It’s been a strange week in Cyprus, which learnt of its vital €10bn bailout just days before it assumes presidency of the EU
The tourists ambling down Ledra Street in the hot midday sun are a welcome sight – and not just for crisis-hit Cyprus’s shopkeepers. Four days after Nicosia sought financial help from the EU – the latest casualty of an escalating drama that has now reached the bloc’s most easterly shores – care-free holidaymakers have become a reassuring presence for locals, too.
“If it wasn’t for them there’d be a feeling of complete darkness,” said Stavroula Stamatiou, sipping an iced lemon at a bar on the busy boulevard. “They’re uplifting in a way that until now I’d never have thought would be the case.”
The country that assumes the presidency of the EU on Sunday is to be bailed out to the tune of an estimated €10bn (£8bn) – more than half the island’s GDP.
At all hours of the night and day, labourers are hard at work embellishing the Cypriot capital ready for its presidency – roads have been freshly surfaced, flower beds installed, pavements broadened. But for visitors the signs of distress are hard to miss. No amount of cosmetic makeup can hide the glaring fact that the island’s once robust economy has well and truly hit the rocks. Beyond the bustling tourist hive around the city’s Venetian walled old town, the telltale signs of recession are everywhere – in the boarded up shops, the “for rent” signs draped from the verandas of private homes, the empty showrooms and empty stores.
“Every day there is someone who comes into this shop to sell jewellery or gold sovereigns their families may have kept, anything to make a bit of cash,” said Costas Mavrikios, a longtime goldsmith on Ledra Street. “The crisis is everywhere.”
Cypriots are phlegmatic in a way their more hot-blooded Greek neighbours are not. Aided by a public administration established when Cyprus was a crown colony, business-savvy islanders are acutely aware of their economy’s radical transformation from the ruins of 1974 – when Turkey invaded following attempts to unify the island with Greece – to economic role model as a global offshore banking and shipping centre.
With recovery had come an overriding sense of immunity. Since the eruption of Europe’s great financial crisis in Athens in late 2009, Cypriots had watched events unfold with wide-eyed surprise at the scale of Greece’s economic mess and relief that at least it was not affecting them.
Now that its toxic effects have rippled across the sea – engulfing the island nation through the exposure of its banks to debt-stricken Greece – shock has been replaced by anger at the way the crisis has been handled, not least by Demetris Christofias, the country’s veteran communist president.
“Nobody saw this coming and nobody thought the IMF would be part of the rescue as well,” said Hubert Faustmann, a prominent political analyst. “The public is not prepared for a fully-fledged fiscal consolidation programme along the lines that the troika has imposed on Greece. No one anticipated the economy to be in such a bad state.”
For many the rude awakening has been exacerbated only by embarrassment that Cyprus should be reduced to joining the bailed-out club of Ireland, Portugal, Spain and Greece just when it is about to take over the EU presidency.
No one denies that it hurt when Kurt Lauk, the president of the economic council of Angela Merkel’s Christian Democrats, pronounced this week that putting Cyprus at the helm of the EU was tantamount to allowing “the dog … to be put in charge of the supply of sausages”.
With the island shut out of international markets for the past year, finance ministry officials insist that the decision to resort to the EU rescue fund will give it the breathing space to ring-fence banks operating in Greece.
Anger at Athens is almost palpable. At €18bn, the Cypriot economy may be worth only a fraction even of tiny Greece’s, but with officials calculating the bailout at around €10bn, Nicosia is mortgaging its future for decades.
“For the last two months we’ve had no government to talk to because of their idiotic decision to hold elections,” said one official who requested anonymity. “Had we been able to prepare beforehand, we may well have been able to ease the conditions in return for assistance. Instead, we’ve had to deal with their stupidities.”
Cypriot-owned banks account for more than 10% of Greece’s entire banking system, with local lenders suffering an estimated €6bn losses following the massive restructuring of Greek debt. Buoyed by their success, banks overzealously invested in Greek government bonds. “Our crisis is the result purely of over-exposure to Greek banks,” said George Sklavos, a senior economist at the finance ministry. “At 72% our debt to GDP ratio is among the lowest in the EU … yes, we could have taken measures earlier but they wouldn’t have solved the problem because our problem is linked to the banking system in Greece.”
But the magnitude of the support now needed has sparked widespread criticism that the government has exploited the banking crisis. Faced with a presidential election next February, Christofias has been increasingly accused of hoodwinking the public into believing that state finances were better than they were declared to be. Public debt has doubled in the time the 65-year-old leader has been in office, with Cyprus’s budget deficit last year hitting 6.3% of GDP compared with a budget surplus of 3.5% when it joined the euro in 2008.
A profligate public sector, with golden handshakes and mammoth benefits handed out indiscriminately to the rich and poor, also grew as the ruling communists handed out favours.
On the eve of Nicosia formally making its funding request, the communist leader announced that the economy had “healthy foundations” despite unemployment reaching a record 10%.
In his 11th-floor office, Cyprus’s former president George Vasilliou shakes his head more in sorrow than anger at his island’s plight. The crisis is by far the worse since 1974 and, he says, it could have been avoided.
“Everyone constantly said there was no serious problem with public finances but it was obvious there was,” he lamented. “We needed to address it long ago … instead every effort was made to avoid facing reality.”
A president out of his depth
Demetris Christofias is the only communist leader of a European state. The Russian-educated 65-year-old remains a diehard believer in the tenets of marxist-leninism. On the eve of requesting financial help, he lashed out at the European Union and International Monetary Fund for their “colonial occupation” of countries they had sought to rescue.
The son of a builder, he retains good relations with Moscow and Beijing. Christofias further unnerved Brussels by insisting that he may supplement whatever financial aid Nicosia receives with a loan from Russia or China. “He is completely out of his depth and, as the end of his term in office approaches, there is an overriding sense of failure – that he has failed the nation and himself,” said an insider. “The tragedy is, he isn’t a bad man. He isn’t corrupt. He is just corrupt ideologically and that got in the way of making essential changes to the economy.”
Christofias won office after pledging to reunify Cyprus’s divided Greek and Turkish communities. Little progress was made in talks brokered by the UN. With the Cypriot economy now in freefall – and likely to be administered a hard-hitting austerity programme when EU and IMF officials begin assessing its true state on Monday – many believe that the veteran leftist will go down in history as perhaps the worst president since the island won independence from the British in 1960.
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