Cyprus & bailouts: That great sucking sound

Patrick Young
Patrick L Young is CEO of niche crowdfunding platform HanzaTrade and an advisor to fund managers throughout the world. Born in Ireland, he is an active investor in the “New Europe” amongst other emerging markets and is an active Co Founder of grassroots startup group "Mission ToRun." Home Page: http://patricklyoung.net Twitter: @FrontierFinance
Cyprus & bailouts: That great sucking sound
One week’s bailout is another week’s €6 billion shortfall. I’d question the auditing skills of those discerning just how much Euro crisis countries need to stay afloat.

Think about the black hole in the Cyprus budget which emerged almost as soon as the bailout was agreed.

We’ve all been there. In deep mid-winter, the central heating has gone eerily silent and icicles are starting to form on grandma. The plumber spends a few moments fiddling, tapping, testing and finally sits back and offers that most dreadful of human exclamations. Sucking in breath around the edges of his mouth he starts to shake his head from side to side, slowly at first but with increasing vigour and finally he utters that death statement ‘tut tut tut tut...” 

Now imagine being an inspector handed a failing bank, or even government, to assess. Here the job is too much for one number cruncher, so teams of analysts roam the corridors of power amassing data. The risk of ‘garbage in, garbage out’ is enormous. Eventually you have your very own ‘tut tut’ moment while taking care not to knock over the mountains of paper now causing a fire hazard in your makeshift office. This, roughly, is what it is like to be one of those souls given responsibility for looking at the finances of a future bailout candidate, and let me tell you, this is a job which makes working out quite why a nuclear reactor has just gone a bit toppish, look easy. ...With reactors at least they give you a multitude of gauges which seek to pinpoint just where the problem lies. With a bank, or worse still a government, there is a relative paucity of information to address risk.

Okay, true, banks do have a lot of data to address risk but these use financial models which tend to be remarkably good at following linear trends and pretty rubbish at dealing with crises. Moreover, they are usually modelled to say whether you will sink or not. Once sinking the model knows the ocean bed is next stop but may not tell you where the iceberg left the hole... There is also the problem that management may opt to try to keep steaming along come what may ‘berg gash or no. Management or Ministers may prove ‘economical with the truth’ because they are in denial or simply don’t want to admit all lest they face the consequences for their actions.

Being a bailout expert is a fraught job. Unpeeling the onion-like layers of accounts you reach the dangerous point of challenging assumptions. Challenge too much and your political masters may simply not be able to stomach it. Do too little and you may find yourself in the Cyprus position where soon after a bailout which will last forever, it transpires ‘forever’ has been quantitatively eased down to less than a fortnight. Thus the government needs to suddenly ‘find’ 6 billion more from an economy worth around 18 billion. Tricky. Confidence sapping too.

Of course the EU has also had moments of idiocy. To enter the single currency project, governments effectively audited themselves. So when Greece presented its data - presumably on the back of a gilded cigarette packet to mark such a momentous statistical moment - the EU officials could only ask “are these figures correct?” When the Greek official looked askance and said “of course!” the EU let them join the Euro.

Hidden away in the crevices of a bailout candidate can be all manner of horrible things which may evade attention for a time but eventually bubble up. Spanish banks hold the thicker end of 100 billion Euros worth of underperforming property loans on their books. Mortgages are easy to calculate but who appraises the underlying property value? Here big problems can arise as ‘assets’ are usually the last thing to be written down by banks. What is Spanish property worth today? Well, if bankers offer you what they claim is 100 billion Euros of the stuff, I would haggle. Aggressively.

Is the EU’s inability to work out precise bailout numbers cock-up or conspiracy? Greek government data is difficult to have faith in, such has been the cavalier manipulation by the political classes. Cyprus had a pretty sound hold on governmental finances but their bankers aggressively purchased Greek bubble assets before the meltdown. However it is impossible to avoid a finger of blame also touching the troika. They have many excellent staff who have done sterling work in assessing bailouts. Then again, how much faith can anybody have in the work of the EU, a body whose own accounts have apparently not been signed off by their auditors for 18 years?

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.