Cyprus - so near and yet maybe so far from the Greek financial storm

Nick Hood, May 2011

A strange co-incidence brought a group of international insolvency and restructuring experts to the same Limassol hotel this past weekend as a combined meeting of IMF and World Bank representatives from far and wide.  It was a powerful reminder of events in nearby Greece, where the outcome of the sovereign debt crisis remains in the balance, not helped by the latest collapse of negotiations between rival political groupings aimed at creating consensus on much needed austerity measures. 

On the surface, Cyprus seems serenely unconnected to the economic mayhem taking place 500 miles away across the Mediterranean, although the UK half term holidays didn’t seem to have hotels, restaurants and bars exactly buzzing with trade. 

What activity there was seemed to have a distinctly Russian or Eastern European accent to it, hopefully a decent bulwark against the fall in spending by cash strapped British ex-pats struggling to meet their escalating euro-denominated cost of living out of sterling-based pensions and savings income. 

The economy may also take a hit from the UK’s austerity measures as Lord Ashcroft reviews Britain’s overseas military bases.  Over 3,000 forces personnel are located in Cyprus, and around 1,600 local civilians are employed in support roles.  The bases cover 3% of the island. 

But the sun-drenched island republic certainly is linked to the Greek economy, whether it chooses to acknowledge it or not.  It has received several downgradings from international ratings agencies over its exposure to toxic Greek debt, while Finance Minister Charilaos Stavrakis has admitted recently that in the eyes of many analysts, developments in Greece will affect the Cypriot economy. 

Cypriot banks hold €6.4bn of Greek sovereign and bank debt, amounting to a worrying 35% of the island’s GDP.  Any significant haircut in Athens will wreak havoc on Cyprus’s banking system and risk derailing the fragile climb out of the recession that finally ended in the first quarter of 2010.  This year’s GDP growth forecast from the IMF is between 1.5 and 2.0%.  Fortunately, public debt heading towards 60% is low by Eurozone standards, as is unemployment of around 7%. 

Property prices remain in decline in a downward correction that started in 2008 after a decade of heady growth.  The worst falls have been in tourist areas of Paphos with 20% drops from the market peak.  Away from the beaches and night clubs, the reverse in Famagusta and Nicosia has been less extreme at between 4% and 8%. 

Elections the previous week betrayed the prevailing uncertainty, with several high profile Akerl ruling party candidates losing their seats while the right wing opposition Disy party gained ground and emerged as the largest party with 34% of the vote.  Despite voting being mandatory, the third largest block was over 100,000 abstentions. 

So will business remain brisk at the gloriously traditional Istorikon Tavern in old Limassol, or at the classy Al Pesto Restaurant on the road heading towards Larnaca?  The outcome remains hard to call, but there is at least still a chance that the resolution of the unfolding Greek financial tragedy may be just about good enough to avoid a Cypriot cataclysm – although certainly not before many a bouzouki player’s nails have been bitten down to the quick.

This article also appeared online in Financier Worldwide and Management Today