XVI. Cyprus: Economic Fallout

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The total population of Cyprus in the areas controlled by the Government of the Republic of Cyprus, according to the data of the Demographic Report of 2006, is estimated to have risen to 778.700 at the end of 2006 in comparison with 766.400 at the end of 2005, an increase of 1,6%. A percentage of 1,1% of the increase came from net migration.


In the same year, the percentage of children aged below 15 years was estimated at 18% and the percentage of people aged 65 years and over at 12,3%. Over the years there has been a gradual increase in the proportion of elderly persons and a decrease in the proportion of children, which shows a tendency towards an ageing population. According to data of the European Statistical Service1, the age dependency ratio (65+ / 15-64) will rise from 17,7% in 2005 to 43,2% in 2050.

The total fertility rate was 1,44 in 2006 from 1,42 in 2005. Life expectancy at birth, which was 77 years for men and 81,4 years for women in 2002-2003, has risen to 77 years for men and 81,7 for women in 2004 - 2005. Infant mortality fell from 4,6 deaths per 1000 births in 2005 to 3,1 deaths in 2006.



NATIONAL STRATEGY REPORTS ON SOCIAL PROTECTION AND SOCIAL INCLUSION 2008 - 2010, Ministry of Labour and Social Insurance, 2008 p.5



Cyprus scores well on employment participation rates being at or above the the EU 27 averages for men and women in all three age ranges in the table below.

Combating poverty and social exclusion A statistical portrait of the European Union 2010 (Eurostat) p.23
Combating poverty and social exclusion A statistical portrait of the European Union 2010 (Eurostat) p.23

Sapienta Economics noted big rises in the rate unemployment in 2012 from 7.6 per cent the previous year to 12 per cent and forecast a further rise to 14.3 per cent in 2013 - before the bailout.


Sapienta Ecoonmics, 2013, Country Analysis Cyprus


GDP per capita in Cyprus greater than in most of UK regions


In 2012 a Eurostat report of EU regional GDP put Cyprus's 2009 GDP per capita at purchasing power standards at €23,500.  This was was 99.9% of the EU 27 member state average.


The figure for Greece was €22,600 per capita at 94.3% of the EU average. Spain was €25,400 and 103.2%. Portugal was €19,300 and 80%.


In terms of per capita GDP then Cyprus stands between Spain and Greece and is well above (20%) Portugal.


The GDP per capita figure for Cyprus was above the following regions/countries in the UK:


  • NE England
  • NW England
  • SW England
  • Yorkshire and Humber
  • East and West Midlands
  • Wales
  • Highlands and Islands of Scotland
  • Northern Ireland.


The total GDP per capita for the UK is 110% of the EU average but this is largley accounted for by London 189%, the South East 116% and Scotland 107%.


The lowest scoring region in the UK is West Wales and the Valleys at 68.4% and Cornwall and the Isles of Scilly at 71.9%


The lowest regional GDP figure recorded in the EU in 2009 was Severozapaden in Bulgaria at 27% of the EU average.


Eurostat notes: 'GDP does not measure the income ultimately available to private households in a region' as presumably GDP does not take account of transfer payments. 


Rapid income growth


In per capita income terms, Cypriots quadrupled their real earnings, in constant money, between 1975 and 2011, according to the World Bank; in nominal terms, or current US dollars, the UN records a rise in earnings per head from $1,451 to $30,523 over the same period.


FT Gardner 7 April 2013


Higher incomes than Greece and Germany


Another way of looking at relative levels of affluence is through mean and median income equivalised disposable incomes. Amazingly the table below shows that Cyprus had higher median equivalised disposable incomes in all three age brackets (18-24, 24-49, and 50-64) than Germany in 2007.


The median equivalised income in Cyprus in 2007 was €18,230 compared to €11,577 in Greece and €17,338 in Germany.

Combating poverty and social exclusion A statistical portrait of the European Union 2010 (Eurostat) p.17
Combating poverty and social exclusion A statistical portrait of the European Union 2010 (Eurostat) p.17

The HFCS ECB study below also shows that even at non equivalised rates median incomes in 2010 in Germany €32,500 and Cyprus €32,300 were remarkably similar (see table below).


Again it is interesting that Cyprus is a real anomaly in Southern Europe in terms of its median incomes.

ECB HFCS 2013 p.90.
ECB HFCS 2013 p.90.

Household Wealth


Households in Cyprus are the second richest in the euro area, according to European Central Bank data.


The median net wealth of Cypriot households was 266,900 euros in 2010, according to the Eurosystem Household Finance and Consumption Survey.


Only Luxembourg’s households were more affluent, with median net wealth of 397,800 euros.


