Thursday, 22 December 2011

What Great Depression? Greece is suffering the greatest economic recession in its history.

One of the reasons I have been so upset with the powers that be in Europe is the fact that publicly there is great emphasis that they are trying to prevent a great depression, while their actions seem to mathematically send us into that direction. A crisis needs flexibility, and yet all the EU 26 (- UK) are proposing is more and more rigidity and bureaucratisation.

Greece can be seen as a test bed for their proposals since it has been under supervision since 2010. While new bureaucrats appointed with the Blessings of Brussels, such as the new head of ELSTAT, Mr. Andreas Georgiou, is being prosecuted for correctly calculating the Greek sovereign debt, it good to see what the IMF/EU measures did to the Greek Economy.

Below are comparisons with the Great Depression, which led to the downfall of the Venizellos government and the erosion of democracy in Greece. In that case Greece defaulted on its debts and left the gold standard, the global fixed exchange rate mechanism that was in its final death rows then. In yellow are the years for which the indicators are negative.

The Great Depression did not destroy Industrial output as convincingly as the current economic situation in Greece. This is tragic as manufacturing is a high productivity business, and a reduction of manufacturing usually leads to a focus on services which need high human capital and long hours of work. This is very bad news for manufacturing workers who might not have the human capital to find work in any service sector, and especially for those manufacturing cities that are far away from Athens and Thessaloniki.

In terms of GDP the recession is now the longest on record for Greece. In 1932 such a cumulative fall of income of 6.5% led to massive strikes, agricultural uprisings, and revolts, leading to the dissolution of order and democracy. Yet in this decade, a cumulative fall of income of -12.5% does not seem to lead to dangerous calls for revolution. The striking difference is how in the modern case the recession is both deep but also very prolonged, which morale sapping effects both for the business climate (acting as a stop to domestic and foreign investment inflows) and to the skilled section of the Greek workforce, who is seeking for better employment within the European market as things are not picking up.

Why was there a recovery in 1932-1933? Greece left the fixed exchange rate that existed between it and the major advanced states of Europe. This created chaos in the finances of the Greek state, forcing it to default on its loans and to look inward for development. This greatly aided the budding domestic industry which now had a captive market  the Greek people who now had no option but to buy domestic products as foreign products disappeared form themselves due to Balance of payments issues. Now exiting the Euro is not very simple; it is far more integrated and hence distributive than just a fixed exchange mechanism and you cannot exclude people from the outside economy in order to initiate a domestic recovery driven through industrialisation.

What happened to inflation when Greece exited the then gold standard? Inflation very quickly eroded part of the benefits of the recovery. In fact many of the big family names in Greece made their money in this period, as there was a redistribution of income away from wage earners and towards the owners of means of production.

The lessons from the Great depression are not simple, and more detailed analysis is needed before one can suggest concrete policy suggestions. But two things stand out:
1) This is the greatest economic recession modern Greece has ever seen with no recovery in sight.
2) An exit from the Euro will create problems such as inflation and a reduction of choice of local consumers, and though a reduction of the consumer surplus, there will be a redistribution of wealth from the wage earners to those who own and sell products.

A pdf version with cleaner tables can be found here.

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Wednesday, 7 December 2011

How to reduce the chances of a betting loss.

We all know that Apoel Nicosia defies all odds and statistics, but having some insider understanding of statistics can really help on betting. Although betting is still seem as a non illegitimate investment for portfolio management (mainly because hard to insure or hedge for the losses).

However more and more data is becoming even freely available, and significant data is behind paid walls. Deloitte has a great annual summary, but now SAP is showcasing its powerful analytic tools.

Based on the results I would bet Manchester city to win and 70% possession. Still no hedging but i am sure the next on-line betting sensation will be a insurance to betting losses.
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Monday, 5 December 2011

An article in The Economist about the Cypriot Oil and Gas exploration

I am very pessimistic about the hoopla over the oil and gas purported to lie just outside our reach in the Economic Exclusion zone of Cyprus. We still:
1) Do not know how much is down there
2) Do not have a way to take it out
3) Do not have a way to make it exportable (LPG or pipeline)
4) I have yet to see research that such a venture will actually promote economic growth (although the Euro does help against the Dutch disease --> where a increase in the exchange rate destroys all other industries but the oil and gas fields.

As a practical man I would like to see the steps taken to perhaps capitalize on the future boon of Cyprus such as developing the infrastructure, setting up the institutional basis, removing the topic out of the real of politics ect. Yet it seems that we are taking a different direction (secrecy, squabbling and promise of unearned riches ). Meanwhile the subject is getting an ever increasing interest from abroad as this article in the Economist shows.

I just wish some tells it straight: there is no such think as a free lunch, investments should go to developing a local exploration industry capable to compete globally, and we should copy the Norwegian example of taking gas decisions out of the real of politicians.
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Friday, 2 December 2011

Why do we listen to the market? Sound Macroeconomic policy means much more.

I have been discussing with students recently in how odd the reporting of the financial crisis has been since 2007. Most news publications that claim to have some authority / influence in the global economy seemed to change their stories going through three stages during the last 4 years:
1) 2007 - 2008: The problem was how to save the banks. Governments Should step in and help banks because they are "too big to fail". This is intensified after the collapse of Lehman Brothers in 2008, since media reported that even a smallish banking collapse created panic in the markets.
2) 2009 - 2010: The focus was on the rallying stock markets and how governments are endangering such growth through excessive borrowing. They are removing liquidity from the market and destabilising currencies --> the Euro. The answer was very strict budget retrenchments.
3) 2010-2011: Unsurprisingly the reigning in of government budgets made the possibility of a "Double dip" recession very real as output growth faltered. Stock markets that were rising due to the injected liquidity by governments in 2007/8 ignoring that the real economy underperformed re-adjusted downward very rapidly when government sponsored liquidity dried up and the real economy felt the effect of reduced government expenditure. This caused another scare and placing the emphasis on the printed press to the need of governments to focus on economic growth as the only way out of the economic crisis.

[I am aware that the above is an oversimplification, but I think the emphasis on the three different strands is fair if one looks at the aggregate picture]

What disturbs me with this is that such analysis has proven not only short sighted, but also ruinous as it assumes that the financial markets always know what is best for their long run future.

Now I am not against the existence of global financial markets, far from it, but I do think that sound Macroeconomic policy means that market considerations is only one of the many factors that need to be taken into account. In short, the real economy is always more important than the market!

Back in 2007 growth should have been the only consideration: when you have growth you can fix all the other issues brought up by this crisis (excessive deficits, borrowing, financial weakness of banks, competitiveness)much easier than when you are in recession and all the above issues create vicious pro-cyclical loops that make solving any of them very difficult. I owe this understanding to an MSc class with Dr. Tim Leunig, who thankfully now he seems to be able to be the voice of reason in the UK through his work with the Centreforum.

When one assumes that the financial markets know best, they forget that the profit motive might lead to results that are sub-optimal to the society. It has been recently been discovered that the Federal reserve of US has pledged 7.7$ Trillion dollars, with very little of that being injected in the real economy, with the possibility of some even being re-invested in treasury bonds rather then invested in the real economy in order to increase income and hence promote growth.

Its is clear that what was best globally, including for the global financial markets, would be a return to growth in the US economy through the investment of part of such injections to the real world, but the safe bet won out in the period where bears (conservative investors) as more than the bulls (risk takers) by investing them instead in treasury bonds. Hence market decisions can lead to below optimal results .

If the Fed gave support only on the condition that a share of the liquidity would be given to the real economy as loans, then growth would have enabled the global economy to tackle the issues of excessive government debt much more simply, thus calming the markets and enabling government to support any banks that were still in trouble.

Sadly we once again seems to have forgot our goal, which has to be growth. The press and financial markets seems to be caught in the dream of austerity again, but only a long term goal of growth (followed by reform) will make make the US and EU economies healthy again.

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Sunday, 20 November 2011

Another Excellent Article on the economic travesty of Unions in Cyprus

I personally respect the work of three journalists working in two different fields: Stefanos Evripidou on social and issues, Antonis Polydorou on political issues, and Michalis Persianis on economic issues.

Michalis has been a breath of fresh air since he appeared on the scene with his online comments on and his deeper analysis on the sunday edition of the paper. His knowledge is not just on economics but also in many other fields, allowing a very spherical approach and understanding of our problems.

For example, he has been consistently calling for a Medium term Budget plan for over three years, but unfortunately no one listened to him and now we need to release in a hurry as it has been demanded by the European Union.

In the following article which you can see here in print or read it in his excellent blog, Michalis points out that the ideological division of the organised workers and of the cruel bourgeoisie does not hold when 91.8% of business in Cyprus is classed as SMEs (Small and medium size enterprises), while leaders of unions such as Pasidy take home a greater pay than most entrepreneurs.

