Cyprus Recovery

A Euro Zone Happy Ending

cyprus aiya napa beach 21 feb 2016 ap
Walkers on a beach at Aiya Napa, Cyprus, on Monday. The country is poised to emerge from its three-year E.U. bailout.
  • Why it matters

    Why it matters

    Cyprus’ bailout program, which included tough reforms and bailing in creditors, could serve as a template for how the European Union deals with future financial crises among its member states.

  • Facts


    • Cyprus in March 2013 was given a €10-billion loan in a three-year program monitored by the European Union, International Monetary Fund and European Central Bank.
    • Cyprus’ finance minister says his country will exit the bailout program as planned next month, and will continue along its reform path even without the E.U.’s watchful eye.
    • Cyprus’ economy grew by 1.6 percent in 2015, and its budget deficit has been reduced to 0.5 percent of GDP.
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Three years can be a long time in European politics. For Cyprus, 2013 was marked by street demonstrations, an unprecedented haircut on the deposits of bank customers, and fears that this small Mediterranean island nation could crash out of the 19-nation euro zone.

The crisis, brought about by a financial sector that had ballooned to eight times the size of Cyprus’ own economy, also tested the resolve of the European Union’s leaders, many of whom had grown weary of asking their own taxpayers to bail out other governments that couldn’t manage their banks or their own finances.

In March 2013, Cyprus would become the fifth member of the euro currency bloc to be bailed out by the European Union. But the E.U. leaders also wound up taking a novel approach, agreeing to a three-year bailout only if the island’s own savers picked up a piece of the tab. The result: Anyone with more than €100,000 in deposits in the bank saw part of their savings seized.

Dutch Finance Minister Jeroen Dijsselbloem at the time controversially called it a template for future banking crises, and as of this year, the so-called “bail-in” of a bank’s creditors and depositors in the case of a severe crisis has even been enshrined into E.U. law.

Now, as the European Union’s bailout program for Cyprus nears an end, an impressive calm has prevailed over the island, coupled with an unexpectedly robust financial and economic recovery.

Harris Georgiades, the country’s finance minister, told Handelsblatt Global Edition in an interview how Cyprus managed to keep itself together the past three years, and whether it really could serve as a role model for other European countries in crisis.

Handelsblatt Global Edition: Cyprus’ three-year aid program with the E.U. and IMF will soon be coming to an end. What has been the outcome for the country’s economy and meeting the E.U.’s budget targets?

We shall complete the support program as scheduled, at the Eurogroup meeting in March, and shall not be requesting an extension. Our attitude is that ‘we can take it from here.’ The Cyprus crisis had several manifestations: a recession, a fiscal crisis and a banking crisis. Since then, there has been good progress on all fronts. The banking sector has been restructured and recapitalized. The public finances have been consolidated. We had a deficit at an unsustainable 5-6 percent of GDP annually which we eliminated almost fully (0.2 percent in 2014, 0.5 percent in 2015, with a similar forecast for 2016), and a primary surplus of around 2.5 percent which we intend to maintain. Public debt is now on a downward path. On the real economy, we are now out of recession. The economy grew in 2015 by 1.6 percent – not terrific, but the best for seven years, and at the euro zone average.

That sounds like an advertisement for the E.U.’s program of austerity-based recovery. How have you managed that, and should it serve as an example to others?

What we ensured was that fiscal consolidation would not entail any new taxes. You don’t raise taxes during a downturn. Instead we aimed for public spending cuts; there was sufficient fat to do that. We froze public sector hiring and pay rises, rationalized welfare spending, and brought the deficit down to nearly zero in just one year. Remarkable or not, that was the common sense thing to do. Maintaining tax stability and reforming the banking sector gave a sense of confidence to households and enterprise, thus facilitating the recovery. Stability and confidence are key to recovery. I wouldn’t necessarily suggest that this remedy would work in all economies, but in our case it did.

There was a lot of political drama in Cyprus three years ago. How has the social and political environment since then been kept so relatively quiet?

Obviously, we still face challenges, primarily unemployment, which stands at nearly 15 percent. But everyone knows that was a problem which preceded the program. Within this framework, I believe there is grudging acceptance that the adjustments were what we had to do. My concern now would be that we should not become complacent, and not allow ourselves to return to the irresponsible practices of the past.

