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A polls-based Comprehensive Settlement Proposal

Propose and discuss specific solutions to aspects of the Cyprus Problem

Which aspect of this proposal needs the most work in order to become acceptable?

Security
1
6%
Governance
2
13%
Property
5
31%
Legal Status
3
19%
Settlers
0
No votes
Education
1
6%
Economics
1
6%
Implementation Guarantees
2
13%
Evolution of the New State of Affairs
1
6%
 
Total votes : 16

Postby turkcyp » Wed Feb 23, 2005 10:18 pm

Let’s go point by point again,

MicAtCyp wrote:Dear Turkcyp,
i don't know where you found that proposal however whoever wrote it obviously lacks knowledge of the most basic principles of monentary economics. In other words those schemes cannot be applied on a massive scale, because they touch monetary principles that will completely destabilise an economy.


I did not read the proposal anywhere, I come with it. And as any economic proposal it has ups and downs, but it will not have the destabiling effects you are talking about.


A) Although the writer knows what everybody knows i. e that loans for real estates are paying the lowest possible interest rate, on the other hand he does not seem to know that this is one of the most basic tools in drafting the monetary policy of a state i. e to boost the economy out of recession or slow down the inflation. Too many loans will lead to a hell of inflation!


I have never heard of home loans being used to draft monetary policy. Home loans I am talking about here are private home loans that you can get in any developed country. It is never used as a tool to administer the money supply in the economy.

There are three way conducting monetary supply, and what is called “open market operations” is one of them. Money supply and interest rates in the economy, are adjusted by what is called “open market operations”, i.e buying and selling of government bonds and notes in the open market.

I have never heard of any central bank buying and selling mortgage backed securities in the open market, which are primarily issued by private organizations.

B) Banks do offer such loans only when they have nowhere else to lend their money, and only within the limits set by the Central Bank, so as to avoid inflation.


I also do not understand where you are getting your information. Banks offer home loans because it is very profitable to do so. And almost never this is restricted by the central banks. Central banks do have the ability to restrict private borrowing in an economy by adjusting interest rates, but this adjustment affect the whole economy not just home loans.



C) The interest rates for property are indeed low, but they are NOT so low that would enable everyone acquire property that easy. For your information the lowest price for a house in Nicosia today on just half a building plot is 80K. The lowest possible interest rate for housing is currently 5. 5% for the first 2 years and thereafter it increases. So just to cover the interest a family man will need to pay 360 pounds a month! Add at least as much to cover capital paying up, we end up to 720 pounds a month. All this at current prices at the free areas where the average salary is only 700 pounds a month!


I do not know what the interest rates are in south of the island, and there is no comparable interest rate in the north as this market for home loans simply never existed in the high inflation environment of north Cyprus in all these years.

But home loans usually have very lower interest rates compared to other private loans, because their default rate are very low. They usually run around 1.2 basis point higher than prime rate in the economy. Of course individual rate that each guys gets depends on its credit worthiness as well.

What makes these loans very attractive in any developed countries is their maturity. They usually last anywhere around 15-30 years making the monthly payments for the loans quite comparable to the existing rents in the market for rentable homes.

I do not know the specifics of economy in the south so I can not comment on your figures. But the interest rate figures seems about right, if calculated on simple interest rate terms. If you calculate the information you have give as 80k initial loan with %5.5 interest rate with maturity 20 years, this will result in a 550.31 monthly payment. If you extend maturity to 30 years, then monthly payment goes down to 454.23.

D) It is extremely doubtful whether foreign investors will be interested to invest in a totally new state, where nothing is certain, and where the "united" economy has no history. Moreover the first thing foreign investors will ask is whether their profits will not be wiped off by the inflation that their own investment will cause.


This we do not know. But knowing the fact that Cyprus economy is getting ready to be part of Euro system, meaning out with Cyprus pound in with the Euro, will erase any doubt uncertainty about future levels of interest rates and inflation specific to Cyprus.

There are two problems with your proposal both at the borrowing side of the issue (current user of a property) and at the paying side (the owner getting cash) . If we follow your proposal then from one day to another we will have an X number of people owing money BUT also at the same time a Y number of people having cash in their hands which they will not know what to do.

If the total sum of that money is HUGE (compared with the size of the economy) that will by itself skyrocket inflation.(If you want to explain you how I will in another post). AND THE TOTAL SUM FOR COMPENSATIONS WILL IN FACT BE HUGE!! Like I said in my previous post for just one per thousand refugess we will need a billion pounds compensation compared to the annual budget of the RoC of only 2 billion!!!!

