Cyprus Economy in Wonderland

Abstract

Economic policy in Cyprus completely ignores the fact the problem to overcome is the enormous, and almost unprecedented, private debt burdening the economy. The Government seems to be complacent in serving the narrowly defined needs of the few remaining systemic banks in Cyprus. It presents the problem of the non-performing loans as being the only remaining problem of the economy rather than a mere symptom of the real problem which is private debt. It is therefore leading the economy down a path which entails new legislative measures which facilitate and enable the banks to take the existing non-performing loans off their books, mostly by selling them to foreign funds. The selling of the loans to funds at huge discounts using the provisions made by the banks will on the one hand enable the banks to register a fictitious accounting profit (and thereby ease their recapitalisation needs) but it will make the private situation of the firms and households who are heavily indebted a lot worse. Such a policy will almost inevitably take the country into a balance sheet recession.