Photo: Στηρίζω Κύπρο

Notes from the field

We visited Cyprus in June 2017 to take interviews from politicians, members of the judiciary, academics, journalists and other informed participants on the policies of accountability deployed after the crisis. It has been only four years since the meltdown of the banking sector, yet most Cypriots were primarily concerned about the ongoing negotiations for the reunification of the island after 40 years of de facto partition rather than the state of the economy. This partly illustrates the speedy recovery of the Cypriot economy.

The origins of the crisis

One could draw several parallels between the Cypriot and the Icelandic experience. For example, both islands invested and took pride in the (disproportionate) expansion of their banking and financial sector in the years preceding the Global Recession. In the period preceding the meltdown the size of the Cypriot banking sector was approximately eight times the size of the country’s GDP; similarly, the Icelandic banking sector reached ten times the size of its GDP. This created a widespread feeling of jubilation: it was framed as a success story of transformation of a small country that moved on from its violent past. Yet, this overexpansion coupled with the very weak institutional regulatory framework exposed the Cypriot economy to external risks. For example, the haircut imposed on the Greek Government Bonds as part of the Greek bailout in 2012, was a lethal blow to the Cypriot banks. In 2013 the new Cypriot government requested assistance from the IMF and its EU counterparts, to become the fourth EU country under external supervision. In sharp contrast to the design of other externally sponsored bailout programs, the Cypriot formula was based on a bail-in, namely a haircut was imposed on all accounts exceeding the threshold of 100,000 euros. This coupled with the capital controls at the time, created pressure on the political elites to investigate the causes of the collapse of the banking sector and the punishment of those responsible.

Truth recovery: many, yet flawed, mechanisms

As a result of this growing pressure and the fact that a new government came to power bearing no direct responsibility for the mismanagement of the crisis, led to the deployment of a number of truth recovery initiatives. First, the newly elected president Anastasiades announced the creation of an independent investigative commission tasked to identify the causes of the collapse of the banking sector. Despite high expectations, the commission was largely ineffectively, as it excluded from its scope of investigation the causes that led to the collapse of one of the key Cypriot banks (See here a brief critical note on the commission). When asked about the reasons for this apparent ineffectiveness, former commissioners and well informed observers pinpointed the flawed design of the committee, personality issues, as well as its strict legalistic approach. All commissioners were reputable judges, but they all lacked fundamental knowledge of the financial system and complex financial (white collar) crimes. This comes in sharp contrast to the Icelandic truth commission where at least one of the commissioners was a Yale Professor of Finance, and the investigative team had doctorates in economics and/or finance. Moreover, the legalistic approach taken in the Cypriot case prevented participants from revealing the whole truth, while the absence of any investigative support structures gradually made the commission a toothless enterprise.

In 2012, even before the collapse of the banking sector, the Central Bank commissioned a report to highlight the reasons for the exposure of the Cypriot banks to the Greek Government Bonds. The mandate of the commission was restricted, yet its investigation was more effective detailing the technical and regulatory flaws that made the Cypriot banks so vulnerable. Finally, the Parliament of the Republic of Cyprus requested the designated parliamentary committee to publish a report on the causes of the collapse.

Lock them up?

In parallel with the truth recovery initiatives, the justice system started building criminal cases against bankers, former governors of the central bank and other suspect individuals. Despite the popular pressure and the government’s resolve to bring cases to the court, four years after the collapse, very few cases had led to a conviction. What explains this absence of convictions?

Most informed participants we interviewed identified the very limited previous experience of the judicial authorities to investigate complex (white collar) crimes as the key obstacle. The authorities had to develop new investigative skills, amidst adverse conditions of budget cuts, to learn how to investigate effectively and bring charges against individuals. In addition, some interviewees also highlighted the traditional lack of judicial activism in the judiciary as another key factor that explains the reluctance to take cases that may be seen as overtly politicized. Some participants also alluded to the small size of the island, with a small network of personal relations among the political, economic and judicial elites which inhibits punitive measures such as prosecutions. Still, the smallness of another island (that is, Iceland), did not stop the authorities to proceed more effectively with prosecutions. Thus the role of institutions is crucial and worth exploring further in our analysis.

No Apologies

Cyprus is another country where not a single apology was offered by political elites or the financial sector for the collapse of the economy. It seems that the entrenched culture of blame deflection makes it very difficult for individuals to apologize. The small size of the island, with very few degrees of separation, magnifies public shame for anyone who may decide to apologize. Most notably, all participants highlighted the high political cost associated with public apologies for politicians. As this is an explanation that emerged in most countries we visited in Southern Europe, it is worth exploring whether this is an actual cost or a perceived cost. Finally, Cyprus is interesting for another overlapping reason. There are no apologies for crimes committed during a period of inter-group conflict (between Greek-Cypriots and Turkish) Cypriots in the 1960s and the 1970s. This may put the culture of blame deflection into a broader historical perspective.