25 January 2015 Foreclosure law could unlock investment

Last week the international economic news was dominated the €1 trillion bond-buying by the European Central Bank (ECB).
The ECB will buy bonds on the secondary market (ie from banks and other financial institutions) of countries with an investment-grade credit-rating.

For bailout countries below investment grade like Cyprus and Greece, the countries must be on track with their bailout programmes. Cyprus will therefore not be eligible for ECB funds until the foreclosure legislation is implemented.

But there is a far more important reason why the foreclosure and insolvency bills need to pass. And that is because it could unlock the government’s cash pile, which it currently has to hoard instead of spend, thanks, in large part, to parliament.

In January-November the government reported a primary budget surplus (budget balance excluding interest payments) of €673.4 million. This is frankly enormous, equivalent to around 3.8% of GDP. Under the Memorandum of Understanding with the Troika of international lenders, the government did not have to build up a primary surplus of that size until 2018.

Meanwhile, the government’s budget for capital expenditure in 2015 is just €134m, a tiny €7m larger than in 2014. Similarly, the budget for projects under construction rose by only €12m to €206m.

Imagine if the government could spend half that cash pile on investment.  My calculations suggest that, even if the government spent only €150m of that money, the knock-on effects could produce a positive real GDP growth rate of 1.5% this year, instead of another contraction as both the University of Cyprus and Sapienta Economics are expecting.

A growing economy could mean a job for your unemployed son or daughter who now bugs you daily for coffee shop money. But there is a very good reason why the government is sitting on such a big cash pile, and that, again, relates to parliament.

The government faces a large international bond payment of €500m in July and another one of €863m in November. As long as the foreclosure and insolvency bills are not fully implemented, the government cannot rely on any more funds from the Troika.

It will also be more difficult to borrow from the international markets. Therefore it makes perfect sense to pile up as much cash as possible.
So while Akel was right that the budgeted increase in capital investment was not enough, what its members perhaps missed was that the very reason for low capital expenditure was resistance to the foreclosure law.

I can see that it probably made good party political sense for Diko and the other opposition parties to make life difficult for the government last year, when it looked like we were on the path to recovery and we did not have any big bond payments looming.

But now Russian tourism arrivals are tumbling, we have big debts to pay and we have a lot less gas than we thought we had.
We cannot play politics with jobs.

There is one way out of this darker outlook, and that is to pass the foreclosure and insolvency laws.
It will unlock more funds than many people realise, accelerate the recovery and expand opportunities for the far too many young unemployed.

It can even give MPs something else to argue about, namely how or whether to invest that fat primary surplus.
So let’s all pull together for the future of Cyprus, for this wonderful island with so much untapped potential.