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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