Households in Germany, which is contributing the lion’s share to bailouts of distressed nations, had a median net wealth of 51,400 euros. (Bloomberg 9 April 2013).

Some commentators have questioned the methodology and issues like household sized in the ECB HFCS survey - see Joseph Cotteril FT Alphaville 10 April 2013) but even accounting for differences in household size Cypurs still comes out as the second highest household median net wealth in the EU (see Table 2.4 below).

ECB HFCS 2013 p.78
ECB HFCS 2013 p.78

Cotteril above has also suggested that the net wealth difference of households in Cyprus compared to say Germany has much to do with house price dynamics - which is shown in the HFCS report in tables 4.6 and 4.7.  These suggest that the difference between wealth levels of Germany and Cyprus is largely due to the greater degree of home ownership and the housing bubble that propelled the Cypriot real estate market forward in the 2000s.   This doesn't change the basic 2010 picture but it helps to exaplin it.

See also Wall Street Journal 10 April 2013 report on the ECB study,


Not surprisingly, households in Luxembourg topped the ECB study, with average net wealth of over €700,000 in 2010, the last year for which data are available.


But those in Cyprus were second, with average net wealth of around €670,000. Last month, the government there got a €10 billion ($13 billion) rescue from the European Union and International Monetary Fund. As part of that bailout, large depositors in the biggest Cypriot banks face significant losses.


German households had on average just under €200,000 in net wealth. The figure was slightly lower in Finland and the Netherlands, where public opposition to bailouts of Southern Europe also runs high.


The median, or midpoint, of German households had just over €50,000 in wealth, the lowest in the euro zone. The median in Greece, was twice that, at €102,000, and five times as high as in Cyprus at nearly €270,000.





Cyprus has one of the highest number of non-native residents in the EU, with 18 per cent of the population born outside the country. This is partly because of the number of expatriates, but also from the flood of cheap foreign labour during the boom years. Now, as the jobs run dry, many migrants are left not only without work and surviving on minuscule benefits, but dealing with growing accusations that they are to blame. Independent 31 March 2013

See this short documentary on rising ethnic tensions around migrant workers in Cyprus in the New York Times


Household Indebtedness 2008-9


In addition, at 140 percent, the level of household indebtedness is very high by European standards. This could severely impact the household debt serving capacity should there be a substantial decline in property prices.





The household indebtedness of Cyprus stood at 140 percent to GDP by the end of December 2007 compared to 129 percent in 2006. This ranks Cyprus among the most household indebted countries in Europe where the average ratio was 60 percent in 2006. Countries such as Ireland, Portugal and Spain had household debt-to-GDP ratios of between 80-90 percent while Greece was around 50 percent in 2006. Only Netherlands and Denmark came close to Cyprus with ratios over 120 percent in 2006 (ibid p.32).



The high level of household indebtedness in Cypurs in 2007 made it vulnerable to adverse real estate shocks


In such a scenario household net worth as well as the collateral value would suffer which in turn exposes banks to higher credit and collateral risks.

Cyprus: Financial Sector Assessment Program Update - Technical Note - Measuring Banking Stability in Cyprus 2009



In Cyprus, housing loans corresponded to 37,1% of GDP in 2006 and 68,9% of GDP in 2010, marking a significant increase of 85,7% over a period of just four

years. The figure for 2010 represented 52,7% of the total outstanding household debt (European Central Bank, 2011). Chart 13.3 shows the outstanding amount of mortgage loans in Cyprus and other EU countries in 2010, as a percentage of GDP and as a percentage of the total outstanding household debt (p. 547).


If housing loans only account for just over 50% of Cypriot household debt what accounts for the rest?


The much contested and commented upon ECB’s first Household Finance and Consumption Survey survey released on 9 April 2013 shows in Table 2.4 

Participation in financial assets by demographic and country characteristics


that in 2010 34.6 per cent of Cypriot families held shares as part of their asset wealth which was way above the other EU member states survey - Finalnd was closest with 22.2%.


You wonder if this high share ownerhsip in some way relates to holdings in Cypriot banks? The figures is for 2010 and predates 2012 Cypriot government bailout of Laiki for €1.8bn as preference shares.


Does it have something to do with this protest reported in the FT Hope 31 January 2013)


The demonstration highlighted the plight of some 17,000 investors in €1.2bn of convertible bonds issued by Bank of Cyprus and Popular Bank (Marfin), the second-largest lender. Much of the issue was bought by customers of the two banks who were attracted by an unprecedented 7 per cent annual interest rate.


With regard to the ownership of bank deposits Cyprus households were below the average of over 90% at 81.2% (p.38).


