Apples, pears and oRehnges
“People have been comparing apples with pears and coming up with oranges,” EU Economic and Monetary Affairs commissioner Olli Rehn said patronisingly in the press conference after the Eurogroup meeting in Dublin last Friday, urging people not to rely on leaked documents. That was part of his response when he was asked how the Cyprus bailout went, within a matter of weeks, from a total of 17 billion euros – as was initially communicated – to 23 billion euros – as the leaked draft document of the financing aspects of the program revealed.
Catchphrases seem to be the only way that Olli Rehn can explain this discrepancy. Yesterday, he gave the same response in the session of the European Parliament where he was battered by MEPs over the handling of the crisis in Cyprus and the damage it inflicted on Cypriots.
According to the commissioner, the difference lies in the fact that the figure of 17 billion refers to net figures whereas the 23 billion is a gross number and it also includes additional buffers in the event of fiscal derailments, which are more likely to materialise than not given the projections for economic contraction that are the basis of the program and the debt sustainability analysis. The Commission is the only one that sees this year’s recession in single digits. The IMF refrained from giving any macro and fiscal projections for Cyprus in the World Economic Outlook presentation two days ago
But how close is actually the gross figure of 23 billion euros to the gross figure of the first program of March 15?
Peter Spiegel of the FT wrote an excellent post in the Brussels blog attempting to untangle the apples and pears mess with the added motive of providing some clarity as it was in his blog that the leaked documents Rehn referred to were published.
The gross figure that led to the net 17 billion euros that formed the “financial envelope” is not available in any of the official documents of the deal that Cyprus was forced to agree in the early morning hours of Saturday the 16th of May. The closest to a breakdown of the first deal is a Wall Street Journal report written on March 18:
– Tax on Cypriot bank deposits 5.8 billion euros
– Privatisations, sale of central bank gold reserves and asset swaps 1.5 billion euros
– Bail-in of junior bondholders 1.4 billion euros
– Increases in tax 1 billion euros
Going on the assumption that the WSJ figures are reliable as they include even the sale of gold from the central bank, something that most picked up about three weeks later. The breakdown gives a total contribution from Cyprus of 9.7 billion euros, which combined with the troika’s 10 billion euros, gave a total gross amount of 19.7 billion euros, 3.3 billion short of the latest gross figure of 23 billion.
In the leaked document, Cyprus is expected to contribute around 13 billion euros to the program financing. It is broken down as follows:
– Restructuring of the banking sector up to 10.6 billion
– Additional taxes 600 million
– Gold sales 400 million
– Rollover of debt 1 billion
– Privatisations 1.5 billion, 1 billion in the duration of the program and 500 million afterwards
– And a minor 100 million from the reduction of the interest rate of the loan from Russia
All this adds up to 14.2 billion euros if you count the 500 million from privatisations after 2016. A clearer view of the actual contribution from Cyprus can be found in the quarterly breakdown of the program financing, many of which reduce the actual financing needs like the sale of gold or the rollover of debt held by domestic investors.
Cyprus’s contribution from the restructuring of the banking sector is expected at 10.3 billion euros. The debt rollover is worth 400 million in 2013, 300 million in 2014 and 300 million in 2015. The contingency buffer is 1.1 billion euros. Sale of state-owned enterprises are due to bring in 1 billion euros split between 2015 and 2016 and there is 400 million euros from the sale of the central banks gold. A total of 13.8 billion is expected to come from the Cypriot side.
Comparing these figures with the breakdown of WSJ’s report of March 18 it is evident that the big discrepancy emanates from the restructuring of the banking sector, which increased from 7.2 billion (tax on deposits and bail-in of junior bondholders) to 10.3 billion euros. Other figures also seem to have been re-worked, for instance in the final program privatisations, sale of gold and asset swaps now amount to 2.5 billion euros compared to 1.5 billion previously. I suspect this is where the 1.1 billion for contingency buffer will come from. Additional tax revenues seem reduced by 400 million.
Try as Rehn may, it is evident that we are not talking here about comparing different fruit but of Cyprus’s contribution between the first and the second program increasing by approximately 4 billion euros. This is primarily driven by a substantial increase in the amount expected to be required as a result of the capitulation of the local banking system – with obvious implications for the haircuts at Bank of Cyprus and recoveries of uninsured depositors in Laiki – and the need for buffers to cushion fiscal target misses.
Although the whole effort is a bit forensic and the final figures might get revised, based on what we know the additional amount needed is somewhere in the region of 3 to 4 billion euros. As much as it may sound like a rounding error, it corresponds to 20-25% of the country’s GDP.
Instead of being smug and blaming reporters for publishing documents that they surely did not find randomly on the street, it would be more useful if Olli Rehn addressed the issue in the official documentation of the Cypriot program and detail exactly how the figures developed and we ended up in this situation.
If for no other reason, 800,000 Greek Cypriots have the right to know.