As a result of this inflation the originally low interest rate the borrowers got, will not be applicable anymore, and the borrowers will never be able to pay up their loans. As you know salary increases always follow the inflation by one or more years.


This is the only problem with this system. Presumably you may have a situation where we have lot of people with a lot of liquidity in hand which may affect the economy as a whole if it is to big in numbers.

I do not know the exact amount, but couple of things tell me that the effect will not be that much destabilizing. First of all this borrowing is not going to be done overnight. The whole property issue is probably going to take upto 3 years to be solved. So assuming 100k people on average will get 100k compensation (which I think you should appreciate that it is very generous, because in reality this figure is probably going to be less when the property left in south is deducted from it) makes 10 billion pounds. 10 billion pounds divide it into three years can be though as 3.3 billion pounds of injection into economy for three years. Last year the GDP of south was 13 billion dollars, and in the north this was around 2 billion. So total GDP on the island was around 15 billion dollars. Total money supply M1+M2 was around 8 billion pounds.

So this injection would mean around 40% increase in money supply in one year. But this is if we do the transition in 3 years instead of more and it is also the crude effect not taking into account the the contarction of aggregate demand due to high borrowing, and also this is before any taxes and assuming that all the liquidty will be spent with no savings. When you all take these into account I believe that we can easily contril the increase in money supply under less than 10% a year.

And if we further cut the normal increase in money supply of around 5% to lower levels the marginal increase in money supply would be much lower than you have anticipated.

And also assuming the fact that not all of the 100k accepted by the GCs are not going to be spent immediately but rather would be saved to some degree and also government taxation of capital gains in the property sale would further reduce the spendable amount.

But if everything seems still very high, government can force an temporary forced saving scheme on this money, to increase the time period into 5-6 years instead of 3. As I have said it all depends on how many years the goverment lies this transition.

The whole thing does not change if the loans are transformed to securities and sold to foreign investors. I leave aside the fact that foreign investors will not be interested to buy such securities in an economically destabilised state with a sky rocketing inflation. Lets take for example a foreign investor getting a security worth of 50, 000 pounds representing one real building plot. This foreign investor paid 80, 000 Euros to get his security. If within a year the value of that plot (due to inflation) is 100, 000 pounds the foreign investor loses because all he has in pocket is a 50, 000 pounds security which now due to inflation worths only 40, 000 Euros!! And foreign investors are not that ignorant you know. . . .


Your whole assumption is based on the fact that this will cause very high inflation rates in the whole economy which I disagree. Foreign sale of the securities in itself has a balancing effect because as more capital moves into the country the value of pound will go up limiting inflation. In fact it would be even worse if these securities are sold inside the Cyprus because this means inherently that money supply would go up causing inflation.

And also what you are missing is the effects of contraction of spending by the borrowers on the whole price level from the aggregate demand level. This in itself will have a stabilizing effect to curb inflation going up.

In my opinion the most healthy thing to do regarding the properties is to encourage people to exchange properties. This way yes a lot of people will get loans to pay their compensations. Now instead of letting those people who get the cash cause inflation lets give them the opportunity to get rid of their money by offering them the chance to buy land that is currently owned by the State! If the solution will be a Fed system then an equal proportion of State Land from both States should become available for sale to those who will get the cash compensations!


This is another solution, but I doubt it would be acceptable to GCs. And also here you are forgetting about the fact that 1) not enough state land exists to compensate 2) the plummeting property prices with the increase in aggregate supply of property.

Anyway. I think you are exaggerating the inflationary effect of this on the economy in a controlled environment.. If you are so concerned about those effects we can wait till we put this into practice until Cyprus start using Euro and all those inflationary effects would be nill.

Take care,
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Postby -mikkie2- » Wed Feb 23, 2005 11:56 pm

I have never heard of home loans being used to draft monetary policy. Home loans I am talking about here are private home loans that you can get in any developed country. It is never used as a tool to administer the money supply in the economy.


Well, in Britain home loans and property speculation have been the driving force of the economy in recent years. People draw money on their property and then spend it to buy consumer goods. The Bank of England has raised interest rates 5 times in the past year precisely to control the housing boom and accelearting consumer spending. Accelerating consumer spending leads to increased inflationary pressures as it affects supply and demand - it is a fundamental aspect of monetary plolicy.
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Postby turkcyp » Thu Feb 24, 2005 12:13 am

-mikkie2- wrote:Well, in Britain home loans and property speculation have been the driving force of the economy in recent years. People draw money on their property and then spend it to buy consumer goods. The Bank of England has raised interest rates 5 times in the past year precisely to control the housing boom and accelearting consumer spending. Accelerating consumer spending leads to increased inflationary pressures as it affects supply and demand - it is a fundamental aspect of monetary plolicy.