Michalis is a breath of fresh air in the economic discussions that take place in printed media - I just hope that he is listened to more often. The article as published in Kathimerini is below:

Ημερομηνία: 20.11.2011 | 14:06
Τα φετίχ της «εργατικής» αριστοκρατίας
Του Μιχάλη Περσιάνη
Ένα από τα πιο αναπάντεχα φαινόμενα που βασάνισαν τον Λένιν, ήταν η στήριξη που παρείχαν τα οργανωμένα σύνολα που μετείχαν στη Δεύτερη Διεθνή, στις εκάστοτε κυβερνήσεις τους κατά τη διάρκεια του Α΄ Παγκοσμίου Πολέμου. Αντί οι προλετάριοι να στηρίξουν την εργατιά, στήριξαν τα έθνη, δηλαδή –κατά τον Λένιν– το κεφάλαιο. Φυσικά, ο Λένιν δεν ήταν κανένα τυχαίο κεφάλι και η εξήγηση ήταν απλή.

Την είχε, εξάλλου, εντοπίσει και ο Ένγκελς, ο οποίος συχνά έγραφε στον τρόφιμό του, Μαρξ, για τον συντηρητισμό των προλετάριων: Η «εργατική αριστοκρατία» αποτελείται από εκείνους τους προλετάριους που, μέσα από τον συνδικαλισμό, εξασφάλισαν καλύτερους όρους εργασίας και μετατράπηκαν σε μπουρζουαζία.

Αυτή η διαπίστωση οδήγησε τον Λένιν στη θεωρία του για τον ρόλο του ιμπεριαλισμού στη διεθνή καπιταλιστική σκηνή και δη στον Α΄ Παγκόσμιο. Ο ιμπεριαλισμός ήταν μια αθλιότητα που ευθύνεται για μεγάλο ανθρώπινο πόνο, αλλά ο Α΄ Παγκόσμιος μάλλον δεν οφείλεται σε αυτόν. Αυτό, όμως, είναι ένα άλλο θέμα.

Η δημιουργία, όμως, μιας εργατικής «αριστοκρατίας» (των «σκλάβων του σπιτιού», όπως λένε και οι μαύροι των ΗΠΑ), η οποία δεν θέλει να ταράξει τα νερά, δεν είναι πλέον το ουσιαστικό πρόβλημα για την Αριστερά. Σήμερα το πρόβλημα είναι πολύ μεγαλύτερο και εστιάζεται εντός των ίδιων των συντεχνιών.

Εντός της εκάστοτε συντεχνίας, υπάρχουν μεγαλύτερες ανισότητες παρά μεταξύ των «εργαζομένων» και των «εργοδοτών». Αυτός ο διαχωρισμός έχει αλλάξει ριζικά ύφος και, μαζί του, πρέπει να αλλάξει και η προσέγγιση της Αριστεράς.

Εάν η εκμετάλλευση ήταν αναπόσπαστο μέρος του πλούτου κατά τη βικτωριανή εποχή, σήμερα υπάρχει και μια άλλη παράμετρος – η άνοδος των μικρομεσαίων επιχειρήσεων (ΜμΕ). Λόγω των ΜμΕ, ο «πλούτος» είναι αποτέλεσμα σκληρής εργασίας και όχι της εκμετάλλευσης. (Υπάρχουν, φυσικά, εξαιρέσεις).

Αυτό μάλλον οφείλεται στην παγκοσμιοποίηση, παρά εμποδίζεται απ’ αυτήν. Στην Κύπρο, όλες οι επιχειρήσεις, με εξαίρεση 72, είναι ΜμΕ, ενώ το 91,8% των επιχειρήσεων είναι μικρές, οικογενειακές. Αυτός ο πλούτος, «η Κούλα η ράφταινα», όπως συνηθίζει να λέει αυτή η στήλη, μάλλον είναι ήρωες της βιοπάλης, παρά εκμεταλλευτές των εργαζομένων.

Αντίθετα, εντός των ίδιων των συντεχνιών, παρατηρείται μεγάλη ανισότητα. Γράψαμε πολλές φορές πως ο τρόπος με τον οποίο λειτουργούν οι συντεχνίες, αδικεί τα χαμηλόμισθα μέλη τους και ευεργετεί τους υψηλόμισθους. Μάλιστα, αυτή η στήλη διερωτήθηκε –και ακόμα διερωτάται– πώς υπάρχει τόση ανοχή από τα χαμηλόμισθα μέλη των συντεχνιών για την ηγεσία τους.

Ίσως η εξήγηση να βρίσκεται σε μια άλλη μαρξιστική ανάλυση. Ο φετιχισμός των εμπορευμάτων ήταν μία έννοια που ο Μαρξ τράβηξε από τα μεγάλα ρεύματα των ανθρωπολόγων που άνθιζαν στην εποχή του. Τα αντικείμενα, μέσα από τη διαδικασία παραγωγής τους –την εργασία–, αποκτούν μια σχεδόν μεταφυσική ιδιότητα, «σαν να είναι ανεξάρτητα, προικισμένα με δική τους ζωή». Κάτι παρόμοιο έχει συμβεί, φαίνεται, και με τις πολιτικές.

Στην Κύπρο βλέπουμε μια επιμονή των συντεχνιών, ακόμα και της ίδιας της Αριστεράς, σε μια σειρά από πολιτικές που είναι αντιλαϊκές.

Η ΑΤΑ εντείνει την ανισότητα αλλά η κάθε μεταρρύθμισή της αντιμετωπίζεται ως «κουτσούρεμα», ακόμα κι αν το «κουτσούρεμα» αφορά αποκλειστικά και μόνο τους υψηλόμισθους και όχι τις χαμηλές κλίμακες.

Παρομοίως, ως απώλεια των «κεκτημένων» (ένα άλλο φετίχ) αντιμετωπίζεται και η μείωση των επιδομάτων που είναι αφορολόγητα αλλά συντάξιμα. Ένα τρίτο φετίχ είναι και η συνεισφορά των δημοσίων υπαλλήλων για τις δικές τους συντάξεις, μια συνεισφορά που ουσιαστικά κάνουν άλλοι, συνήθως φτωχότεροι.

Εν τω μεταξύ, ίσως το μεγαλύτερο φετίχ να είναι και η φοροδιαφυγή, η οποία αντιμετωπίζεται ως «εναλλακτικό» της διόρθωσης των προνομίων της «εργατικής αριστοκρατίας». Η λογική των συντεχνιών είναι πως πρέπει να δώσουν χρήματα οι φοροφυγάδες για να μην κοπούν προνόμια από τους πιο εύπορους. Ουσιαστικά, λένε: «Αντί να τα τρώνε οι δικηγόροι και οι γιατροί, πρέπει να τα τρώμε εμείς».

Η φοροδιαφυγή, φυσικά, είναι κλοπή και πρέπει να πατάσσεται, όπως και να ’χει το πράγμα. Αλλά η λογική πως είτε οι Α προνομιούχοι είτε οι Β προνομιούχοι πρέπει να τα φάνε, αγνοεί τα όσα υποφέρει «η Κούλα η ράφταινα» για να πληρώνει όσα δεν πρέπει να κλέβουν οι μεν για να τα τρώνε οι δε.

Εν τω μεταξύ, η οικονομία έχει φτάσει σε σημείο όπου, μελλοντικά, η περικοπή μισθών είναι σχεδόν αναπόφευκτη. Τελικά, οδεύουμε προς μείωση μισθών για όλους, με στόχο να προστατευτούν τα «φετίχ» της Αριστεράς. Χαρακτηριστικό είναι πως, με τις πιο πρόσφατες αποφάσεις, το επίδομα τέκνου αποκόπτεται μόνο κατά 50% για μια οικογένεια με μέσο μηνιαίο εισόδημα 7.500 ευρώ.

Εάν κοβόταν στο 0, και με πιο χαμηλό όριο, θα ήταν πιο δίκαιο, ενώ θα μπορούσε να μας επιτρέψει να αυξήσουμε τη χορηγία των πιο φτωχών και να έχουμε, ταυτόχρονα, και εξοικονομήσεις. Αλλά μπαίνει στη μέση το φετίχ των «κεκτημένων».
Ίσως να ήρθε η ώρα να αξιολογηθούν εκ νέου αυτά τα φετίχ, ιδίως αν αναλογιστεί κανείς πόσο «αντι-αριστερό» είναι το αποτέλεσμα.

Επίσης, ένας αληθινός αριστερός θα τα έβαζε με το κεφάλαιο για να προχωρήσει το ΓεΣΥ. Και πρέπει να εκπονηθεί Μεσοπρόθεσμο Δημοσιονομικό Πλαίσιο (ΜΔΠ).
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Relaunch of the Syndicated Blog: "Economists of Cyprus"

Back in December 2008 I noticed that there was a great deal of good economic analysis of the Cypriot economy, but it was disjointed on social networks and blogs. Thus I attempted to bring all this together through a syndicated blog of online commentators, In order to create a community of interested parties to the Cypriot economy.
Today the site "Economists of Cyprus" is being re-launched with additional material and help by Protesilaos Stavrou, a very active member not just of the Cyrpiot blogosphere but also in a European Context.
Please have a look at the website and subscribe and/or comment!

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Friday, 18 November 2011

Old comments... But like many other warnings, none listened.....

It was not just me who was warning that things would reach a crisis in Cyprus, but sadly no one listened. I was requested to repost the comments I made previously to the crisis and i take the opportunity to do so in this post.

Here is the Article on "The Economist" warning on the potential problems published on December the 2010. The interview was extensive but looking back the journalist was right to focus on this:

"Alexander Apostolides of the European University of Cyprus laments the lack of urgency. “There is not a feeling that we are on a slippery slope.”