Source: Central Bank of Cypurs
Source: Central Bank of Cypurs

Cyprus has the second highest household debt as a percent of GDP in the EU and the highest in the euro area, but this is covered by substantial assets. Although the high level of household debt exceeds the MIP scoreboard threshold, it should also be noted that households hold substantial assets leading to a positive net asset position. Nevertheless, a high stock of debt increases the vulnerability of the private sector to business cycle fluctuations, inflation and interest rate increases. Evidence shows that countries with a highly leveraged private sector and strong credit growth suffer relatively more in the event of crises. Although the share of interest payments to the disposable income in Cyprus for households is the second highest in the euro area, this is very close to the euro area average (Graph 16), indicating comparable burden of interest payments to households in Cyprus and in the euro area.


Although the sector’s aggregated view does not reveal to what extent deposit-holders are identical with loan-takers, information from the Central Bank of Cyprus shows that almost 90% of households having loans also have deposits and financial assets. This reflects Cypriot households’ tendency to have loans and deposits simultaneously, as a means of security against times of hardship. This is driven by household reactions on the political insecurity, macroeconomic uncertainty, the inadequate and non-universal healthcare coverage and acute bequest motive (high savings for children).


Household debt mainly takes the form of loans that are well collateralized. According to the Central Bank of Cyprus, more than 75% of total household loans are taken out for the purchase of a main residence, while around 15% are for another real estate asset or for renovation of the main residence. Housing loans in Cyprus account for more than 70% of GDP, the highest share in the euro area where the average is 40%. Home ownership is at very high levels in Cyprus compared with the euro area. Specifically, almost 75% of the population in Cyprus own main residence, higher than the average Graph for the euro area.


Given the positive net financial position of households, household debt seems to be less of a problem than suggested by the gross debt figures. Nevertheless, it is expected that, due to worsening macroeconomic conditions and the squeeze of disposable income, the net financial assets - acting as a risk management shield for household loans - will continue to fall, as households use some of their deposits for consumption in the short term. pp 25-26 


Household loans ... the servicing costs of the debt absorb a relatively high share of household disposable income, implying an important vulnerability in terms of potential interest rate rises p.4.



Occasional Papers 101 | July 2012 Macroeconomic imbalances - Cyprus, European Commission


See also Cyprus Property News

Latest data on HH indebtedness


Latest data shows Cyprus's household indebtedness as percentage GDP rose between 2008 (112.5) and 2011 (129.7) p.17. As percentage of disposable income it rose from from 115 (7.3) in 2000 to 156 (4.4) in 2008 to 186 (3.5) in 2011. (Figures in brackets are interest burden as percentage disposable income).  In the same period the interest burden of these debts fell from 7.3 per cent disposable income to 3.5 per cent disposable income p.3.


Our analysis suggests that immediate deleveraging pressures could be highest in Cyprus [and] Portugal p.40.


The report finally looks at the policy implications of high levels on non-financial sector indebtedness.


Limiting the negativeimpact on growth remains one of the key policy challenges ahead.


The room for manoeuvre to attenuate the underlying negative consequences foreconomic activity is extremely limited in countries whosepublic sectoris also highly indebted.


The report stresses the need for structural reforms in labour and product markets to offset the negative economic consequences of deleveraging


Measures aiming to decrease nominal and real rigidities, as envisaged by thelabour and product market reforms now beingimplemented in programme and vulnerable countries, are crucial to attenuate the impact of private sector deleveraging on economic activity and unemployment.


Measures targeted at guaranteeing an orderly and coordinated deleveraging process in the private sector should also be envisaged...improving insolvency and bankruptcy procedures in the household and non-financial corporations' sectors can become crucial to guarantee an orderly deleveraging process.(p.41).


EC Economic Papers April 2013 Indebtedness,Deleveraging Dynamicsand Macroeconomic AdjustmentI C Cuerpo, IDrumond, J Lendvai,P Pontuch R Raciborsk

The Mediterranean Social Model


There is possibly some interesting work to be done here on comparative household economy and social welfare models between Northern Europe and the Mediterranean.  See for example this section from Wikipedia: European Social Model


This model corresponds to southern European countries who developed their welfare state later than the previous ones (during the seventies and eighties). It is the model with lowest share of expenditures and is strongly based on pensions and a low level of social assistance. There exists in these countries a higher segmentation of rights and status of persons receiving subsidies which has as one of its consequences a strongly conditioned access to social provisions.


The main characteristic of labour market policies is a rigid employment protection legislation and a frequent resort to early retirement policies as a means to improve employment conditions. Trade unions tend to have an important membership which again is one of the explanations behind a lower income dispersion than in the Anglosaxon model.


