by K.H. | NICOSIA
JUST over a month ago, Michalis Sarris, a retired World Bank official who served as Cypriot finance minister during the boom years that followed European Union accession in 2004, signed up for another stint in government. Nicos Anastasiades, the island’s newly elected president, had asked him to return to his old job.
This time the task was much tougher. Mr Sarris knew Cyprus’s oversized banking sector would have to shrink fast and that the cost would be high. The “haircut” on bank deposits demanded by Germany would drive away many Russian and Ukrainian companies that use Cyprus as a base for doing business, providing a comfortable living for several thousand Cypriot lawyers, accountants and bankers. Yet the cost of resisting would be even higher: immediate bankruptcy and a speedy exit from the euro.
Mr Sarris, a quiet technocrat, and Mr Anastasiades, an argumentative lawyer, were soon at odds with each other and with the so-called eurogroup, the finance ministers from the 17 euro zone member-states. After an unsuccessful trip to Moscow to seek a €5 billion ($6.4 billion) emergency loan, followed by the eurogroup’s rejection of Nicosia’s alternative plan to raise €6 billion to avoid a levy on deposits as well as the collapse of Laiki Bank, the island’s second-largest lender, Mr Sarris threw in the towel. He resigned on April 2nd, hours after completing negotiations on a €10 billion bailout with EU and IMF officials.
Mr Sarris’s troubles are far from over. He must testify twice before a team of three Supreme Court judges, appointed by Mr Anastasiades, to find out how Cyprus rushed headlong into financial ruin. The inquiry may result in prosecutions of prominent public figures. Mr Sarris’s brief term in office will come under scrutiny, along with his chairmanship last year of Laiki after it was nationalised and kept afloat by injections of emergency liquidity assistance from the Cyprus central bank. Having failed to persuade a Russian or Chinese investor to buy Laiki, Mr Sarris was summarily sacked by the then Communist government.
At least he will not have to implement the EU-IMF austerity programme. That will be up to Charis Georgiades, a former spokesman for Mr Anastasiades’ right-of-centre Democratic Rally party, who was promoted from labour minister. Mr Georgiades, a 40-year-old economics and international affairs graduate with no previous cabinet experience, faces a steep learning curve. A leaked draft of the bailout agreement suggests there will be fierce battles with Akel, the Communist Party, the main opposition, over plans to privatise telecommunications, electricity and ports, and abolish the index-linking of public sector wages, a hangover from the 1970s. Civil servants, who make up the biggest sector of the workforce, will take unprecedented salary cuts.
Perhaps the hardest part of Mr Georgiades’s new job will be coping with new uncertainties. This year’s forecast for a 4.5% contraction of the economy pre-dated the financial collapse. Hastily revised projections suggest it could shrink by anything from 7% to 15%. Much will depend on how long Cyprus’s new capital controls, the first imposed anywhere in the euro zone, will last and how big the deposit haircut will turn out to be. Last week’s estimate of 40% has already been revised upwards to 60%, according to officials at the Bank of Cyprus, the biggest lender. With strict limits on credit card transactions and cash withdrawals as well as transfers abroad, most business activity has stalled. “We’re in limbo and we don’t know how long for,” sighed an importer of bathroom fittings in Nicosia.
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