On an non-related issue this is the comment I made and it was published on "The Economist" the real ideological debate within the ECB back in March 2009. This debate between Keynesian and Monetarist principles is now the focus point of the whole EURO project. If the ECB just accepted the principle of last resort or supporting the the EFSF then the Euro crisis would cease to threaten the fragile global economic recovery. Note that if the ECB believes in the ability to influence the real economy then it knows it can provide a solution (even if it is short term in nature). I finish with a quote back in 2009:

"While there might be a definite disagreement on what the monetarist solution is for Europe, both parties within the ECB accept that the ECB holds the answer and fiscal policies of the respective European countries are at best complimentary but at worst unhelpful."
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Thursday, 17 November 2011

Bad news for Cypriot Banks in the Greek Stock Market...

From published date 16/11/2011.
Τορπίλισε» το Χρηματιστήριο Αθηνών η Morgan Stanley με τις αλλαγές στο δείκτη MSCI. Ο ξένος οίκος ...έδειξε την έξοδο σε τέσσερις ελληνικές μετοχές διότι η κεφαλαιοποίηση τους έπεσε κάτω από το 1,5 δισ ευρώ. Οι μετοχές που αποχωρούν είναι η Alpha Bank, η EFG Eurobank , η ΔΕΗ και η Τράπεζα Κύπρου.
Η είδηση έριξε στα Τάρταρα τις μετοχές. Η μετοχή της Τράπεζας Κύπρου έπεσε 15,65% διότι οι επενδυτές φοβήθηκαν ότι θα αυξηθεί κατακόρυφα η προσφορά τίτλων τις επόμενες συνεδριάσεις. Σύμφωνα με ασφαλείς πληροφορίες ο αριθμός των μετοχών που κατέχουν τα index Fund ανέρχεται σε 4,2 εκατομμύρια μετοχές ενώ η Morgan Stanley δεσμεύτηκε ότι δεν θα πουλήσει τα 46 εκατ. μετοχές που έχει στα χαρτοφυλάκια της.
Η EFG Eurobank έπεσε 12,35% αφού η προσφορά τις επόμενες ημέρες θα φθάσει τα 14 εκατ. μετοχές. Η Alpha Bank έχασε 11,67% και ο αριθμός των μετοχών που θα βγει στο «σφυρί» φθάνει τα 21 εκατομμύρια. Ο τίτλος της ΔΕΗ σημείωσε τη μικρότερη πτώση κατά 5,86% διότι ο αριθμός των μετοχών που θα αλλάξει χέρια ανέρχεται σε 4,9 εκατομμύρια.
Οι αλλαγές θα πρέπει να ολοκληρωθούν την Τετάρτη 30 Νοεμβρίου 2011.
Σύμφωνα με χρηματιστές για να ολοκληρωθεί η έξοδος των ξένων θεσμικών επενδυτών θα απαιτηθεί χρόνος που φθάνει ακόμη και τις 18 συνεδριάσεις με βάση τον ημερήσιο όγκο που κάνουν οι τέσσερις μετοχές. Πάντως η Εθνική Τράπεζα παραμένει στο δείκτη αλλά αυτό δεν εμπόδισε τους επενδυτές να προχωρήσουν σε πωλήσεις. Η τιμή της είχε απώλειες ύψους 4,30% στο 1,78 ευρώ.
Οι ίδιοι εκτιμούν ότι εξαιτίας των αλλαγών θα εκδηλωθούν πιέσεις στο ελληνικό χρηματιστήριο ενώ οι μετοχές που δεν επηρεάζονται δεν είναι σε θέση να απορροφήσουν τους κλυδωνισμούς που θα προκληθούν στο Χ.Α. Την ίδια στιγμή αναλυτές θεωρούν πλέον βέβαιο ότι ο γενικός δείκτης θα πέσει κάτω από τις 700 μονάδες. Προσθέτουν ότι η στήριξη των 680 μονάδων θεωρείται καθοριστικής σημασίας για την περαιτέρω πορεία της αγοράς. Σύμφωνα με τα στοιχεία της εταιρείας ο γενικός δείκτης έκλεισε με πτώση 2,41% στις 717,93 μονάδες.
Στο σύνολο της αγοράς με κέρδη έκλεισαν 48 μετοχές ,οι 113 με ζημιές και 131 παρέμειναν αμετάβλητες. Ο τζίρος ανήλθε σε 46,8 εκατ. ευρώ.

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Wednesday, 16 November 2011

Forecasts of the Cypriot Economy: Estimate still on Track

Back in the 14th September, I was asked to estimate the GDP of 2011 and 2012 for Cyprus. I was reluctant to do so since I do not consider myself a forecaster, nor do I have a formal model of the Cyprus Economy that is forward looking.

I do however understand national accounts and how they work, and having recently looked at estimates and with help of others revised the Mari disaster, I applied this knowledge to GDP. Yesterday the Government of Cyprus has released the latest quarterly estimates being negative at -0.6. So up to now total growth of GDP is just 0.7%.

I am aware that this is a flash estimate and I am sure once the additional cost of more expensive electricity gets updated the value added will drop and the GDP fall will be even larger (-0.1%/-0.2%)

Unlike the third quarter, which was considered universally poor from most available indicators and anecdotal evidence, there is a less clear picture for the fourth quarter. The SMEs in the construction sector and support services to construction seem to be recovering. Consumers are upgrading and repairing existing houses and cars rather than spending for new ones, providing substantial work for several repair and SME services such as plumbing, carpeting etc. One is unsure how much of such business is actually recorded since it is largely done in the shadow economy to avoid paying VAT.

At the same time the news from the most dynamic contributors of economic growth, such as the banking and the construction of housing are suffering. The need for the financial services sector to raise capital and prepare for exposures to Greece, and perhaps additional losses due collateral damage of the current turbulence of the markets (see the exposure to the receivership of MF Global) will reduce income generation.

I stand by my original predictions of September: Negative growth in 2011 (-0.1%), weak recovery in 2012 (0.8%) and negative per capita growth for both years. Any one willing to bet on a different number?

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Tuesday, 15 November 2011

The Euro crisis and democracy

I am troubled by the idea that Politicians are great during the good times, but in bad times one needs to hand out power to technocrats. I think it makes democracy sound like a luxury that prosperous persons can afford, and that politicians (and by proxy those who elected them) are in this way escaping their responsibility of creating the mess in the first place.

Another interesting issue is posted by Protesilaos Stavrou, who has been blogging constantly and with good insight on the economic issues of the Eurozone crisis. He highlights the lack of democracy of the European Central Bank and how this affects the decisions of handing to it the ability to impose both monetary policy (which it has) but also fiscal policy (in the form of control of finances). See the original article here.

ECB and democracy: The traps of debt monetization By Protesilaos Stavrou

Sooner or later the European Central Bank will have to monetize debts to pacify markets, who see the illiquidity of Italy and Spain as an underlying risk that might make their public finances unsustainable within the few years ahead or even sooner, depending on the overall conditions in the Eurozone first and the global economy second. What should be made clear is that the ECB is already buying sovereign bonds from the secondary markets, via its Securities Markets Programme (SMP), though the quantities it purchases are relatively insignificant to shape interest rates and send a clear message to international investors that there is a determined final backstop in the Euro Area. Having already stated on several occasions my belief that the ECB should take a more active role in combating the disintegrating dynamics of the crisis, I now need to point out some issues relating to democracy, transparency and equality with respect to euro member-states, that are often neglected by the vast majority of analysts, for whatever reason that may be.

First of all, the ECB has been given the unique task to issue and control a currency (the euro) without the existence of a counterparty treasury with jurisdiction over the exact same area. The eurozone is a currency union, an area with a single monetary policy (together with all the rest Community acquis), which lacks a unified fiscal policy, or in other words a single authority that would have the power to raise money from its constituent states, by imposing taxes or issuing bonds of its own. Regardless of what was the rationale behind this setting, the gist is that there is a significant institutional gap in the architecture of the euro that makes the management of the crisis ever more challenging. This currently leaves the whole euro with only one policy leg, implying that any efforts to introduce the missing "leg" would either require a cumbersome Treaty change that will take years to be concluded, given the complexity of law-making in the EU and the need for any Treaty change to be ratified by 27 parliaments, making the labor unfeasible within the rigid time frame of the crisis; or alternatively the introduction of ad hoc measures that would give the missing powers to some mechanism that would lack credibility and would most probably be undemocratic, just like the EFSF, or ultimately to assign to the ECB itself the twin task of monetary and fiscal policy.

