Thursday, 20 January 2011

We are Falling – but we refuse to open the parachute

First I wanted to apologise for not blogging for so long. The reason was that I was interviewed by the Economist, where I extolled the virtues of Cypriot banks and condemned the lack or any sense of urgency in actively tackling our economic crisis by our government.

The resulting article however focused more on the perceived difficulties of the banks and their exposure to Greece, and went so far as suggesting that we might be the next Iceland or Ireland in the making, which was completely contrary to my belief.

However such negative exposure has been our own fault. We have given the international community to doubt even wise investments and strategies because of the unwillingness in tackling with our current domestic problems.

I stated in the Sunday mail on the 22nd of Octomber 2010 that the first small downgrade of our economy and our banks was more a warning to our government that “Credit rating agencies will first wait to see the government reaction in the new budget before making further decisions” in regards to a deeper cut to our international standing.

The result: the downgrade seemed to spur the government in some haphazard measures to reduce the public deficit, measures that were then bogged down and diluted so much before passing through parliament that they bared no resemblance to the brave measures demanded by the global economic players. As a result further downgrades of our economy are expected and with it our banks ability to borrow also suffers a blow, to the detriment of all Cypriots.

However we must understand that we were not pushed out of a plane without a parachute: the government had the chance to significantly reduce government wages, and thus free up capital both for debt repayment and investment projects, but it chose not to do so. The analogy is of government economy falling out of a plane and choosing not to open the parachute in order keep a consensus with the major unions of the government sector. However the result is that the drastic measures needed will hurt now more that if they were taken a year ago. My greatest fear is that with each further downgrade the incentive to point to foreign “dark powers” will outweigh our desire to finally tackle the real problem in the Cypriot economy, which is the lack of any connection between the government wage bill and the country’s competitiveness.

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