Historian Tony Judt argued that the European social model "binds Europe together" in contrast to the 'American way of life'. (Wiki ibid)


But maybe the differences in these European models, and the way that they responded to very different historical and economic contexts, are now wrenching Europe apart due to both the inflexibility of the Eurozone and the dominance of the orthodoxy of austerity.


It is argued elsewhere (see for example Phillip Stephens in th FT) that the welface state as we know it is passing.  Money is tight and reforms are essential.


So we not only have four distinct models, locked in the inflexible embrace of the Eurozone and austerity, but they are also all having to confront the need for reform.

The Four European Social Models


Giddens 2005 (see below) argues these orginate with Gosta Esping-Andersen (1989)


Following the work of Gosta Esping-Andersen it is widely accepted that there are three or four main types of ‘welfare capitalism’ in Europe. These are the Nordic type, based upon high taxation and extensive job opportunities provided within the welfare state itself; the Central European type (Germany, France), based mainly on payroll contributions; and the Anglo-Saxon type, which supposedly is a more ‘residual’ form of welfare system, having a lower taxation base and using more targeted policies. The fourth type, alongside the three Esping-Andersen originally recognised, is the Mediterranean one (Italy, Spain, Portugal, Greece), which also has a fairly low tax base and depends heavily upon provision from the family (p.8).



The Nordic model, in Denmark, Finland, Norway, Sweden and the Netherlands.


feature the highest levels of social protection expenditures and universal welfare provision. There is extensive fiscal intervention in labour markets based on a variety of “active” policy instruments. Strong labour unions ensure highly compressed wage structures.


The Continental model, in Austria, Belgium, France, Germany and Luxembourg. These

rely extensively on insurance-based, non-employment benefits and old-age pensions. Although their membership is on the decline, unions remain strong as regulations extend the coverage of collective bargaining to non-union situations (Sapir below


The Anglosaxon model, in Ireland and Great Britain.


feature relatively large social assistance of the last resort. Cash transfers are primarily oriented to people in working age. Activation measures are important as well as schemes conditioning access to benefits to regular employment. On the labour market side, this model is characterized by a mixture of weak unions, comparatively wide and increasing wage dispersion and relatively high incidence of low-pay employment.


The Mediterranean model, in Greece, Italy, Portugal and Spain.


concentrate their social spending on old-age pensions and allow for a high segmentation of entitlements and status. Their social welfare systems typically draw on employment protection and early retirement provisions to exempt segments of the working age population from participation in the labour market. The wage structure is, at least in the formal sector, covered by collective bargaining and strongly compressed.


Quotes from Sapir, 2005 below pp. 5-6

Giddens argues that the models differ internally and maybe make a nonsense of the typology. 


Hemerijck has concluded that the welfare states that have adapted best to changing conditions have created ‘hybrid models’, borrowed in some part from elsewhere. It is a case I find convincing, and I shall suggest below that a great deal of mutual learning is possible p.9.


Second, the notion of “European social model” is misleading. There are in reality different European social models, with different features and different performance in terms of efficiency and equity. Models that are not efficient are not sustainable and must be reformed. The combined GDP of countries with inefficient models accounts for two-thirds of the entire EU and 90 per cent of the eurozone.





Need to reform Continental and Mediterranean Models


In conclusion, there is a strong case for reforming European labour market and social policies, especially in continental and Mediterranean countries. There are two overriding reasons for focusing on these two groups of countries. First, in many of them the welfare state system has become highly inefficient. By relying on strict employment protection laws at a time of rapid change when old jobs and practices are no longer warranted, it discourages adaptation to change and preserves the status quo.


The system therefore reduces overall employment and raises unemployment. For a long time “median voters” were largely spared from growing unemployment, the burden falling mainly on the young and the immigrants,11 while older workers exited the labour market through generous early retirement schemes.


Today, however, the political equilibrium has changed. Median voters are no more insulated from the ever-growing pressure of globalisation and also realise that the combination of population ageing and low employment rates jeopardises their future pension benefits.


The second reason for focusing on the continental and Mediterranean countries is simple arithmetic. The combined GDP of the nine continental and Mediterranean countries accounts for two-thirds that of the entire EU-25 and 90 per cent that of the 12-member eurozone.


Sapir, 2005 above p. 10

Definition characteristics of European Social Model


Giddens The Future of the European Social Model 2004 INSA Lyons



• A developed and interventionist state, as measured in terms of level of GDP taken up by taxation.

• A robust welfare system, that provides effective social protection, to some considerable degree for all citizens, but especially for those most in need.

• The limitation, or containment, of economic and other forms of inequality.