Given that a credible Treaty change is practically impossible within the time frame available (what Merkel is saying all the time about changing the treaties is mostly to exert pressure on certain governments to pass the necessary reforms), the only real choice, should full scale monetization be allowed, is to either resort to half-measures undertaken by ad hoc mechanisms, or to give all power to the ECB. In either case we are dealing with an issue of democratic illegitimacy and most probably with the over-concentration of powers to unelected bureaus/bodies/agencies/institutions with basically little to no accountability. The ECB for instance is completely independent and no power can tell it what to do. This derives from Article 130 of the Treaty which states the following:
When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB [European System of Central Banks] and of the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks.
Given this legal framework, the transfer of considerably more powers to an institution that cannot be controlled by anyone, is certainly not a prudent choice. The institutional gaps of the euro make the ECB a supranational entity, not a federal one, like the Fed in the US, which is from a qualitative perspective quite different since the ECB will in fact be above any state and will therefore have the power to impose its own conditions for monetization and discriminate among the states it wishes to support. This might sound overstretched to some, yet there already exists an instance of such coercion back in August, when a letter dated August 5 was sent from the ECB to the Italian government demanding austerity measures to be taken prior to the intervention in the secondary markets that took place during that time. Who can guarantee that similar actions may not be repeated in the future, especially in the case the ECB is asked to perform the dual task of being the treasurer and the issuer of the currency imposing rules and conditions and making discriminations? This democratic deficit is indeed an important issue, one that needs be considered prior to any steps towards such a direction.

On the flip-side, one might argue that the EU as a whole is already suffering from a similar democratic deficit which of course exists from the national level and it increases as we move higher in the institutional hierarchy. For instance the European Commission is unelected, yet the powers it commands are impressive. The point now is not to raise the issue of democracy in the EU, but to add to the discussion the argument which suggests that since Europe already suffers from a structural democratic deficit and since all measures that have been taken so far to combat the crisis are in most cases democratically illegitimate (excessive powers to the monitoring mechanisms in bailed out countries, democratically illegitimate mechanisms such as the EFSF etc.), why not move deeper in to the hole by adopting in full the sort of Faustian policies that are already exercised?

Regardless of where one stands regarding the argument, the point remains the same. We as Europeans are found in a situation where we have restricted our selves by designing a flawed monetary union and we now come to the point where the ECB will, sooner or later, have to monetize debts to prevent the implosion of the whole project. Democratic or not, this seems to be the only path to safety (combined with a series of other measures of course). Given that our leaders have proven to be quite creative when it comes to devising all sorts of complicated plans and bizarre mechanisms, an optimist might suggest that we should expect them to come up with a way to circumvent the democratic issue that has been raised above. Failing to do so in an effective manner, might well lead to unpleasant consequences, suggesting that this issue requires carefully taken decisions, with full agreement by all parties involved. At any rate we are already walking on a very thin diving line between virtue and vice. Alas we brought our selves to this position.

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Some interesting juxtapositions: Cyprus and the Piri Reis

The republic of Cyprus and Turkey have increased tension on the Eastern Mediterranean due to the decision of the Cyprus to use its sovereign right of allowing drilling for gas its its economic exclusion area. Turkey has responded by sending the cartographic vessel "Piri Reis" not to the North of the island which is is under occupation by its military, but to the south, dangerously close to where the explorations are taking place.

Yes not many people do not know who Piri Reis was. His name and effort to build very accurate global map indicates the ambition of the Ottoman Empire at that time, when it began to dominate the Eastern Mediterranean through the conquest of Egypt and by forcing the Christian enclaves of the region into retreat or dismemberment. Detailed maps of the New world where commissioned as the empire looked not to the conquest of the Mediterranean which was seen as inevitable(but was eventually checked in Vienna, Malta and Lepanto) but in access to the riches of the New world shared by Spain, Holland, France and Britain.

It is clear that Cyprus was also an important expansion point, as the Venetian ruled island could dominate trade between the Ottoman Empires possessions of Anatolia, Greece, Palestine and Egypt. In its history Cyprus was always considered as a threat by the greatest power of the region, but after conquest it its value declined; it was always valuable to keep it from the enemy, but not so valuable to have it yourself.

I have no way to check if indeed this drawing is by Piri Reis as the source claims; However it puts into perspective that the island, as well as the sea around it has been a strategic concern of Turkey as far back of the 16th century.
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Wednesday, 9 November 2011

Lessons from History: Government Wages in Cyprus

In 1931 the British colony of Cyprus was facing a debt crisis. The very serious effects of the great depression, made worse by the worst drought the island had seen in 100 years, led to a lack of funds for the government. The government cut all public works spending, and argued that the situation would get better soon.

Politicians from all communities, discussing in the talking shop (bereft of real power) provided by the authorities (known as the Legislative council) were pointing out that the wished for surplus was not going to materialise, since the same wishful thinking occurred in 1929 and 1930; then the government increased taxation, only to see further deficits and the shrinking of the colony's reserve. They suggested instead:
1) a cut in surplus positions in the government (especially high ranking ones) starting by cancelling the newest appointments and or promotions.
2) A reduction to the COLA (Cost Of Living Allowance) increase (ATA was in Cyprus since 1878!) and performance related increase by 2/3 but not for those with income below 120 pounds
3) Reduction of government scales across the board especially of those who were created after 1914, which operated in a higher scale.

Of course in 1931 the demands were a statement of political intent as wall as an attempt to introduce fiscal austerity to the apparatus of government: The above measures would hurt the British working in Cyprus, forcing some of them to leave and thus weakening the British grip on power in Cyprus.

What is interesting to me however is how modern these demand are in regards to the current problems of Cyprus. ATA - our current COLA adjustment to wages is set to go in hiatus, and there have been calls for it to remain for the lowered income civil servants. At the same time the desire of the majority population to see more public works at the expense of an over-privileged government wage sector is facing resistance by the government itself, which like in 1931 , is worried about the repercussions in its ability to govern.

What is depressing is this is taking place not between a clash of nations but through a clash of vested interests: It is clear that the pay scales of some government appointments have to be re-aligned to the conditions of the demand and supply of the labour market - there simply is no reasons to have an 80% premium for government teachers as it starves the education system of new teachers and distorts the signalling of our graduates.

If history is our guide the results are not encouraging: the government refused to listen and managed to rack up a very large deficit, leading to a outside aid, increased taxation implemented by force and violent riots. Our government's inability/unwillingness to accept the need of similar measures is sadly leading us to the same direction.

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Tuesday, 4 October 2011

In defence of NOVA (Greece) and the European Court Rulling

The European Court of Justice (note: the court that interprets EU law) has said that the English government wrongly stopped publican Karen Murphy (note: when did publicans stop being ugly as sin ex-boxers?) from paying for the cheaper satellite service of Greek company NOVA in order to show premier league games in her pub. Now one can watch from the cheaper service on offer, regardless of the EU country - The end of the SKY stranglehold on Premier league football.

This decision is the correct one and is based on the principle idea of the European Union - more competition is good for everyone, especially the consumers. But I predict far reaching consequences for football and club financing because of it - it might turn up to be more important than the Bosman ruling on EU players:

1)The financing platform of most Football Associations and of most clubs will need to change. The ruling states that an FA does not "own" the game (that is "owned" by the teams on the pitch) and hence it can not sell it as part of a parcel. Except most clubs signing separate deals with broadcasters in the near future - with possible an even greater divide between rich and poor clubs.
2) Once again it has shown how behind the times are the conservative heads of European Football Associations really are. It is clear even to basic student of EU laws that discriminatory pricing based on national borders is illegal - and yet they have failed to move to another model of financing. FA's would sell the rights to platform in different countries at varying prices, making a fortune in the process - this was clearly illegal since the creation of the single market in Europe. FA's are completely incapable in finding solutions (we are still waiting for the answer to diving, and promoting national players) and should be reformed.
3) This is good news for the prices of games. This ruling makes it very difficult for anyone to offer anything but the lowest price in Europe, especially if a clever clogs takes UEFA to the same court for forcing internet video of the Champions league to have alternative pricing according to the country you are watching it.
4) The financing of clubs is directly affected. A greater drive to have a pan European presence will be needed, as suddenly your share of the pot from the UK TV rights will be reduced. I think it might make playing in Europe more important as the new trance of Sky TV cash for premier league games will be significantly reduced, since SKY will not be able to force British citizens to pay 480 pounds a month (for a Sky pub licence) to show the games, when consumers can watch them for 118 pounds.
5)Well done to NOVA - that is exactly how Greece can bounce back - by being cheaper and aggressively trying to get exports from the EU.
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Tuesday, 27 September 2011

Number Crunching: Why all efforts to reduce the budget might have been futile...

I was told to try and be more positive on the goings on in Cyprus. As a natural born optimist I try, but unfortunately it seems that no one connect the bigger picture - which is completely dire.

1) Possible savings if the measure to withhold the wage indexation of government employees (ATA): 130 million over two years. Will cost 130million more after 2013...
This measure passed with great resistance and with a strike from government teachers.
2) Cost of the contribution of Cyprus to the Greek bailout plan: 150 million
Thus our actual savings is -20 million

In addition:
Amount of short run debt that needs to be rolled over (reborrow) by the end of 2013: 9.9 billion. Amount the Republic of Cyprus is planning to borrow on a 3 month basis 100million. Thus amount we need to roll over soon on a much more expensive interest rate has topped the 10 billion mark.

Oh and what happened to that "loan" from Russia? Can someone please explain who you announce such a deal before it is finalized - and why there has been such a delay in closing the deal?

So once again I tried to write an optimistic article, but my optimism evaporated by 11:00 am. I hope you have a more optimistic day...
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Thursday, 8 September 2011

From a series of bad choices, we chose the one with unknown repercussion.