Bank of England has raised the interest rates to control the inflationary pressures on the economy resulting from years of continued growth. Booming housing prices or in other words “property price bubble” is one of many concerns of any central bank.

Having said that, this does not mean that bank of England or any other central bank uses home loans to control monetary policy. The amount of home loans or the price level of properties is one of many indications of economy overheating and the easiest way to cool it down is increasing interest rates.

And these interest rates can never only be increased or reduced only on property market. It is the general interest level that Bank of England controls not the interest level on property market.

Controlling interest level only on property market requires additional tools other than open market operations, designed specifically to work on restricting funds availability on mortgage lenders, and bank of England or any other central bank does not have these tools.

Saying that Bank of England, or for that matter any central bank, conducts monetary policy through mortgage market is plainly wrong. Central banks may try to control property bubbles but this is done by adjusting interest levels, not by directly intervening mortgage market.

Anyway, we are way off the topic discussing economics here.
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Postby MicAtCyp » Thu Feb 24, 2005 12:58 pm

Thanks Turkcyp for your reply, I was always interested to discuss this matter with someone to relay my concerns and perhaps correct my misconceptions. Well lets see your reply in detail:

Turkcyp wrote: There are three way conducting monetary supply, and what is called "open market operations" is one of them. Money supply and interest rates in the economy, are adjusted by what is called "open market operations", i. e buying and selling of government bonds and notes in the open market.


You forgot the percentage of borrowing that the Commercial Banks can do which is regulated by the Central Bank. In other words one year the Central Bank tells the Commercial Banks you cannot give more loans than 30% of your deposits, the next year may increase that to 35% to boost the economy. Selling securities to foreigners IS borrowing and does not differ from an increase to the allowable percentage the Commercial Banks can let out in loans.

I have never heard of any central bank buying and selling mortgage backed securities in the open market, which are primarily issued by private organizations


Who said it is the Central Bank doing that? The Central Bank regulates/controls what the Commecrial Banks do like I explained above.

If you calculate the information you have give as 80k initial loan with %5. 5 interest rate with maturity 20 years, this will result in a 550. 31 monthly payment. If you extend maturity to 30 years, then monthly payment goes down to 454. 23.


You are right on the numbers here, but still my point remains valid. It is not that easy! 30 years is the working life for many people, living on an average salary of 700 pounds! I leave aside the fact that for the TCs to reach that average after a solution we need at least 10 years. The question is will the TCs afford to plunge into such a debt from day number one after a solution? When will their standard of living increase then - 40 years after?

This we do not know. But knowing the fact that Cyprus economy is getting ready to be part of Euro system, meaning out with Cyprus pound in with the Euro, will erase any doubt uncertainty about future levels of interest rates and inflation specific to Cyprus.


You missed my point. RoC and the new state of affairs are two different things. Are we talking about the return of the TCs to the RoC in this thread by any chance?

wrote: This is the only problem with this system. . . . . . .
So assuming 100k people on average will get 100k compensation (which I think you should appreciate that it is very generous . . . makes 10 billion pounds. . . . Total money supply M1+M2 was around 8 billion pounds.


A, ok I am glad we agree on the main point of the compensation system. However you seem to forget that the 8 billion of GDP is NOT primary wealth but the result of multiple rotations of the primary wealth among the people. This rotation according to my estimates is between 2 - 4 times per year.
If we follow your suggestion for injecting the compensation slowly slowly even at the rate of 1 billion per year this is enough to create a surplus of money in the rotating circle from 25 - 50% per year which will mathematically lead to minimum inflation of 15 - 35% the first year, 30 - 70% the next year and so on, which in turn will create really huge problems both on the value of the remaining portions of the compensations and also to the borrowers themselves.
For your information there has never been an injection of money into the economy of RoC that would increase the GDP by more 0. 3 billion in one year.

Your whole assumption is based on the fact that this will cause very high inflation rates in the whole economy which I disagree. Foreign sale of the securities in itself has a balancing effect because as more capital moves into the country the value of pound will go up limiting inflation.


Turkcyp, sorry but you have to convince me why you disagree. I have never heard anyone disagreeing on this point I mean it is more than obvious. Furthermore don't confuse the terms.
It is not capital that moves! It is crystal clear borrowing. And for what? So that some people will lose their source of primary wealth (mostly GCs) so that some others will get it?

