The lessons from Cyprus

    There are a number of similarities between Cyprus and Malta. Both islands are in the Mediterranean Sea and they both formed part of the British Empire before their independence. They are both members of the European Union and joined the euro area in the same year. The population of Cyprus is nearly double that of Malta, with over 840,000 inhabitants. The land mass is much bigger at 9,251 square km. Following the Turkish invasion of the island in 1974, Cyprus is divided into two. The Government controlled part of the island, the Republic of Cyprus which is an EU member and which is recognised internationally, and the Turkish controlled part of the island. This political divide between the Greek Cypriots and the Turkish Cypriots is still a serious sticky point after forty years of the Turkish invasion. The “political question” surfaces regularly in EU and international debate. Just to put things into perspective, Cyprus is considered to be one of the smallest EU economies, contributing only 0.2 per cent to the European Community’s gross domestic product.

    It is significant however how this country which was looked up to by a number of countries including Malta up to five years ago is now in a dire state, financially, economically and socially. In mid January Moody’s has downgraded the Cyprus government bond ratings to Caa3 from BB3 negative outlook. The country is awaiting the final plans for economic recovery to be issued by the Troika (ECB, IMF and the European Community). The latest estimate for the country’s bail out is that of € 17 bn.

    What has happened to this country which was renowned for its aggressive reconstruction after the civil strife following the Turkish invasion, for its dynamic and outward looking entrepreneurship and for its economic diversification? It all began with the election of a left leaning president, Mr Christofiades in 2008 and his handling of a series of crisis which the country faced since then. The watershed in the destiny of the country happened in July 2011 when a tanker with confiscated Iranian explosives which was berthed in the southern coast of the island exploded in the heat of summer, killing twelve people, striking by the blast a nearby power station at Vassilikou and consequently having an economic impact of knocking an estimated 13.8 per cent of the country’s gross domestic product. The public questioned why these explosives were stored so close to military warehouses and the power station, and why they were still in Cyprus after two years. The suspicions were that the government did not want to irritate the Iranian government. The bad handling of this explosion crisis alienated both citizens and business, and this was further aggravated by the European debt crisis of 2011 and the crisis in Greece. The first to be hit were the banks which had a significant exposure to Greek debt. It is now estimated that € 10 billion are being allocated by the Troika for the recapitalisation of the banks. Business is now starved of cash and government has difficulties in paying the salaries to civil servants. Analysts point out that the politically obstructive environment as well as the relative concentration of the economy and the risks of a large financial services predominantly made up of Russian money are keeping the economy from a credible re-start. The Troika has estimated a bail-out of € 17 billion, with € 6 billion going for debt financing and € 1 billion to cover government spending. The intransigence on the part of Mr Christofiades to accept restructuring in the public service and more rigor on public spending has aggravated the situation. Mr Christofiades accepted defeat and he will not contest the next presidential elections.

    There are high hopes that a centre- right president will be elected to government later this month. Opinion polls are showing that Mr Anastasiades will most likely be the next president. Mr Anastasiades is a convinced Europeanist but also a reformer. It is expected that government will start looking at Europe and relying less on Russia and China, two countries with which the Left dealt with enthusiasm. His priority will be that of reigniting confidence in both citizens and business after five years of economic failure. The greatest hope comes from his handling of a natural gas find 175 km south of Limassol. Cyprus will become geographically important for gas pipeline routes. There is much optimism in a change to an open minded, Europeanist government of the country.

    Joseph FX Zahra
    Economist