That the Cypriot state is facing a serious an immediate liquidity crisis was known for a while. Most analysts who saw the first package of measures realised that they were mainly measures to aid the reduction of the structural deficit in the future and less about raising finances for the present. The new package of measures was expected to introduce deep cuts to government expenditure and increased revenues through taxation in order to alleviate the short term issues of liquidity for the government.

The news of the Republic of Cyprus borrowing 2.5 billion from the Russian Federation is instead a much more worrying development. Although the amount sounds small by global standards it is huge by Cyprus standards as it represents about 25% of yearly Government expenditure. The deal is for five years at a high (4.5%) but sustainable interest rate.

The concern is twofold:
1) This will reduce the pressure on the government to introduce very unpopular reforms that need to be addressed.
2) Such a huge aid package offered directly from the Russian Government is not given without giving something back. In choosing between the very bad decision to resort to the EU support mechanism (the DEVIL we know), we instead chose the one with unknown consequences - both in our economic and political sovereignty.

The DEVIL we do not know might in the end compromise our national sovereignty in more significant ways that resorting to the EU support mechanism. The EU support mechanism shows a way out and offers a return to fiscal policy sovereignty in recovery; a loan by a government keen to influence EU decisions by proxy can be an open ended commitment.

We must avoid such open ended commitments just because we panic about the present; The lesson of Dr. Faustus, who sold his soul to the devil in order not to die, but lived perpetually in damnation, should make us cautious in making open ended borrowing commitments in order to avoid making hard decisions now.

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Saturday, 3 September 2011

In praise of the New Cypriot Minister of Finance

After the slow departure of the Cyprus cabinet in the beginning of the month many names were suggested for the position of minister of finance, Until Mr. Kazamias was chosen.

I have to say that I originally thought the choice was a unknown and hence not what one would needs in grave times like these. However I withheld judgement since Mr Kazamias has the support of the respected fellow blogger Professor Panikos Georgiades, who gave a shining reference on his personality, astuteness and character.

The Minister has surpassed all expectations in his first month of office. He has repaired the relationship between the minister of finance and the governor of the central bank, and has brought a spirit of co-operation with the opposition parties, allowing a very swift passing of economic measures that the previous Minister of finance argued they were not possible - even arguing that such measures were not even necessary.

The minister has quickly and without fanfare rescinded decisions of the previous minister that did great damage to the Cypriot Credit Rating. It gave the handling of the government debt back to the central bank, thus reversing one of the most damaging decisions of the previous minister. He has talked bravely of tough changes and managed to haggle something out of the strong unions without ruining his relationship with them... relationship that is crucial in his attempt of passing further measures of budget restrictions.

The success of the new minister makes the previous "do nothing" approach of the Mr. Stravarkis look very poor in comparison. Mr. Kazamias seems capable in providing strong leadership and in promoting the spirit of co-operation that would allow for drastic changes to tackle structural problems of the government budget and i wish him all the best.

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Friday, 5 August 2011

For those that speak german: My interview as part of an excellent and optimistic article in Die Welt.

I am so glad to see this well balanced article that has contribution by me and the fellow blogger economist that I admire, Professor Panikos Demetriades. The link here is in German - you can get a poor translation of it in google translate.

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A single party government will lead us to Greek style trouble

Having been a resident of this island for 20 years, I am still amazed by the narrow mindedness of political priorities in Cyprus.

There is no doubt that we were facing very difficult economic times even before the explosion of Mari. The governor of the Central Bank of Cyprus, (who has not been invited by the government to suggest any plan for the economy) has openly warned that the economy after the Mari explosion is facing the largest national emergency since 1974. The explosion's effects have led to a further downgrade of our economy and our major banks by credit rating agencies, making public borrowing in the international market prohibitively expensive.

The opinion of the credit rating agencies matters as it directly affects at what interest rate the Cyprus Government can borrow. The rule of the thumb is that an interest rate of above 6% Medium terms borrowing is unsustainable, as the very high interest payments will force governments to default rather than introduce incredibly harsh budget cuts.

Back in December I warned that despite repeated downgrades “There is not a feeling that we are on a slippery slope.” The inaction in taking the type of measures that would calm international investors and rating agencies is now hurting us tremendously as the government has very substantial debt to roll over over the next 3 years, and it will have to do so at substantially higher interest rates.

So the next 3 years the Cyprus government will be called to find the money to pay more interest payments in order to renew its existing debt, as well as borrowing more due to Mari and the reduction of revenues that the explosion has caused to our economy. Only very brave and immediate drastic actions to tackle to budget deficit might convince foreign agencies of the will to avoid default in 2-3 years time.

Yet despite the increasingly anxious calls for action, politicians still behave irresponsibly, by mixing political priorities along with measures to prevent a economic meltdown. The fact that it took more than a week to form a government, is very bad news for our credit rating agencies, who want to see quick and decisive politicians who agree on the steps that needed to be taken (especially in regards to supporting our banks and in reducing the size and borrowing needs of government).

DHKO decided to push concessions out of the president on the Cyprus issue at a time of a national economic crisis, delaying the appointment of a government for a whole week. Other parties did not want to join the floundering ship of the president's government. Most irresponsibly of all, the president decided to go ahead and have a one party government.

This one party government is a totally irresponsible act. This government will not be able to pass the budget for 2012 through a hostile parliament, which means that we are set for even more inaction and political wrangling in October. All of this will lead to further downgrades of our economy, making borrowing prohibitive and a default / EU support more likely.

The economy is at a crisis point, and all political parties need to work together to tackle the looming dangers that are just around the corner...

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Thursday, 21 July 2011

Another Estimate By Credit Suisse: 2.4 billion.

Credit Suisse has reached similar results to my First and Second Estimate. I am glad that there is now a lively discussions on costs and their effects.

I base the similarity from this report on stockwatch, which indicates the only substantial difference is the 600 million which will be recovered by the insurance has been factored in. I am still not sure if the insurance will pay up and thus barring any confirmation I left it out.

It is slightly sad to see that they do not reveal their sources, but for a private institution it is perhaps understandable. Once again I would urge economists and other professionals to crowd source and get both estimates policy implications collaboratively. If you are interested replay to this in the comment box.

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Tuesday, 19 July 2011

The cost to GDP of the Vassiliko for 2011: Bringing the economy down by -1.6%

Apparently (I have not had the chance to verify it) The Economics Minister has argued that the Vassiliko Explosion will reduce our growth from 1.5% this year to 0%. It means that the public assertion of Mr. Stelios Platis that the maximum damage can be a reduction of GDP by -1% is not believed by the Cypriot Government, as the Cypriot government expects a fall of at least -1.5%. I feel vindicated in saying that things are much worse than Mr. Platis suggested on the panel on Monday.

I have many reasons to doubt however if the Ministry number is accurate. Even if the first quarter GDP of 2011 showed we were on our way, there is no doubt that industry and retail felt that the second quarter there was a slowdown as unemployment was higher than what we expected during the tourist season.

I have thus converted my own estimates to GDP effects in order to have an attempt to calculate the effect on GDP. I corrected my previous estimates for several issues:
1) Electricity power cuts will be less severe thanks to T/C power. Hence time spent off work for those affected was reduced to just two hours a day (5 day working week).
2) I added the urban effect of Nicosia, which suggests that more people come to work in Nicosia from areas that might have uninterrupted electricity, by increasing the affected rate of Nicosia labour from 80% to 89%.
3) I argued that since Gross Fixed Capital Formation (i.e. creation of new capital) was 2.8 bn in 2010, it is not possible to invest more that 500 million to repair Vassiliko until the end of the year.
4) Thus there is a positive effect of rebuilding Vassiliko of 500 million, with its positive multiplier mean there is a positive GDP effect of 746 million.
5) I have also argued that the reduction of the capital to labour ratio will reduce our growth. If 30% of Growth is from capital deepening, and since capital stock took a hit of 6% due to Vassiliko and other failures of stock, then a reduction of the expected growth rate by 0.30% is very likely.
6) I added the cost of IT repair and IT systems after the demand of friends who constantly complain about this issue. I argued it only affects Tertiary companies and it affects then by raising costs (and hence intermediate consumption) by 0.005%. Let me know if this is valid or if it should be removed since it is a transfer payment between industries.

The results are shown below:

The effect is bad. I fully stand by my numbers and argue that at best we scrape with -1.5 / -1.7%% of GDP for 2011.

However i would not be a good researcher if I did not indicate what can alleviate the losses:

1) Faster, uninterrupted power supply. The above is based on regular power back on the the 18th of December. A faster power normalcy will can dramatically reduce the GDP impact.
2) A faster reconstruction of Vassiliko than the 500 million I suggest until the end of the year.

Here I would like to appeal for help. I have a very old input output table, and crappy capital stock and growth accounting for Cypriot growth. Being a fan of crowd sourcing I appeal anyone with relevant information to send it my way and we can work together.
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Monday, 18 July 2011

A fuss over the 3 bn number. It is a valid and worthwhile estimation, but we need to understand what it is.

An explanation of the 3 bn cost of Vasiliko.

There has been a good load of fuss over the number 2.9/3.1 bn. euro of my 2nd and 1st estimate respectively. I must re-iterate that this number is the reduction of Wealth Of Cyprus. What is the difference between reduction of wealth: this combines the loss of capital stock like Vasiliko in addition is showing losses of income.