• A key role in sustaining these institutions is played by the ‘social partners’, the unions and other agencies promoting workers’ rights. Each trait has to go along with

• expanding overall economic prosperity and job creation.




The myth of the Golden Age - 1950s - 70s - of the ESM


For member states such as Spain, Portugal, Greece and most later entrants to the European Union, there was no Golden Age at all, since welfare provisions were weak and inadequate. Even in those nations with advanced welfare systems, everything was far from golden in the Golden Age. The era was dominated by mass production and bureaucratic hierarchies, where management styles were often autocratic and many workers were in assembly-line jobs. At that period few women were able to work if they wanted to. Only a tiny proportion of young people entered further or higher education. The range of health services offered was far below those available now. Older people were put out to pasture by a rigid retirement age. The state generally treated its clients as passive subjects rather than as active citizens. Some of the changes in welfare systems over the past thirty years have been aimed at correcting these deficiencies and hence have been both progressive and necessary. (Giddens, 2004 above p.3)

Internal challenges to ESM


They include primarily demographic changes, especially the ageing population, the associated issue of pensions, and the sharp decline in birth-rates; changes in family structure, with many more one-parent families than before, and more women and children living in poverty; and high levels of unemployment coming in some part from unreformed labour markets. (Giddens above p. 4)


Comparing the realtive performance of the EU and US economies since the 1980s he concludes,


There is therefore good reason to support the conclusion that over recent years ‘the sustainability of the “European Model” has become more and more questionable’. Achieving higher average levels of economic growth and of job creation must be placed at the forefront, since the current combination of low growth and higher public expenditure cannot continue.(p.5)

That Business Model


There was a widespread perception that Cyprus had an unsustainable business model.


The finance sector was deemed too big (with banks holdings funds eight times the island's GDP), too reliant on Russian money, and too reliant on loans to the Greek government and corporate sector.  


During the years 2007-2010, deposits of non-residents increased by 59% (EC study 2012 op cit. p.12.


Figures for the contribution of the broad financial sector to GDP vary wildy from 25 to 60 per cent.


The EC study of 2012 shows that business services accounted for 11% of GDP

in 2010 (from 6% in 1995) and financial services increased significantly in the years 2007-2010, rising to 18.2% of GDP Occasional Papers 101 | July 2012 Macroeconomic imbalances - Cyprus, European Commission. p.11



The Economist produced an anlysis of the different parts of the business model (Haven Sent 30 March 2013):


The island’s Russocentric banking model is badly fractured. Large depositors will doubtless look to move what’s left of their money as soon as they can. It is hard to imagine banks attracting new foreign customers. This is bad news not only for lenders, but also for the dozens of Cypriot law firms and service providers that cater to the post-Soviet market.



Less clear is the likely impact on Cyprus’s other offshore speciality: holding companies used as tax-avoidance conduits. Many Russians and east Europeans have used these for the “tax-efficient” shuffling of shareholdings and profits, making creative use of Cyprus’s network of tax treaties and its non-taxation of dividend payments or capital gains (except on property). These vehicles are also used for “round-tripping”: moving funds abroad and then back home disguised as foreign investment that is eligible for tax breaks. It remains to be seen if the reputational damage from the banking crisis affects the holding-company business. The head of a large incorporation firm expects some clients to redomicile to Malta or somewhere offering the same benefits as Cyprus (EU access, tax treaties aplenty).


On the vexed question of money laundering and the definition of Cyprus as a tax haven, as opposed to an area of business-friendly low taxation the article goes on to say,


[There is] is a disconnect between anti-money-laundering (AML) controls on paper and in practice. Cyprus scores better than Germany in an index produced by the Basel Institute on Governance (see chart), but that is almost certainly because it turns a blind eye to informal practices that circumvent the law. The Financial Action Task Force, which polices global AML standards, has started to pay as much attention to enforcement as to what’s on the statute books.


Some bloggers have argued that Cyprus is not a tax haven (naked hedge?) and point to its inclusion on the OECD 'white list of tax compliant countries.  Others suggest that US disinterest in the gray and white lists has led to almost all countires being admitted to the white list (see Gravelle, J. (2013) Tax Havens: International Tax Avoidance and Evasion, US Congressional Research Service.



The post EU accession boom was unsustainable



More than a decade of sustained and strong economic expansion in Cyprus, with an average annual real GDP growth rate of 3.8%, came to an end when the crisis hit in 2009.For the first time in 35 years,economic activity in Cyprus contracted in 2009, falling to-1.9% p.6.


