Troika Risking Its Credibility on Cyprus: El-Erian
Every week we all come across statements that, in seeking to engender confidence, risk stretching the truth too far. It is a hazard that governments, companies and individuals inevitably face when trying to emphasize the positive dimensions of a complicated situation.
In seeking to strike a rather delicate balance, the natural inclination often is to err in the direction of being too positive rather than too negative. But once in a while, we come across a vivid an example of how easily this can turn counterproductive, especially if the reassuring statement is meant to play a "catalytic role" — that is, encourage others to do something they are hesitant to do.
A striking example this week comes from the three institutions now charged with the difficult task of rescuing its fifth European country, Cyprus.
For sure, the "Troika" (which consists of the European Commission, the European Central Bank and the International Monetary Fund) has a tough task: Armed with inevitably imperfect information, they're under a race against the clock to negotiate a "reform program." And their counterparts are shell-shocked country officials (often in denial), as well as reluctant creditors (who are often also angry and uncooperative).
Once negotiated, the program has to be sold widely. There is a particular tough part to this unenviable task: Convincing the trio of those directly providing the emergency cash (namely, the political bosses of the Troika), those who carry the brunt of the burden (citizens in the country being rescued), and those whose parallel actions can contribute to making or breaking the program (private investors).
It is therefore natural that the announcement of the program is accompanied by a very sophisticated and coordinated PR effort. The primary aim is to try to shape a constructive narrative, particularly by accentuating the positive elements while recognizing (but not amplifying) the challenges.
Having worked for 15 years earlier in my career at a multilateral institution involved in country rescues, I know how difficult and time consuming this can be; and I remember the long hours spent with the multiple wordsmiths, including seemingly endless debates as to whether "significant" is better than "substantial" in a particular sentence.
Yet I was still struck by what came out of the Troika this week after it finished negotiating the program with the authorities in Cyprus.
"We believe that [the program] provides a durable and fully financed solution to the underlying problems facing Cyprus and provides a sustainable path toward a recovery," Christine Lagarde, managing director of the IMF, said in a statement.
Anyone even vaguely familiar with the details of the Cypriot program realizes that the country is a long way away from "a durable and fully financed solution," let alone "a sustainable path toward recovery."
Already, key assumptions of the program are outdated if not totally obsolete (including, and particularly regretful given the social costs, a programmed economic contraction limited just to 8 percent this year). Little is being done to realistically develop new job engines for a country that is suddenly void of any meaningful growth model. Accordingly, the fiscal adjustment being asked from Cyprus will likely prove inconsistent with social and political realities.
This is not the first time officials have bungled an element of the Cypriot rescue. Only three weeks ago, they agreed on the first iteration of the program that, within just a few hours, attracted so much worldwide criticism that the Troika sought to disown it (having endorsed it earlier). And all were forced red-faced back to the negotiating table.
Especially after the earlier debacle, the Troika could be forgiven in seeking to oversell the Cypriot program. Yet, by going too far, this critically-important group is risking credibility that is key to its success here, as well as in other difficult European rescue cases (and there will be other cases).
Few, if any, investors are likely to commit funds to Cyprus when the Troika seems so disconnected from reality. If anything, they could be tempted to use this period of relative and temporary tranquility (if you can even call it that) to pull whatever they have left out of the country.
Lacking a credible good outcome down the road, citizens will resist making the sacrifices that are being asked from them, increasing the risk of social unrest. And those who still keep money in local banks will be more inclined to withdraw it, thus deepening a financing hole that is far from covered.
These types of Troika statements do not reassure. If anything, they raise doubt about the judgment of officials that are central to a good outcome for Cyprus. Indirectly, they also harm the probability of future European country rescues, and do so at a time when the continent is yet to regain a stable footing.
The Troika is not the first to make this mistake. Many companies, governments and individuals have fallen into the same trap. Let us hope that this rather vivid example serves to limit similar mistakes going forward.
Mohamed A. El-Erian is the CEO and Co-CIO of PIMCO, which oversees $2 trillion in assets including the PIMCO Total Return Fund, the largest bond fund in the world. His book, "When Markets Collide," was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business Book of the Year, and was named a book of the year by The Economist and one of the best business books of all time by the Independent (U.K.).