In an odd way if only the losses of income where estimated first, people might have been puzzled why repairing Vasiliko would be positive for the income of the economy.
For economists, I will provide today a cost and benefit analysis in terms of GDP.

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Sunday, 17 July 2011

Article in Greek Presenting the Second Estimates At Kathimerini On Sunday

This is an article written by Michalis Perisianis and my self that explains the 2nd estimate and its impacts in Greek. It was published in today's Kathimerini.

My interview of CYBC on Saturday night on the Costs of the Naval Base Explosion

Calling for a debate and research on the cost of the Naval Base explosion and the Urgent action to be made on the naval base disaster. Things can be changed today, but once again brave but urgent decisions are being postponed.

2nd estimate on "best case" cost estimate: 2.9 Bn euro

This is the second estimate of the Cost of the Naval Base explosion using several different sources and internalizing many things that very previously exogenous. I still come to within 5% of the original estimate. I want to thank Michalis Persianis at Kathimerini and Manos of LolGreece for all their comments and help.

Once again this is a preliminary and rough estimate that that is here to show the "best case" scenario and to begin a debate on how to tackle the calamity. That I came within 5% of the original with different sources makes me more confident that this is the Lower Bound cost. Most international commentators argue I am much to conservative and that the true cost of the "best case" scenario could be up to 30% higher.


Our thoughts are to the families of the deceased at these moments, but it is important to quickly understand the effect of this apparent negligent homicide and get a public dialogue on the costs. I tried to make calculations based on energy intensity per sector, but being out of power today for more than six hours meant that I could not access vital data. Once again this is an effort to stimulate debate and not by any chance a final projection of costs.

Total damages are close to 3 billion Euros, or 17% of the GDP of 2010. Even if we delay fixing 2/3rd of Vasiliko until after Christmas, the burden to the economy just in 2011 will be 11% of GDP, with the additional 6% to be imposed on 2012.

I am ever more confident of this estimate, and have calculated a 30% confidence interval at a 95% level. I know this is rough, but if you notice have at least internalized some issues such as costs of petrol etc. that where previously exogenous. Once again I have again biased all figures against what I expected (a high result), so this should be seen as a conservative estimate.

1) Vasiliko Power station
There is increasing hope in salvaging one turbine and perhaps recovering some of the investment, but until we hear a cost figure I stink to a low estimate of the recovery and repair. We need to ask original builders, Austrian Energy and Environment, which built the first phase, and Ansaldo which built the second.

2) Loss of Work Hours in Nicosia, Limmasol and Pafos
We argued that not all areas are affected by the power cuts. Thus we decided to try and capture that by only having the power cuts affect some workers of the economy. We argue that based on the areas that power rationing exists at present, 80% of the Nicosia workforce, 50% of the Limmasol workforce and 60% of the Pafos workforce is affected.

The using the total workforce of the 2009 labour Statistics (376,300) we needed to calculate how much of this labour force is in each province (without having access to the internet due to another powercut). Thus we argued that the population per district of the latest Demographic report is representative of the labour force per district, as use the share of total population to find out the population share per district. This was used to find the total employment per district. Actually this is almost certainly an underestimate as the we actually know that the economic activity rate in Nicosia is about 9.9% higher than that in Limassol, according to the EU’s urban audit.

Thus the total employment per district was multiplied by the proportion of employed population affected per district to argue that 194,146, or 51% of the islands labour force will be affected.

We then used the labour survey of 2009 to estimate the average salary of the labour force per hour. We assume that salaries are constant since 2009 (effectively meaning negative salary growth) in order to bias the result downwards. The average salary of 2,130 euros per month is multiplied by 13 salaries to get an annual average salary figure. Then we estimated that with allowed time of work, the average worker works 40.2 hours a week for 50 weeks (taking out the large number of public holidays in Cyprus, to estimate the average labour hours worked. We then divide the average annual salary by the average hours worked per year to get a annual creation of value added of 16 Euros an hour. Again this is quite an underestimate as the labour cost per hour worked in Cyprus is considered on average as 17.43 Euros.

How much labour time is lost by the power cut? Based on research by Dr. Tim Leunig of the LSE on train delays, predictable cuts (delays) are better for people than the type of unpredictable power cuts we have been having, as one can plan to maximize his efficiency around the power outage. Since power cuts are unpredictable, we estimated that there will be power cuts at least until the last week of December, and that they will be on 3 hours a day for 5 days a week, leading to 360 hours of powerless working time for each affected labourer.

We then argue that the unpredictable nature of the cut does not allow you to be very effective during power outages, being able to produce only 20% of when you have electricity. Thus for every hour of lost time, on average 12.8 euros of value added are lost. So for each worker that is affected the lost hours from the power outage from now until resolution before Christmas costs the economy 4608 Euros.

Again this is very optimistic and almost certainly and underestimate. The cost of planned outages is estimated at one third to one tenth of unplanned ones in Thailand, about one fifth to a quarter in Nepal, or about one half in Sri Lanka, etc. International commentators have argued that even these figures are very conservative as it omits, in a knowledge-based economy, the impact of data and service outages. LolGreece argues that the additional probability of an IT company going out of business following a major data loss incident can create additional significant costs.

By multiplying this by the amount of workers affected we get a staggering loss of the economy of 894,628,513 Euros of lost value added.

3) Additional loss due to Multiplier effect of no.2 (same for 5,7,9,13)
The loss of value added has cumulative effects the economy. Each 1 pound placed in the economy created more than 1 pound. Alternatively each 1 pound loss of the economy will reduce the income of the GDP by more than 1 pound. Using the input/output of the Cypriot economy we can then estimate the additional loss for the economy. Thus for 3, 5, 7, 9, 13 I calculate the knock on effect of the reduction of income when it is resolved through the economy of each cost.

However the Republic of Cyprus does not release its newest Input/ Output tables, and as a result the only publicly available input-output table is shamefully from 1986. Thus I reduced the multiplier effect to lower numbers (biasing against a high figure) to take account of the increased import dependence of our economy since 1986.

4) Loss through increase electricity cost (50% rise) primary and secondary sector(excluding Utilities), and 6) Loss through increase in tertiary sector

The Cyprus Electricity Authority can in no way absorb all the cost of the smaller and hence expensive units that are in use today due to Vassiliko being knocked out. In addition many companies have to rely on alternative power sources such as generators to keep operating even basic systems going. Thus the cost of electricity for companies and households will increase, despite any suggestions to the contrary. A brief survey found that electricity is approximately 4% of cost in the Secondary sector and 2% in the Tertiary sector. An increase in the cost of electricity by 50% (partly increased unit costs and partly cost of rebuilding) will thus lead to a reduction of the value added, as cost will jump by 2% in Primary and Secondary, and by 1% in the Tertiary sector. Thus assuming all else is constant (i.e. value added of 2010) there will be a reduction to the value added share due to the increase cost (2% or 1%) of electricity Production.

Once again LolGreece is correct to argue that we need to add to the estimate some cost consequences of other power plants running at high capacity levels, as indeed we have already experienced system failures through the overload on Friday. This can lead to more costly more maintenance and the increase the frequency of outages.

8) Loss of Utilities value added

All major utilities are affected, with electricity generation being the first. We estimate the loss of value added as 40% for the last six months of this year. This is based on estimates of increased cost per unit of electricity produced (i.e. a reduction of the value added share of electricity, as more of the gross output is cost), and of a reduction of electricity capacity. Similar reductions are expected on all major utilities, water / sewerage, as they are also main clients of electricity and hence very much affected by this crisis where our electricity maximum capacity has fallen below our demand for electricity.

It must be clear to all that there is no doubt that the income created by the production of electricity has been reduced as even if we come to our previous capacity the power currently produced by Moni, Dekelia and auxiliary sources, cost much more per MW hour to make than Vasiliko, as power plants have very large economies of scale in production.

11) Diverted resources of police, army, fire-fighters etc.

The diversion of police, army and fire fighters due to traffic duties, helping trapped visitors and gassing peaceful protesters diverts police time. I arbitrarily picked a low number for the overtime and additional work load based on high overtime wages

12) A fall of 1% of hotel occupancy rate due to tourism cancelations

Using estimates I devised in another project that attempts to measure economic interdependence between the communities in Cyprus, I have an estimate of how a 1% in occupancy rate impact the hotel and restaurant sector. Notice I am only suggesting a very small decline in occupancy and not a mass exodus of tourists – just a reluctance of a small number to come to Cyprus after the negative publicity.

Things I have not estimated include: Increase in insurance premiums due to increased car crashes (traffic lights are out); cost of repairing the damage to the villages around the base; cost of rebuilding the state of the art base that was destroyed; cost of compensation to victims if negligent homicide is proven; additional deaths caused by heat during power blackouts during the expected August heat wave; additional cost of health provision for the injured of the accident and of the accidents due blackouts; Machine degradation and IT support due to system shutdown and failure.

Saturday, 16 July 2011

Congratulating the Communal Chamber of Commerce

****I am not saying that the government did not aid the Chamber for this agreement to happen; all I am pointing out that a braver decision was to be candid about our energy means and do it directly****

The Cypriot Chambers of Commerce have reached an agreement in providing at least 70 MW of electricity from the Turkish Cypriot power station. This is the greatest relief for the economy and once again the private sector has steeped up to make decisive steps where the government prevaricated.

