View from Cyprus: Greek financial crisis

Cyprus, a small country heavily reliant on Greece, is facing its own fragile recovery

Cyprus is the only bailed out country in the 19-member euro zone to support Greece’s demand for restructuring its huge debt and could consider writing off €370 million if other members agreed to reduce Greece’s debt burden.

A Cypriot banker observed: “All the [bad] things that happen to us start in Athens” – referring to the 1974 Greek junta’s coup that led to the Turkish invasion and division of the island as well as the 2012 meltdown of Cypriot banks due to exposure to Greek bank debt.

Nevertheless, Cyprus still has a strong filial bond with Greece as well as intimate economic ties.

A Greek default and/or exit from the euro could have a negative impact on Cyprus’s fragile recovery, which was set to get into full swing next year. After negative growth in 2013 and 2014, Cyprus was expected to achieve a low positive growth rate of 1.5 per cent this year.


However, the European Commission revised the figure down to a contraction of 0.5 per cent. The economy also remains exposed to €1.5 billion – 1 per cent of GDP – of Greek government debt.

So far independent Cypriot subsidiaries of the four "ring-fenced" Greek banks – Alpha, National Bank of Greece, Eurobank and Pireaus – are operating normally although nervous depositors have, reportedly, withdrawn funds over the insured level of €100,000.


Many large Greek firms operating in Cyprus could lose liquidity if Greek banks remain closed, go bust or Greece exits the euro. A businessman told

The Irish Times

that since the Cypriot market is so small, many firms order goods and raw materials through Greek companies which can no longer pay suppliers.

Since Greek agricultural produce and manufactured products are cheaper, undercutting more expensive Cypriot counterparts, Cyprus could suffer major losses if Greece dumps exports on to the Cypriot market. Some dumping is already taking place, notably of rock hard peaches that never ripen.

If Athens returns to the drachma, Cypriot exports to Greece would become more expensive and could be reduced. While this would be true for exports to Greece from other EU members, Cyprus could sustain greater losses because of its small output.

When Cypriot banks crashed in 2013 and the republic became the fourth country to apply for a bailout, the troika dealt Cyprus harsh terms for its €10 billion rescue package.

Structural reforms

It demanded that the country raise a similar amount, close its failing second largest bank, impose a “haircut” on deposits of more than €100,000 to recapitalise banks, boost tax collection, reduce the size of the civil service, cut pensions and carry out structural reforms.

Cyprus endured a two-week bank holiday, long queues outside branches where depositors were permitted to withdraw €300 a day, and vociferous but pointless protests by the country’s powerful unions.

Emergency cash was flown in from Frankfurt. Capital controls, also imposed on businesses, where not lifted until April this year.

The outsized banking and financial sector was essentially finished off although the commercial services sector has grown. Unemployment stands at 16 per cent. Hundreds of families reduced to poverty depend on food handouts from charities that did not exist before the 2008 global meltdown.

At least a quarter of shops on Makarios Avenue in Nicosia have closed. One local grocer says that people are not buying as much as they did before. Although tourist arrivals have increased at about 10 per cent per year, shops and restaurants in resorts complain that many do not spend outside their hotels as they come on all-inclusive packages.

If Greece exits the euro and tourism becomes cheaper there, many travellers who might come to Cyprus would go instead to Greek islands.