During the boom period that followed EU accession and the subsequent introduction of the euro, low lending rates and easy access to credit prompted a credit-fuelled boom, which was reflected in a rapid rise in prices in the property market and a sharp increase in private sector indebtedness and leverage ratios. At the same time, unit labour costs rose as strong wage growth, underpinned by wage indexation (cost-of-living agreement–COLA), overtook the slower pace of labour productivity growth.


These developments led to significant losses in cost and price competitiveness and witnessed the emergence of a rapidly growing trade deficit and persistently high current account deficits. The latter were financed mainly through foreign direct investment inflows (including reinvested earnings and undistributed profits of firms with foreign shareholding based in Cyprus) and, more recently, through "other investments" (deposits and loans). The net international investment position (NIIP) has deteriorated sharply in the past few years mainly as a result of the persistent trade deficits and sizable valuation losses on bank assets. The counterpart of high external indebtedness is high private sector debt, particularly in the non-financial corporate sector, notwithstanding the rising public sector debt.


from Occasional Papers 101 | July 2012 Macroeconomic imbalances - Cyprus, European Commission. p.4

The large current account deficits (15 per cent of GDP in 2007 and 2008) incurred by Cyprus were covered by large inflows of foeign deposits and Foreign Direct Invesment. These inflows were particularly volatile and dependent on confindence in Cyrpiot banks and sovereign debt.


For many years in the past, Cyprus was able to rely on high external capital inflows from foreign deposits and FDI (also including the re-invested profits of foreign companies in Cyprus) to finance its current account deficits. However, the crisis has shown that such reliance is fragile. The huge swing from net capital inflows to outflows suggests that FDI flows can be quickly reversed if confidence in the sovereign and the private economy fades away. Sales of real property by foreigners have exacerbated this trend (ibid p.8 emphasis added).

Wage over-heating


Wage dynamics in Cyprus have been disastrous for competitiveness pricing many Cypriot goods out of export markets.


Wages are driven by the bell-wether public sector and organisations like Cyprus Airways.  In the public sector there are three cost of living increases a year. The private sector looks to the pbulic secotr to drive wages up and then attempts to follow.


There are strong labour unions in the public sector.  The public secotr is deemed to be oversized (ibid p. 8).

Saviour Gas?


Sapient Economics (Cyprus profile Jan 2013 p7) are sceptical of the early monetisation of the gase deposits found in Cypriot waters.


We believe that gas will not actually be exported for 15 years—rather longer than the government’s estimate of a liquefied natural gas (LNG) plant by 2018.


Alex Jackson covers the Cypriot gas field and concluded after the bailout,


The question is what Turkey will do now that it realises how seriously the Cypriots are about planning to drill. Blacklisting foreign companies is a self-defeating path – as the half-hearted block on Eni shows, Ankara is fully aware of this. And trying to drill in Cypriot waters will probably come to nothing. So Turkey may try to take more serious steps, leading to a new stand-off with the EU. A lot of trouble for gas that hasn’t even been discovered yet. (Natural Gas Europe 2 April 2013)

Israel Mixed Deal?


Israeli Foreign ministry special energy envoy gives clear signal Israel open to a mixed deal with both Turkey (pipeline) and Cyprus (liquefaction plant) (FT World blog 12 April 2013)

Saviour Tourism ?


Tourism accounts for more than 10% of GDP (down from over 20% at the end of the 1980s)and around 20% of employment7but was amongst the sectors most affected by the credit squeeze in 2009.


Whilst 2011 shows a recovery of tourist arrivals in Cyprus, this trend has nonetheless been declining since its peak in 2010 due in part to the rise of increased price-competition from other Mediterranean countries. (EC report 2012 op cit.p.20).


Cyprus now struggles to position itself in the international tourism landscape. The World Economic Forum (WEF) ranks Cyprus 109th in the world.


Capacity constraints and the increasing use of non-English and Greek speakers may be undermining the local charcter of the tourism offer as well as the loss of tax-breaks and incentive schemes that disappeared with Cyprus's accession to the EU.


The tourism strategy for the 2011-15 aims at upgrading the non-price competitive elements to attract high-value tourists e.g. construction of marinas,golf courses, infrastructure/marketing of sport tourism) (EC study 2012 ibi. p.21).



Cyprus Mail Opinion had this to say 8 April 2013,


The current crisis provides an opportunity to finally value the tourist instead of using him or her just to make a quick buck.  The fact is Cyprus has lost control of its tourism industry.  The Russian market is 70 per cent controlled by one company. The UK market is controlled by two giants. The CTO has paid low-cost carriers to come in and if they don’t see enough profit, they will pull out, like one did at Larnaca, and will operate where the same sun shines a lot cheaper. 