Electricity was always provided across the green line from the Republic of Cyprus to the Turkish Cypriots - this needed no involvement of the private sector and it went without saying that no one in the Turkish Cypriot Community thought that this entailed recognition of the sovereignty of Republic.

However the latest request to receive electricity was made in a major political issue by the government adding provisos that were not necessary, such as stating that this would take place only if it would not entail recognition.

That last statement shows lack of knowledge about the issues of the Cyprus problem. It is endemic of the lack of a clear line given top down to the whole government apparatus in how to behave in communal matters. There are very clear things that entail recognition, and also clear what things led to recognition. The republic and the Turkish Cypriot communities have constant interaction about day to day issues. In fact more informal interaction needs to be encouraged: Is it better to let a murderer run away because you do not want notify the police of the other community that he fled across the Green line? The answer is no - informal negotiations for mutual benefit happen even between parties at time of war.

However the government prevaricated, making a non-political issue political. Once again the Chambers of Commerce have shown that it can step up where the government prevaricates. It has secured a deal that saves us for a looming disaster: the existing electricity capacity is failing under the strain. The diagram below
explains the issue.

Our productive capacity has been suffering from using it 100% all the time and its falling to even less than 40% of what we had before the accident. From having a problem between the hours of 11 and 6 we now have a problem from 7:00 to 1:00 at night. We are not just in crisis in peak periods any more: we are in crisis in all the productive periods!.

EUROKO (and DHKO's Nikos Papadopoulos) are pandering to the masses saying that we do not need the T/C power. This is an outright lie. The loss of man hours through unpredictable power cuts is approximately 1 billion alone. This is only until December: Any further delay will increase the cost and the recession of the economy will deepen.

The new generating equipment for Israel and Greece will only provide at best 10% of T/C electricity. EUROKO (and DHKO's Nikos Papadopoulos) are being totally irresponsible in arguing that rationing or other sources can lead to an increase in capacity: T/C power is the best way to stop our economy bleeding to death. In a national crisis, we all need to stop and think of the consequences of what we are suggesting: EUROKO, by rubbishing the agreement, effectively tells us that even greater electricity rationing and much harder economic hardship is worth it, even if there is no issue of recognition. This is unacceptable behaviour.

The best and immediate way to get electricity is the solution that did not have to be political and that a prevaricating government let the private sector to finalize. Well done the Chambers of Commerce on both communities: showing us that tough times needs rapid and brave decisions.

Friday, 15 July 2011

The Macroeconomic costs of the Naval Base blast

In this third article on the “E Florakis” base I will consecrate on the macroeconomic problems that arise from the disaster. Just to recap, up to now we have seen the very serious microeconomic effect to companies, and that the lowest estimate possible of costs of the disaster is €3.1 billion, or 17.9% of the whole income of the economy (GDP).

Sadly this only captures what we call the static costs of the accident. This only takes account of income lost until the damage is fixed in the electricity generation and in fixing the generating capacity of Cyprus. However, experience has shown that the dynamic costs on the economy can be much more significant, and still have an effect in the economy after many years.

The dynamic costs will reduce not just income today but create conditions that keep the growth of income of Cyprus lower than it would have been. I will focus on three issues: Inflation, Reduction of Capital intensity, and national debt.

1) Inflation:

The electricity produced either by the existing stations or through generators is by far more expensive to produce that the (relatively) cost efficient Vassiliko power station. At times like this the emphasis on basing our energy future on carbon based power stations rather than diversifying in renewable energy is clearly seen for what it is: totally myopic. The cost per MW hour of many of the power sources currently used to make electricity are more expensive than renewable resources, resources for whom funding was partially reduced in an effort to cut costs in the last 2 years.

Part of this additional cost of electricity will be passed to the consumer: it is not possible for firms and the electricity authority to absorb this added cost in their entirety as they have already been struggling due to the economic crisis. An increase of fuel bills though a hike in electricity bills or indirectly through emergency taxation, is unavoidable.

Thus prices will increase (i.e. inflation) across the board, and inflation tends to create a self fulfilling cycle of further inflation in the future. This increase in prices will have two main effects that will create further downward pressures in our total income (GDP). The purchasing power of the income of those working in the private sector will fall, reducing consumption and thus further reducing the expenditure that keeps the economy afloat. More serious is the second possible effect of a reduction to competitiveness. An increase in prices makes all our products and services less competitive relative to other EU countries, who can freely export to Cyprus. Thus imports are expected to increase while exports fall, making it very difficult for the economy to find the road to recovery.

2) Reduction to capital intensity

Economic growth depends on many factors, but the most important are considered increases in capital (both human - education and physical - power stations) and the adoption / generation of technology. In my first article I explained how the lack of power is slowing down the rate of technology adoption (or even at times making people go to older less efficient technology, like analogue phones). This will reduce the rate of economic growth in the future, as long as our electricity needs are not fulfilled.

More serious is the loss of capital intensity, or the amount of capital per worker in the economy. According to all theories of economic growth (Unified Growth Theory, Endogenous Growth Theory, Neo Classical Growth theory) the increase of the amount of capital per worker is the single largest component of economic growth and prosperity. Simply put, a man with just a needle can only sew one shirt a day, but with a sewing machine (more capital per worker) he can produce much more. Using a personal example i cna relate it to what we are experiencing today: I am writing this by candle light, without internet access.

The destruction of the largest investment project of the island though ineptitude lead to a mass reduction in capital intensity. It is not just that the capital stock of the economy is poorer by €2 billion euro. It is also the fact that so much capital is lain dormant at as the unexpected power cuts prevents their use.

All growth theories argue that a reduction of capital intensity can lead not to just lower growth, but in extreme cases it can lead to a reversal of the growth process. This is by far the most serious consequence of the blast: it reduced not just our current capabilities for growth, but our future capabilities for growth as we need an ever greater amount of capital to reach the capital to labour ratio that we had on the 10th of July, since our population keeps rising.

3) National debt

The debt we will need to incur for Vasiliko alone is in excess of 1 billion; even if we assume that the insurance will pay 600 million despite not being an act of god or war damage. This is debt was not projected for 2011 and for 2012, and the ability for the government to borrow both from domestic and for external markets was already being questioned before the accident and the additional need to find resources to rebuild the damage. The issue is how the government can raise the money for repair without raising too much debt, and without lowering the GDP. Both are crucial as Debt to GDP (Debt / GDP) is a measure used by international markets and the EU to judge solvency of a country.

The choices of the government are thus as follows:
a) Appeal for aid: This will be ineffective our traditionally major aid donors (US, UK, Greece), since they are already in debt trouble of their own. EU aid is a possibility.
b) Save: An emergency withholding of 5% of government wages to be used to repair Vasiliko will have little impact in terms of GDP as additional revenue created by the government wage bill (i.e. the multiplier effect) is very small.
c) Tax: Taxation will need to go up, but as taxation reduces output, this can actually still increase the debt to GDP ratio as the economy will shrink further.
d) Borrow: It will be at much higher rates that previously; thus government will still need to save through a reduction of government wages in order to afford the repayment of the debt. It will also lead our debt to GDP ratio at close to the levels seen in other Eurozone countries when they requested EU/IMF bailouts and hence we will be running the risk of handing fiscal control to outside organizations.

Choice A and B are by far the “least bad” choices. We must remember that even before the explosion we were talking about the need to lower wages in the government sector: this negligent homicide has me convinced that the best policy right now is an across the board reduction in wages, for both the government and the private sector, bit with an greater cut for the government employees.

This is not unprecedented in face of disaster; union agreed a large pay cut and an increase in hours worked after the 1974 invasion and it must be understood that what happened in the 11th of July is the second biggest calamity faced by Cyprus since independence.

A reduction in wages (especially if wage indexation is suspended until Vasiliko is repaired) can aid both with inflation low, and the reduction of the wage bill will allow for repair expenditure at Vasiliko.

What can we due to reduce this Macroeconomic costs:

1) Buy Cypriot:

Our producers of goods and services will need support since they are now competition with other EU countries while facing power cuts and higher costs.

2) Regular and planned power cuts:

The cost of planned outages is estimated at one third to one tenth of unplanned ones in Thailand, about one fifth to a quarter in Nepal, or about one half in Sri Lanka, etc. Planned outages reduce the microeconomic and macroeconomic consequences of the loss of Vasiliko.

3) Set up an Escrow account for repair:

The civilians, companies and government officials that might be requested to make monetary sacrifices will need to feel that such sacrifices are not misused. A separate account from central government accounts needs to be created, with deposits only being withdrawn if they are to be used to repair the effects of the calamity. This account needs to be transparently managed, allowing the people to make the sacrifices without feeling that accounts are misappropriated (i.e. it is not being used for dental work for government officials).

4) Wage reduction:

The government unions must now understand that there is not choice: the only real savings that can be made in the government budget, is a substantial reduction of the pay scale at all levels. This is the “least bad” way of financing reconstruction as it calms the markets and prevents us going to the international markets with a large amount to borrow. PASIDI, OELMEK and other government unions need to realise that the most patriotic think is to allow the government to withhold a 5% of their monthly wage in an Escrow account to rebuild Vasiliko, or else the whole economy will be in much greater danger of default.

