Looking Back and Forth at Cyprus

style="float: right; margin-bottom: 10px; font-weight: 600;"Sun 19th May, 2013

As the Eurozone crisis widened to include Cyprus, it revealed Europe is not out of the woods yet.

Russia was quick to respond, though efforts did not proceed as planned when the crisis widened and Cyprus' rating was downgraded. Russia backpedaled as investors scrambled to recover their savings and a further deal was struck with the help of the ECB and IMF, making Cyprus the fifth European nation to receive money from the EU-IMF.

Austerity measures put in place with the second bailout deal have been unpopular in Cypriot politics as well as having caused uproar among the population, displaying many parallels to the Greek popular response.

The cause of the crisis has been cited as being part of the fallout caused by the failure of the Greek banks, as well as a junk rating by international rating agency Moodys. As with many other nations around the world, the year 2009 took a particularly heavy toll on the economy, causing rampant unemployment in both tourism and shipping industry sectors.
The economy has recovered slightly since then, but not to the level before 2009, which was close to the EU average. The rising costs of social benefits coupled with the already existing debt further plunged the nation into crisis. When national bank assets were downgraded by rating agencies, the crisis widened.
Emergency funds for the country were first mobilized by Russia in early 2012 in the form of a loan, which was scheduled to be repaid by early 2013. Two months later in March, Moodys changed the rating of Cyprus to "junk" which caused widespread fallout and instability of the Cypriot banks, as well as a "haircut" of upwards of 50% on Cypriot assets, effectively downgrading their value.
As a result, Cyprus was forced to request an emergency bailout from the EU and strike a deal with the Troika, which comprises the European Committee, the International Monetary Fund and the European Central Bank. A prerequisite to further funding enforced austerity measures including cuts to civil service salaries, social benefits, allowances and pensions, as well as increases in VAT, tobacco, alcohol and fuel taxes, taxes on lottery winnings, property, and higher public health care charges.
This, of course, did not resonate with the public, who still suffer widespread unemployment and rely heavily on government programs. The government was forced to concede, however, and narrowly avoided bankruptcy. The deal further included refinancing of privately held assets and the closure of the Cypriot Laiki bank, drawing criticism that private citizens would once again be forced to bail out the mistakes of others. Fiscal consolidation will also be expected of the government in order to bring down the budget deficit by cutting costs.
Cyprus has long served as a popular tax haven for some of the Russian multinational corporations' elite, and will also be forced to change its banking structure to aid the Russian government in striking tax evasion. The anti-money laundering framework will be implemented in all Cypriot financial institutions and is seen to be one of the few positive results of the crisis.
A privatization program was also implemented. Whether or not it will work in the favour of the Cypriot public remains to be seen. In order to restart the Cypriot economy, "Structural reforms to restore competitiveness and macroeconomic imbalances" will be implemented and new sources for financing have been sought by the government. It was revealed that one such initiative includes a plan to sell casino licences to international investors as well as building a natural gas storage facility, which will require a medium-term cooperation with US and Israeli companies seeking to develop seabed gas deposits located off southern Cyprus.
German politicians have widely supported the bailout, as fears are abound that a bankruptcy could have far reaching implications for the EU. Should one nation fall, others could follow, and though Germany has had a comparatively strong recovery from the 2009 economic crisis, the effects are still being felt and the attitude is strongly socially oriented.
The deal will leave Cyprus in debt and is predicted to be felt until the year 2020. An interesting study from an economics grad student at UMass Amherst has challenged the math behind the austerity measures and argued that they are detrimental to recovery.
In what started as an attempt to replicate a popular study cited in economic circles supporting a slashing of government spending, the student and two Harvard professors determined that countries whose debt exceeds 90% of its GDP effectively crippled growth. This stands in stark contrast to the prevailing school of thought in European and American economic measures.


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