The latest in the concatenation of disjointed actions characterizing the Cyprus bailout programme, is what appears to be a reprofiling of the sovereign debt, realized through a “volunary” bond exchange, under domestic law, worth €1 billion, with the material effect of extending maturities while holding coupon rates constant. The press release of the Ministry of Finance reads thus:
The Ministry of Finance of the Republic of Cyprus announces that on June 27, 2013 the Republic of Cyprus will offer to exchange a number of existing local government bonds with a total nominal value of €1,0 bn, which mature during the economic adjustment programme period (2013-2016Q1), with 5 new bonds with correspondingly equal coupon rates and 5-10 year maturities.
In a joint statement, the European Commission and the International Monetary Fund, ventured to essentially laud and to support this fiscal exercise. The two institutions noted the following (emphasis mine):
We welcome today’s announcement by the Cypriot authorities to launch a voluntary debt exchange of Cypriot sovereign bonds with a total nominal value of €1,0 billion and maturing within the economic adjustment program period (2013-Q1 2016), for new bonds with the same coupon rates and 5‒10 year maturities.
The objective of this liability management operation is to facilitate cash-flow management for the government and to ensure adequate funding at terms that support long-term public debt sustainability, an essential step towards Cyprus’s economic recovery. The transaction is fully in line with the country’s previously announced commitment to roll over €1 billion of government debt held by domestic investors at existing coupon rates and extended maturities. Once this transaction is completed, the refinancing commitment undertaken by the Cypriot authorities in support of the adjustment program would be fulfilled.
We reiterate our commitment to stand by Cyprus in partnership and to support its return to growth and prosperity.
The beautifying and obfuscatory palaver aside, it seems that the reprofiling of that portion of the sovereign debt has been part of the bailout programme, as a precondition to the distribution of funds by the European Stability Mechanism. If that is so, we have certain initial reactions to this mode of operation that raise practical and normative concerns about the internal coherence of the macroeconomic adjustment programme for Cyprus and, in particular, the role of the European Central Bank in this grand design. We have thus far witnessed, as a response to this, credit rating downgrades from two of the three members of the state(s)-sponsored oligopoly of major credit rating agencies, Standard & Poor’s and Fitch. In principle what a clique of financiers does and thinks, aloof from the fray of the powerful regulative forces of genuine competition, should be irrelevant to the political orientations of an official entity and, a fortiriori, should not anyhow hamper the much-touted “solidarity” permeating common European action. Alas, crowning the kind of appalling antinomies inherent in the architecture of the EU, the ECB qua indispensable member of the troika, has taken the questionable decision to side with the aforementioned credit rating agencies in also considering the debt exchange as of dubious quality, value or necessity. According to the statement of the ECB, issued on June 28, 2013:
The Governing Council of the European Central Bank (ECB) has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Republic of Cyprus for use as collateral in Eurosystem monetary policy operations. This decision takes into account the changes in the credit rating of the Republic of Cyprus as a result of the transactions announced by the Ministry of Finance of the Republic of Cyprus on 27 June 2013.
Such a decision amounts to an effective exclusion of Cypriot banks from the credit channels of the ECB, on grounds of inadequacy in quality of collateral. This shall force local banks to resort to Emergency Liquidity Assistance in order to meet their liquidity needs, with all the concomitant side effects this will most likely have on their—and the economy’s—sustainability over the longer term, and to further reduce their exposure to the real economy by cutting back on furnishing credit to private entities, effectively increasing the intensity of the ubiquitous credit crunch and, consequently, exacerbating an already deleterious economic crisis. What the government gains out of this debt reprofiling as enhanced flexibility in the management of its debts, the economy loses in the mounting duress exerted upon its already precarious banks and fragile capital structures. If a cost-benefit calculation were to be conducted at this stage, it would most probably show the overall suboptimality of this process.
Adding to the above, there are at least a couple of aspects to the ECB’s modus operandi that practically beg to be examined or, at the very least, to be enumerated:
- inconsistency of the bailout programme: the ECB in its role as a member of the troika should in principle conduct its operations in a manner that would not contradict those policies peculiar to the implementation of the macroeconomic adjustment programme; policies which it contributes to in its function as technocratic troika expert to the drawing up of the Memorandum of Understanding and as the citadel of expertocracy contributing to the formulation of the specific austerity measures stemming from—or enshrined in—that Memorandum. It is to be understood that this reshuffling of Cyprus’ sovereign debt is inextricably bound up together with the bailout programme, or is a necessity arising from the enforcement of its provisions that have already brought about a dearth of liquidity, a shortfall in state revenues and an overall downfall in economic activity. What the ECB now succeeds in doing, is to pit further stress on a collapsing edifice, by increasing the liquidity squeeze on both the sovereign and the local banks, thus further blurring the boundary between illiquidity and insolvency.