5) Immediate debt restructuring:

We do not need to wait until we are in the position of Greece to ask the private sector to come to a new, more favourable deal with the government for the existing debt. Even if we can reduce debt repayment by 1% through such voluntary re-negotiations, this can release valuable funds for the immediate repair of the damage.

Sadly all of the above needs a government that is willing to be innovative and acts decisively fast, and the events since the 11th of July seem to indicate that the present government seems incapable of taking accountability, acting rapidly and being brave.

Thursday, 14 July 2011


‎"καλύτερα στη μπανανιά κι ας τρώω μόνο μπανάνες" - Ιντα τόπος είμαστε σιορ..

Θ’ ανέβω σε μια Μπανανιά
Στην πόλη βρήκες δουλειά
και στο καψόνι σ’ έχουν ταράξει
τρέχεις για αλλωνών λεφτά
κι εσύ δεν έχεις βενζίνη στ’ αμάξι
Σπίτια ,νταηλίκια ακριβά
κι έτσι μένεις σε μία τρύπα
όλοι άγνωστοι στη γειτονιά
δεν ξέρεις ούτε τον δίπλα
Διασκέδαση ,δύο ποτά
κάθε Σάββατο σ’ ένα μπαράκι
να του πει να πας σινεμά
Κυριακή,τι πίκρα παιδάκι
κι εγώ
Θ’ ανέβω σε μια Μπανανιά
και θ’ αρχίσω να τρώω μπανάνες
καλύτερα στη μπανανιά
κι ας τρώω μόνο μπανάνες
Θ’ ανέβω σε μια Μπανανιά
και θ’ αρχίσω να τρώω μπανάνες
καλύτερα στη μπανανιά
κι ας τρώω μόνο μπανάνες
καλώδια στην κίνηση με κόρνες
κάμερες και μπάτσοι στη χρονιά
εκμετάλλευση, βαράς διάλυση
πάμε μαζί στην Μπανανιά
Άτοκες δόσεις, υποχρεώσεις,
δε φτάνουν τα λεφτά
ακρίβεια, κι εσείς τα ίδια,
ανέβα σε μια Μπανανιά
Θ’ ανέβω σε μια Μπανανιά
Με το ευρω σου πατάνε καλά
σου πίνουν το αίμα, μα ο χρόνος κυλάει
κυβερνήσεις πέφτουν,απο αυτες περιμενεις
τα θες κ τα παθαινεις
όλοι τα ξερουν κ ολοι τα κραζουν
ολοι μιλανε κ ολοι φωναζουν
οι ιδιοι σωπαινουν, οι ιδιοι βελαζουν
μολις βολευτουν, αραζουν
κ εγω
Θ’ ανέβω σε μια μπανανιά
και θ’ αρχίσω να τρώω μπανάνες
Καλύτερα στη μπανανιά
Κι ας τρώω μόνο μπανάνες
Θ’ ανέβω σε μια μπανανιά
και θ’ αρχίσω να τρώω μπανάνες
Καλύτερα στη μπανανιά
Κι ας τρώω μόνο μπανάνες
Δικτυο, καλωδια, στην κινηση με κορνες
καμερες και μπατσοι στη γωνια
Εκμεταλλευση, βαρας διαλυση
Παμε μαζι στη μπανανια
Άτοκες δόσεις, υποχρεώσεις,
δε φτάνουν τα λεφτά
ακρίβεια, κι εσείς τα ίδια,
ανέβα σε μια Μπανανιά

Excellent Review by Finance Lecturer, Alexander Michailides. This insanity goes right to the top.

Original source: Stockwatch 14.07.2010
By: Dr. Αλέξανδρος Μιχαηλίδης

Αξιότιμε Πρόεδρε της Κυπριακής Δημοκρατίας, κύριε Δημήτρη Χριστόφια.

Επειδή έχετε στο πρόσφατο παρελθόν ενθαρρύνει τα παιδιά του γυμνασίου να έχουν και να εκφέρουν άποψη, πιστεύω θα θέλατε και τους καθηγητές πανεπιστημίου να εκφράζουν και τη δική τους άποψη.

Επειδή τα εκρηκτικά στο Ζύγι σκόρπισαν το θάνατο και άφησαν την Κύπρο χωρίς τη μισή της ηλεκτρική ενέργεια στην πιο κρίσιμη στιγμή της οικονομίας μετά το 1974.

Επειδή δεν μπορείτε να πείσετε τους πολίτες ότι είτε δεν είχατε γνώση του προβλήματος, είτε ότι δεν χρησιμοποιήσατε το φορτίο σαν μέσο άσκησης εξωτερικής πολιτικής.Επειδή η δικαιολογία «Ο Πρόεδρος δεν γνώριζε» δεν είναι ούτε πιστευτή, ούτε αποδεκτή.

Επειδή η κυβέρνηση χρειάζεται επαγγελματίες σε όλα τα επίπεδα για να ελπίζει ότι θα μπορεί να δουλέψει επιτυχημένα, δεδομένης της πολυπλοκότητας διακυβέρνησης μιας μελλοντικής ομοσπονδιακής χώρας με τους Τουρκοκυπρίους.

Επειδή επαγγελματίες όπως ο Αθανάσιος Ορφανίδης (Διοικητής της Κεντρικής Τράπεζας) και η Χρυστάλλα Γιωρκάτζη (Γενική Ελέγκτρια) δεν έχουν διοριστεί από εσάς αλλά από τους Τάσσο Παπαδόπουλο και Γλαύκο Κληρίδη αντίστοιχα.

Επειδή αντί να προστατεύετε τους πιο πάνω επαγγελματίες, είτε τους υπονομεύετε (Ορφανίδη) είτε τους αγνοείτε (Γιωρκάτζη).

Επειδή οι ανάλογοι διορισμοί από σας είτε δεν εμπνέουν το κοινό (Παπασάββας), είτε δεν έχουν τα ανάλογα προσόντα (Χριστοφόρου), είτε έχουν παραιτηθεί υπό την κατηγορία για διαφθορά (Μολέσκης, Βάσος Γεωργίου), ενώ συμβάντα όπως η «απόδραση» Κίτα δε βοηθούν την εικόνα της διακυβέρνησης.

Επειδή δεν βασίζεστε σε αξιοκρατικά κριτήρια για τους διορισμούς σας. Αλήθεια, ο κ. Χάρης Θράσου ήταν τόσο καλός υπουργός Συγκοινωνιών κατά τη διάρκεια του ατυχήματος της Ήλιος που έπρεπε να τον επιβραβεύσετε με το διορισμό στην προεδρία της ΑΗΚ;

Επειδή ο κομματισμός οδήγησε την Ελλάδα εκεί που έχει οδηγηθεί και το χρώμα της κομματικής ταυτότητας από μόνο του (είτε αυτό είναι κόκκινο, είτε μπλε) δεν θα οδηγήσει ποτέ σε αποτελεσματική διακυβέρνηση.

Επειδή η αναβλητικότητα και αναποφασιστικότητα στην εισαγωγή μέτρων για την οικονομία είναι παρόμοιας μορφής με τη διαχείριση του φορτίου. Και όπως για το φορτίο σας τα έχει γράψει στην έκθεση της η κα Γιωρκάτζη, για την οικονομία σας τα έχει γράψει τουλάχιστον ο Διοικητής της Κεντρικής εδώ και πάνω από 2 χρόνια.

Επειδή όπως ο λαός δεν ξεχνά τι έγινε στις 15 Ιουλίου 1974, ο λαός δεν θα ξεχάσει τι συνέβηκε στις 11 Ιουλίου 2011.

Επειδή δεν αμφιβάλλω ούτε για τη δική σας τιμιότητα, ούτε για τον πατριωτισμό σας, ούτε για τη θέληση σας να προσφέρετε στον τόπο. Λανθασμένοι χειρισμοί όμως είτε από άγνοια, είτε από ερασιτεχνισμό, είτε από περισσό γινάτι, παραμένουν κατακριτέοι.

Επειδή η προσπάθεια της κυβέρνησης να αποδώσει αλλότρια κίνητρα στους επικριτές της δεν είναι μόνο προσβλητική για τους πολίτες, αλλά δείχνει και μια ανησυχητικά επικίνδυνη αντίληψη και ερμηνεία των πραγματοποιηθέντων γεγονότων.

Επειδή έχετε απωλέσει την εμπιστοσύνη των πολιτών ότι μπορείτε να κυβερνείτε αποτελεσματικά τη χώρα.

Επειδή αν παραιτηθείτε ίσως να διασώσετε την υστεροφημία σας. Σαν ο πρώτος πρόεδρος που παραιτήθηκε για να αλλαχτεί το σύστημα και να βάλει πίεση στον επόμενο πρόεδρο να ακολουθεί αυστηρά αξιοκρατικές διαδικασίες. Να βάλει τέλος στους ερασιτεχνισμούς, τέλος στον κομματισμό και τέλος στο ρουσφετισμό.

Για όλα αυτά τα επειδή κύριε πρόεδρε, σας καλώ να παραιτηθείτε και να προκηρύξετε άμεσα προεδρικές εκλογές.

Ο Αλέξανδρος Μιχαηλίδης είναι καθηγητής χρηματοοικονομικών στο Πανεπιστήμιο Κύπρου.