Harris Georgiades-DPA
Harris Georgiades, the Cyprus finance minister, told Handelsblatt Global Edition that his country would emerge soon from its three-year E.U. bailout. Source: DPA


The banking system also went through a massive trauma that must have caused a great deal of public anger. How has that played out?

The escalation of the banking crisis was very painful, with thousands of depositors losing money. But here also I feel Cypriots understand that this was not a choice but rather an inevitable outcome. We paid for past mistakes. We never gave the impression that we can undo the damage, but explained that with effort, determination and time there would be a way forward for Cyprus. There is a silent consent to that.

The European Union has also demanded tough and often controversial structural reforms as part of all its aid programs. What progress has Cyprus made in tackling vested interests?

I see the glass as half-full rather than half-empty. We have been able to promote more structural reform measures during the last three years than probably during the previous thirty. We have restructured the banking sector. We have completely reformed the welfare system, in cooperation with the International Monetary Fund and International Labour Organization, bringing both efficiency and fairness. Now we are aiming for an ambitious reform of public administration.

What we ensured was that fiscal consolidation would not entail any new taxes. You don’t raise taxes during a downturn. Instead we aimed for public spending cuts.

We shall also be implementing a policy of privatization, licensing and concessions. We are soon to finalize a deal regarding the main port, to be handed over to private investors; also an integrated casino resort, with significant foreign investment. We want to proceed then with the partial-privatization of Cyta, the telecoms group, a project facing some delays and stronger opposition. So, significant work has been done, more is needed, and we are determined to continue even after the Troika leaves.

What about the banking sector itself? There remains a problem with billions in non-performing loans on the banks’ books.

It has completely changed. We have a smaller but much healthier banking sector, operating under stricter oversight, actually under the direct supervision of the ECB. The Cypriot banks have strong capitalization, achieved through significant foreign investments from the United States and Europe, and satisfactory provisioning. There is new management in most banks. Essentially everything has changed, apart from the names of the banks!

NPLs (non-performing loans) are indeed a challenge, a leftover of the previous boom and bust cycle. The best remedy is obviously a recovering economy. But also the right tools, which we have installed, primarily the foreclosure law, the insolvency framework, the banking ombudsman, etc. We are already seeing significant progress in viable restructurings.

Lines outside a Bank of Cyprus branch in 2013. Source: DPA


How have bank deposits and foreign investment in the island been affected, including the Russian money that was a source of controversy during the 2013 crisis?

Obviously, we sustained reputational damage. But both local and foreign deposits have since stabilized, and are actually increasing. But I should emphasize that we now have a smaller banking sector: total assets were some 800 percent of GDP at their peak, now just 350 percent, not extraordinarily high by European standards. What is even more important is the strategic reorientation of the business and financial services sector, not relying any more on an oversized banking sector nor on particularly high foreign deposits. The new direction is to provide quality services to local and foreign business pursuing real economic activity. What we are seeking is not foreign deposits but foreign investments, a marked difference.

How have the European economy and the euro’s exchange rate impacted Cyprus over the past three years?

Obviously, the euro exchange rate has provided a tailwind, as have lower energy prices, whereas the European economic environment has provided ups and downs. The Eurozone economy is growing again, which is positive also for our own economy, with its strong reliance on European markets, especially in tourism.

The uncertainty regarding the Greek economy, however, was a drag, given a perceived (rather than real) connection to us. I say perceived because our banking exposure to Greece has been significantly reduced. There are no Cypriot banks in the Greek market any more. There is a Greek bank presence here, but through independent subsidiaries, with no exposure to the mother banks, so the banking interconnectedness is very limited nowadays.

Other issues that could impact Cyprus’ economy include the discovery of new natural gas reserves off the coast, the possible unification of the island, not to mention the troubles in the nearby Middle East. What effect have all these considerations had on your policy discussions and the outlook for Cyprus?

We had a very clear policy of doing whatever is necessary to bring our economy back on track, irrespective of the huge prospect of the natural gas in our exclusive economic zone, or the equally immense prospect of potential unification. We wanted to ensure that our economy would stand on sound foundations, with our banking sector healed, our public finances sustainable, and our economy more competitive, and not to entrust our hopes in those other, important prospects, which are over and above.

Likewise we are determined to ensure Cyprus remains an island of stability in an otherwise unstable region – one of business and investment opportunities, with a reformed economy: a credible member of the E.U. and the euro zone.


Andrew Shouler is a freelance journalist for Handelsblatt Global Edition. To contact the author:

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