Open Europe crisis impact forecasts on Cyprus's GDP
Open Europe crisis impact forecasts on Cyprus's GDP

Economic Impact of the Crisis


It is estimated the budget deficit for 2012 prior to the bailout was already 5.8%.  This was despite a decline in the primary deficit (budget balance minus interest payments).  Interest payments on short-term government debt rose 15.4 per cent and as unemployment rose rapidly to 12.1 per cent in Q3 2012 social security expenditure rose by 10.4 per cent year on year by the end of 2012 (Sapienta Economics, Jan 2013).


On April 4 the government's spokesperson, Christos Stylianides, said,


“In 2013 the recession may not be 8.7 percent as is estimated, it may reach 13 percent.”


The European Commission predicted before the island’s financial rescue that the economy would shrink 3.5 percent in 2013 (ekathimeri 4 April 2013).


Reuters (10 April 2013) reports Debt Sustainability Analysis (DSA) documents from the EU and IMF that suggest that Cyprus's economy is expected to contract 8.7 percent this year and will go on contracting through 2014, returning to marginal growth of 1.1 percent in 2015.  Debt as a proportion of GDP is expected to peak 126 percent, before falling to 104 percent in 2020. Forecasts for the budget deficit are 6.0 percent of GDP this year, 7.9 percent next year, 5.7 percent in 2015 and 2.5 percent in 2016.

Open Europe 4 April 2013


Cyprus’ main trading partners, Greece in particular, remain mired in recession. Its two largest banks – key employers – will be restructured and unemployment will undoubtedly rise. Meanwhile, the government will be cutting spending and raising taxes, laying off public sector workers and embarking on some strict labour and product market reforms – as part of the standard Troika bailout package. Many of these reforms are needed but as we have seen across Europe, when combined with other impacts mentioned above, a downward spiral can be created.
The key hope for growth remains tourism. However, with the euro remaining strong and the prospect for political and social unrest in Cyprus still high, it is difficult to see a huge boost in this area. It will continue to truck along but is unlikely to fill the gap left by other areas of the economy shrinking. As we have discussed before, the prospect of growth from large gas revenues remains a pipe dream for now.

Gold sell off


Reuters 10 April 2013 reports that the Cypriot authorities will sell off gold reserves to help finance its part of the bailout.


400 million euros and help finance its part of its bailout, an assessment of Cypriot financing needs prepared by the showed.


A draft European Commission assessment of Cypriot financing needsnotes that Cyprus could raise 10.6 billion euros from the winding down of Laiki Bank onuninsured deposits in the Bank of Cyprus.


A further 600 million euros will be raised over 3 years from raising the corporate and capital gains tax rates.


Cyprus has total financing needs of 23 billion euros between the second quarter of 2013 and the first quarter of 2016. The bailout will provide 9 billion euros from the eurozone and 1 billion from the IMF.

Withdrawals from Cyprus banks before the bailout


Six thousand individuals and legal entities withdrew tens of millions of euros in cash from Cypriot banks and sent it abroad in the period from March 1-15 ...

The data was sent by the Cypriot Central Bank to Parliament's Ethics Committee on Tuesday


ekathimerini 9 April 2013




The cost of the bungled first bail in attempt


On April 10 2013 the EC bail out documents were leaked to the FT and Reuters.  The Assessment of the public debt sustainability of Cyprus revealed the cost of the first bungled bailout attempt.


Originally, Cyprus was to contribute €7bn to the €17bn total cost of the bank and public finance bailout. Just over a week later, the amount Nicosia will contribute almost doubled, to €13bn, and the total price tag had increased to €23bn.


...In other words, the cost to bank account holders to bail out Cyprus’ financial sector increased by nearly €5bn in nine days. That’s almost a third of the island’s entire economy (FT Spiegel Brussels Blog 10 April 2013).




Rolling over bonds


The Assessment document above also calls for the voluntary roll-over of €1bn in domestic-law (ie  Cypriot law) bonds.


That is, of the €1.7bn in Cypriot bonds in private hands that come due during the three-year bailout programme and are written under Cypriot law the troika is only giving Cyprus €700m to pay their owners back.


With regards to the difference “Cypriot authorities will encourage domestic investors (banks, insurance companies and state-owned interprises) to roll over” those holdings – in other words, getting them to accept new, long-term bonds in their place.


When this happened in Greece some ratings agencies deemed it a 'selective default' (FT Spiegel Brussels Blog 10 April 2013).

What the EU funding is for


An estimated €2.5bn will go to recapitalise Cyprus’ remaining banks and cooperatives – not the two largest banks, which get no bailout financing – while another €4.1bn will go to redeem outstanding bonds. The remaining €3.4bn will be to fund the Cypriot government itself (as in the ESM’s “Proposal for a financial assistance facility agreement for the Republic of Cyprus” reported in FT Brussels Blog 12 April 2013

The Poverty/Wealth Rhetoric is ratcheted up


Spiegel Online translates 4 page article that leads the German edition of Der Spiegel, 15 April 2013 called The Poverty Lie: How Europe's Crisis Countries Hide their Wealth.

