The precedent of Cyprus – Country & Political risk in times of global redistribution of assets
The events in Cyprus might not only require re-defining country and political risk analysis as well as risk mitigation they first of all set a precedent from an institutional point of view and are a warning sign. We look at this case because the problems faced by Cyprus are not an isolated but a systemic issue and the solution to the case should not be comfortably viewed as an isolated approach.
We are not trying to defend the failure of a government to fulfill its responsibilities or manage the financial system (by the way this is a system functioning not as a separate entity within the Euro-zone nor without the oversight of the IMF). And it is not about the Russian oligarchs nor is it about Russia, although it might be a very comfortable point of view for someone who would like to look at the events as being a punishment against the “grey” economy, money laundering or simply put greed. It is not even about the shale gas discovered in the region although it is known that institutionally weak countries are the perfect pray in energy politics. It is about how the future might look for investments, for businesses and for the individuals. It is about the future and freedom… and about the fact that private property is not so private anymore…but it is not public either…
The precedent of Cyprus “bailout” can be summarized by the following ECB, EU and IMF backed consequences:
1. Institutionalizing government appropriation of private assets/nationalization;
2. Institutionalizing government intervention in the financial markets;
3. Rewriting the rules of the functioning of the financial system;
4. Destroying trust in the financial system;
5. Destroying the idea of private property rights;
6. Punishing entrepreneurs and destroying entrepreneurship;
7. Punishing individuals and creating social discontent.
We already said that we live in times of redistribution of assets and big governments with fragmented power both of which make the global environment much more volatile and unpredictable. In the world of country and political risk, insurance agencies like MIGA and OPIC cover among other things several major types of losses: inconvertibility, negative government actions, process deterioration, expropriation and nationalization, war damage, civil strife damage and terrorism etc. The main goal of Country & Political risk analysis is to forecast these types of losses.
Thus the problem with risk mitigation is basically that in the case of Cyprus some of these losses received directly or indirectly the support of institutions which shape the global governance system and that according to one of them : “The IMF has always said that we would support a solution that is sustainable, that is fully financed, and that appropriately allocates the burden sharing.” (1)
…”appropriately allocates the burden sharing”?
If we look at the case of Cyprus from the point of view of social emergence and the social emergence paradigm it would be good to remember that according to Douglas North: “The constraints imposed by the institutional framework (together with the other constraints) define the opportunity set and therefore the kind of organizations that will come into existence.” (2) If a precedent has been set by the institutional global governance framework authorizing government appropriation of private assets the role of Country & Political risk analysis and Strategic Analysis in general should be to give an answer to the question about the type of organizations that will come into existence as a result.
And yes it is about the claim: ”appropriately allocates the burden sharing”? Interestingly “the burden sharing” of governments’ and international institutions’ (ir) responsibilities, errors or negligence should be proportionally distributed…should populations, investors and businesses in their capacity of organizational elements share the incapacity of the institutions to fulfill their responsibilities? And in that case what should be the voice and the role of these organizational elements in global affairs- to bear, to share, or to shape?
(1) “IMF’s initial public statements on Cyprus conflicted with private doubts”, Howard Schneider, The Washington Post, 29/03/2013, http://www.washingtonpost.com/business/economy/imfs-initial-public-statements-on-cyprus-conflicted-with-private-doubts/2013/03/29/69acc1b2-98a3-11e2-b68f-dc5c4b47e519_story.html
(2) Douglas C. North, “Institutional Change: A Framework of Analysis”, 1994, http://www.bilkent.edu.tr/~neyapti/Readings/North-InstitutionalChange.pdf
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