, by then the pain will be much worse than doing it all now.

  • Spirit of Odd Job Bob says:

    How long (before real change happens)?

    Well Gents, not that long at all!

    Has anyone read this article?

    Russia eyeing Cyprus bases

    To my mind, this is the most disastrously stupid thing the leaders of Cyprus could possibly do (for the society, but coincidentally, maybe not for Mr and Mrs Gullible Foreigner i.e. US!)

    Cyprus understands that, because of its strategic importance, it has a very strong hand to play. Problem is though, historically, they’ve always played that hand REALLY BADLY! I believe the above is a high-risk game of political bluff by the country’s leaders, blinkered by tribal arrogance, to use their flirtations with Russia to remind NATO to convince the EU, IMF, whoever, to be nicer to them financially and thus enable them to retain the present status quo and so not even ATTEMPT to put into place any of the structural reforms everyone and their dog knows are necessary.

    Hopefully, it has been adequately evidenced by now that no change will come (including any movement on “That Old Chestnut” of the Title Deeds Scam, which is NOT considered important) unless from the outside.

    On July 19, 2012 at 5:41 pm, OJB wrote:

    “No outside power nor extremist movement would be allowed to upset the pomegranate-cart as Cyprus is too strategically important for NATO and the West (unless of course the existence of the Sovereign Base Areas is threatened, hence 1974 and all that). However, the present administration may just be dumb enough to do that (even I doubt that though)”

    Well, I was wrong (although not technically, as it IS a new administration). The Americans will do WHATEVER IT TAKES to hold onto their unsinkable aircraft carrier. This they have demonstrated before…

  • Curmudgen says:


    Well done Jim, got it in one!

    Overnight your Euros in Cyprus banks will be converted to Cyprus pounds at a deflated rate. You won’t have a say in the matter. Best guess is €2.50-2.70 to CY£1.00 The government will raise billions by doing so.

    Yes, get your cash out and put it somewhere safe, minimise your currency exchanges, minimise your risk.

  • Pippa says:

    What I find depressing is that every day I see good hard working, honest, caring Cypriots going about their daily business trying to put food on the table and live as best they can. I know they voted in these clowns but given the selection there was to vote for what choice did they have?

    Where are the young entrepreneurs? where are the graduates with business acumen? where are the citizens with any financial understanding? Ah yes I have just remembered, they have all emigrated!

    Unfortunately until every voting Cypriot citizen gets politically wise the ruling elite will carry on as they have done for years, and nothing will change.

  • Jim says:

    The government has virtually done nothing the Troika required them to do. No structural reforms of the civil service. Not even a mention of privatising SGO’s. All the excess banking staff are still in employment.

    I cannot see the Troika agreeing to EU funds continuing to be given to Cyprus.

    Sooner, rather than later, the Cyprus pound will return, as the government throws up its arms & says we cannot inflict this austerity on the poor public servants.

    Only problem is, we will all wake up one morning & find ourselves at least 50% poorer due to devaluation. That is unless we were smart enough to remove our cash to somewhere of safety.

  • Costas Apacket says:

    I sometimes think that Cypriot politicians work on the premise that – ‘If we don’t do anything, then we can’t be blamed for getting anything wrong.’

    They couldn’t be more wrong if they tried.

    As Elbert Hubbard put it: – “To avoid criticism, do nothing, say nothing, and be nothing.”

    And as Ghandi said: – “You may never know what results come of your action, but if you do nothing there will be no result”

  • Jill says:

    Isn’t it sad? It’s SO obvious to all of us what needs to be done, yet the bully-boys in the form of developers, etc. will do their utmost to stop it. We’ve been pointing out for years that giving out title deeds (without any of the rubbish spouting about sheds, too high fences, etc.) Make people pay their taxes, force the developers to pay back their mortgages. This would bring in every cent needed – surely all these things are glaringly obvious so there’s a worm in there somewhere stopping it!! Sort out the worm and growth can begin again.

  • hani chehaiber says:

    A very good article…

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