Reprises the ECB household wealth study and expands into areas such as tax evasion, informal economy with a narrative that ordinary Germans are paying too much and something needs to be done to seize more assets from the asset-rich in Europe's 'crisis countries'.


Surprisingly vehement in its defence of the German tax payer and its attack on the asset-rich southern europeans.  Also makes a lot of German sacrifices from the hyperinflation of the inter-war years to post-II World War 'expropriations' from Germans and costs of reunification.


There are qualifications but they do not seem to get in the way of the broader narrative which ends by asking for a special wealth tax (Bofinger) on crisis countries and more taxes from rich Germans (Wolff).

Exceptions to haircut modified


(Cyprus Mail 24 April 2013 Update on exemptions: several previously exempted categories will now incur a 27.5 per cent loss on their deposits over €100,000, including charities licensed by the finance ministry, and private schools registered with the education ministry. Under different legislation insurance companies will be hit with a 27.5 per cent hair cut on all deposits).


Garbiel Sterne Exotix Debt Sustainability forecasts suggest drop in 2013 GDP by 16%


See these charts published in the FT Alphavile Blog 25 April 2013- looks like -9% GDP 2014 and then -1% 2015 before going positive again.


Fiona Mullen at Sapienta Economis more pessimistic still


Fiona Mullen of Sapienta Economics, a local consultancy. She thinks that output will shrink by 15% this year; and she predicts a further drop of 15% in 2014, followed by a 5% fall in 2015.


Economist 27 April 2013


A Linked leader comment suggest reunificartion of the isalnd will deliver a powereconomic dividend and help with speed and modality of natural gas exploitation

Deposit withdrawals prior to the bailout


All direct quote from Bruegel Erkki Vihriälä on 26th April 2013


The Central Bank of Cyprus released data today on the amount of deposits in Cypriot banks at the end of March. The original rescue plan, involving haircuts to insured deposits, was announced on the 16th of March and the final modified agreement on the 25th of March. The data is therefore an early indicator of: (i) the degree of rush by depositors to withdraw their money; (ii) the efficiency of Cypriot capital controls.


The figure below reveals that total deposits in Cypriot banks decreased from 67.5bn at the end of February to 63.7bn in March, a fall of 5.6 %. This is the biggest absolute and relative monthly decline in deposits in the sample, which starts in December 2005. The previous record (in relative terms) was a decline of 3 % in May 2008.

It is interesting to look at how the decline was distributed among depositors of different nationality and across sectors. Firstly, deposits of domestic residents decreased 3.1 %, those of other euro area residents 12.8 % and those from the rest of the world 9.3 %. Foreigners therefore seemed more eager or more able to withdraw deposits from Cypriot banks.


Differentiating by type of institutions, the decline was most pronounced for ‘other financial intermediaries’ (-11.5 %), followed by non-financial corporations (-7 %), households (-4 %), general government (-1.6 %) and insurance corporations and pension funds (-0.1 %). There was a distinction in sectoral developments, however, depending on the residence of depositors. For instance, whereas deposits by foreign households decreased 10.4 %, the decline was only 2.2 % for Cypriot households. A surprising piece of data is that deposits by foreign governments almost doubled (although from a very low basis) – they increased from 6.3bn in February to 11.8bn in March. Almost all (4.4bn) of this increase was by governments outside the euro area.


The data therefore affirms a significant – though not massive – reduction in deposits since the Cypriot rescue. It also reveals differences in the ability or desire of different agents to decrease their exposure to the Cypriot banking system. The data incorporates, however, only the first two weeks since the original rescue package.  Subsequent data will tell to what degree capital controls have prevented a further reduction in the depositor base.

From Bruegel above
From Bruegel above

Inconclusive Bloomberg report on possible rapid rise in ELA take-up in Cyprus and Greece post-bailout

New Bank of Cyprus Chair and deputy

FT 1 May 2013

Former central bank of Cyprus official as interim chairman and a Turkish Cypriot financial consultant as his deputy. Board is still casting around for a chief executive to oversee the acquisition of assets from Laiki Bank. Alavarez and Marsal working with BofC on restructure.

Cyprus Mail rails against the privileges of public sector workers


The Mail suggests strongly unionised workers in the public sector and semi-governmental organisations are protecting their interests with the collusion of all politicians while private sector workers suffer the most.

To: Social Fallout