By Alexander Michaelides*
On June 6, 1980, the Council of Ministers appointed an independent commission to investigate the “legal and financial status and management of the co-operatives in Cyprus”. On October 19, 1981, the president (Antonis Kourris), and the two members (Nicos Haralambous and Theofilos Theofilou), submitted their report. Given that lessons learned are easily forgotten, it is fruitful to revisit the conclusions and recommendations of that report.
First, it is perhaps important to start by mentioning that despite the 102 public hearings and the oral testimony of 153 individuals, the report states that “many difficulties” were met along the way. Very few witnesses came forward voluntarily, and the report praises the “courage” of those individuals that did come forward to offer evidence voluntarily, while many others tried to intentionally mislead the commission, a fact that could sometimes be deduced from contradicting statements.
Second, the report should be read by all those interested in the economic history of Cyprus. The first few chapters recount the co-operatives’ history in Cyprus and the relevant legislation pertaining to them. For instance, the report contains interesting facts about yearly accounts (deposits, loans, profits) across many different cooperative units.
The fourth chapter describes how with the establishment of the Republic in 1960 a law was introduced to cover the Greek co-operatives. The law established a Cooperative Development Supervisory Office and a governor, a position to which Mr Andreas Azinas was appointed. The problems in the co-operative sector appeared very quickly.
The report mentions the then finance minister Mr Renos Solomides who had written a confidential memorandum (dated June 14, 1968) entitled “The downward spiral of Cooperatives”. The 1968 memo warned explicitly about the independent behaviour of Mr Azinas who, theoretically, should have been a mere civil servant in the department of commerce, thereby reporting to the commerce minister.
The lengthy memorandum was submitted to the Council of Ministers, but no action was taken. In fact, Mr Solomides resigned officially on June 23rd 1968, ending a seemingly successful six year term as finance minister. His farewell speech, dated June 18th 1968, recovered from the PIO archive, lambasts “narrow localistic interests, demagoguery, irresponsibility and the attitude of putting private interests ahead of the national interest that is the National Economy”.
Thirdly, as you might have realised already, the issue of whether, and how, the government should control the co-operatives was a hot topic even from the early 1960s. The report describes how on February 10, 1966, a member of parliament requested the attorney-general’s opinion on whether the government can “exercise control (of the cooperatives) and how” (page 13). In fact, a parliamentary bill was prepared, and was submitted to parliament on 28 November 1967, outlining steps to better supervise and control the cooperatives. This action generated a strong reaction from Mr Azinas (page 14) and was not discussed in parliament despite the efforts of the then attorney-general and the then commerce minister. On January 14, 1976 (yes, around 10 years later) the permanent secretary of parliament asked the commerce ministry whether it still wished the bill to be promoted. The bill was withdrawn and was never discussed at a parliamentary plenary session.
Fourthly, bad management is recounted with specific examples in subsequent chapters of the report. Interesting stories about cars being bought in London and flown over with Cyprus Airways make an interesting connection with other companies that eventually went bankrupt.
Most importantly for us right now, however, are the conclusions (page 136). The reader is left wondering in amazement whether the report is from 1981 or from 2013 (hence today’s title, back to the future). Short-term deposits were used to make long-term illiquid investments in agriculture and industry ignoring maturity mismatch risks. Decisions were made by people in the Central Co-operative Bank about loans to co-operatives where the same people were members. Reckless credit expansion took place without consideration for sustainability and without adequate collateral or guarantees. Donations were made at the instigation of the governor, and payments “for fulfilling other goals” (page 137).
I directly quote from the report: “The responsibility for what has happened cannot lie only with the different Trade and Industry Ministers but must also lie with the other members of the Council of Ministers who were aware of the situation prevailing in the Co-operatives at least since the report by Mr Renos Solomides. The irresponsibility and the incompetence of the co-operative members of most large cooperative societies also contributed to the current slump of the sector.”
One question that arises when one reads the 1981 report is what happened to the substantial taxpayer-financed bailout of the co-operatives in 1980, despite the very strongly worded 1981 report. Another question that arises involves the relationship between government bodies and co-operatives and whether after these experiences there should still be discussions of whether the government “can exercise control over the co-operatives”. One also wonders if the same questions will still be being asked 100 years after the initial parliamentary question was posed in 1966.
(*) Alexander Michaelides is professor of finance at Imperial College Business School.