This is another solution, but I doubt it would be acceptable to GCs. And also here you are forgetting about the fact that 1) not enough state land exists to compensate 2) the plummeting property prices with the increase in aggregate supply of property


Why shouldn’t it be acceptable to the GCs? ! Me as a GC I tell you they will accept it. People getting cash for their properties will firstly look to buy new properties, it's the most natural thing to do. The problem of inflation like I described it, is not really because of the surplus of money but because the compensated people will be deprived the option to invest on new land so they will be forced to compete on who will buy out the existing one which in turn will skyrocket the prices! Of course some will spend their compensations elsewhere but thats their choice. Besides do you think the GCs will be more willing to accpt to enforce them what you said " a forced saving scheme on this money, "? ?

In 1974 the State land was more than 20%. At least 1 quarter of that was useful land for building and agriculturre. It's still about the same in the free areas today. Did that percentage vanish in the northern part I mean did you give it to the settlers? I would really like to know. Because this is the only option I see out of this problem. (Actually I know of another option but you will not like to hear it)

Anyway. I think you are exaggerating the inflationary effect of this on the economy in a controlled environment. . If you are so concerned about those effects we can wait till we put this into practice until Cyprus start using Euro and all those inflationary effects would be nill.


Turkcyp beleive me I am not exaggerating. Something that you might not know is that the Bonds compensation system proposed by the UN in the Anan Plan3 was an a 15 (? ) year basis. Do you know that it is our side (the GC side) who demanded to be extended to 30? Think of the reasons why. (Of course at the total mess that Clerides brought us with his previous handling of the Anan Plan what better could anyone propose. . . . )
The Euro by itself will not change anything! It is not the Euro that controls local inflation it is the supply of Euro in the market. So what will change if from one day to another we have a surplus injections of Euros? Will the local inflation fly and go to the UK?


To summarise the situation:
A) The compensations must be kept to the minimum possible level and the only way to do this is the complete exchange of TC and GC properties and whatever is left be returned to the owners.
B) The compensations must be such that the TCs can afford it and be able to equalise their Standard of living within about 10 years.
C) The majority of the settlers be removed, and Turkey to undertake all costs involved for those who will stay.
D) There must be a way for the compensated people to invest on sources of primary wealth i. e on land in their own country.

Looking forward to hear your views.
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Postby -mikkie2- » Thu Feb 24, 2005 1:21 pm

Saying that Bank of England, or for that matter any central bank, conducts monetary policy through mortgage market is plainly wrong. Central banks may try to control property bubbles but this is done by adjusting interest levels, not by directly intervening mortgage market.


I was not suggesting that. You were saying that the mortgage market has no bearing on monetry policy. In the case of the UK it does, especially when personal debt has passed the £1 trilllion mark! The one thing that we have seen in the past 10 years is that general inflation has been low, yet house price inflation is ten times more! Even when you consider housing transactions per year of around 200000, another significant factor has been re-mortgaging to extract money from property to spend on consumer items. And as I was saying, the intrest rates have increased in the past year as a counter to this.
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Postby turkcyp » Thu Feb 24, 2005 4:22 pm

-mikkie2- wrote:I was not suggesting that. You were saying that the mortgage market has no bearing on monetry policy. In the case of the UK it does, especially when personal debt has passed the £1 trilllion mark! The one thing that we have seen in the past 10 years is that general inflation has been low, yet house price inflation is ten times more! Even when you consider housing transactions per year of around 200000, another significant factor has been re-mortgaging to extract money from property to spend on consumer items. And as I was saying, the intrest rates have increased in the past year as a counter to this.


Ok. Sorry then.

I guess there was a miscommunication between me and you guys. I though you guys were claiming that central banks conducts monetary policy through mortagage markets, hence my comment previously to MicAtCyp on how there are three ways of conducting monetary policy.

Take care,
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Postby Alexandros Lordos » Tue Mar 01, 2005 2:09 am

MicAtCyp wrote:I repeat: The only thing that can be done is to encourage ( I hate to say enforce because that might not be allowed under EU law) the people to exchange properties.


MicAtCyp,

I've checked this point, and it seems that, while it is not allowed to force two individuals to exchange their property with each other, it is allowed if it is the state that is taking over that property "because it is needed in the public interest", and if the owner is fully compensated in return. That is why a Property Board has been devised, so that it would be a state organ that would be taking over the property and not another individual ...

Who defines "public interest", you might ask? The answer is simple: The consent of the people in the referenda. If the majority of the people deem such appropriations of property to be for the wider good (i.e. the wider good of re-unification), then the state is legitimised to take these properties over in lieu of compensation.

The only differentiation from standard land appropriation practice would be that, instead of using this property to build a hospital or an airport, it will be used "commercially" by selling it to its current occupant.

I think that was the legal basis on which the Property Board of the Annan Plan was devised - and from what I have heard, it legally holds ground.
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