- crony-capitalism: the fact that the institution performing the monetary function of the Euro area alludes to changes in credit ratings offered by private corporations, whose record in recent history was rather dismal if not criminally reckless, as justificatory ground for its latest policy, must engender serious doubts over the technical capacity of the ECB to actually evaluate the creditworthiness of sovereigns and financial entities within the confines of the currency area it administers, in a fashion that is objective and thoroughgoing. Doesn’t the ECB have an independent body for the assessment of creditworthiness in the EMU? If not, then how can we regard it as the pillar of credibility it purports to be when it comes to the formulation of monetary policy? The specifics of the ECB notwithstanding, why does it rely on this infamous cartel of credit rating agencies, whose derisory ratings and exercises in mendacity where among the major causes of the grotesque capital misallocation and resource misdirection prior to—and leading to—the Great Recession; and why does it proceed in bestowing a de facto role of counter-party in policy-making to private corporations whose interests are anything but the promotion of the public good (if we are to make the brave assumption that the ECB has such a laudable end, given its monolithic and restrictive mandate)? Whatever the answer may be, it is preposterous to consider the inputs of these credit rating agencies as “market signals”, because their privileged status disassociates them from anything that could classify as truly “free market”. Seen differently, the ECB should not provide pampers and perverse incentives to conniving market insiders; and the fact that it does, is an alarming indication of how profound the symbiosis of officialdom and financial power elite continues to be.
On a more general note, the impact of the systemic crisis in the Euro area on Cyprus’ economy was meant to be devastating, given the numerous structural weaknesses of the island’s economy. An economy whose foundations were anything but firm, whose adaptation to evolving patterns of specialization has been excruciatingly slow and whose most booming sectors were fueled by erratic influxes of capital rather than benign reallocations of scarce resources and adjustments in capital/labor structures that would bring about increased efficiency gains, could never be in a position to remain insulated from the vicissitudes of a raging economic crisis and could not have the means to withstand the severe shock in the absence of sufficient (re-)stabilizing fiscal and monetary mechanisms.
Factually accurate as these issues may be, an assessment of this “pure data” and its projection into a chimerical, decontextualized future, tantamount to a techno-economic determinism, would fall lamentably amiss in disregarding the invidious effects arbitrary politics are bringing upon the fabric of inter-subjective properties and realities. Market operations are as much about the coordination, distribution and infusion of (new) knowledge and information on prices, preferences, tastes, availability of resources, input requirements at all stages of the production chain etc. as it is about the anticipation, appraisal and interpretation of phenomena or events, in their actuality or potentiality, in the minds of acting subjects, against a specific spatio-temporal context and influenced by a given-though-evolving cultural-polital milieu. Couched in these terms, the perverse decision-making modalities of the quasi-confederal architecture of the Economic and Monetary Union, in conjunction with the evident timidity, indecision and underlying defeatism of the “Greek”-Cypriot government, must be perceived as vectors for economic degradation, as contributing to—or fostering—regime uncertainty and antithetical policies.
The malpractices peculiar to the Greek macroeconomic adjustment programme seem to recur with greater determination in the case of Cyprus, since reasonable options are initially ruled out as “unrealistic”, by those congregating the European Council in its various arrangements—those short-sighted, opportunist representatives of parochial interests (nation-states)—only to then be applied belatedly and hastily at a later stage in the process, where their impact is in fact the opposite of what it would have been were their introduction been timely, predictable, foreseeable and transparent.
There is no concerted action in addressing the localized effects of the crisis in Cyprus, as there is no coherent, holistic and systematic treatment of the structural features of the economic crisis across the Eurozone. We may all attribute the downfall to maladministration, ill practices, lack of economic prudence, inadequacy of market institutions etc., all pronouncements of which would be correct in their own accord; yet, whatever our political outlook and aspirations may be, we cannot possibly afford to remain oblivious to the fact that the existing institutional arrangements of the Euro are perhaps the most significant factors to the exacerbation and continuation of this grinding depression. The time must come when the ancien régime of the inter-governmental EU/Eurozone is brought to an abrupt end, replaced by a true European democracy, with no statist gatekeepers separating the citizens from their administration.
It is the humble opinion of the present author that the new chapter to the crisis in Cyprus is yet another manifestation of the egregious shortcomings of European inter-governmentalism, or rather, of European confederalism.
[Note: readers interested in my critique of European confederalism are invited to at least read my extensive Footnotes on Jürgen Habermas' lecture in Leuven about the European crisis]
Picture credit: Wikipedia
