Gold Magazine April - May 2013, Issue 25 | Page 18

COVER STORY

YES
XXX
WE
CAN

A Tragic Tale
s

Mistake
f Cypriot
o

and Eurozone Flaws

THE BAILOUT AGREEMENT AND ITS EFFECT ON CYPRUS’ TWO MAIN BANKS

C

yprus’s economic model, as we knew it up
to 16 March, is now history. The unprecedented and controversial Eurogroup decision of that day and, most importantly,
the amended decision of 25 of March have
changed the island and its economy irreversibly. The large banking sector, which
was equal to about eight times the country’s GDP, with a contribution of up to

By Kyproula Papachristodoulou
countless EU, IMF and credit rating agencies warnings as well as those from officials
and economists within the country over the
past few years. But equally, it is hard to argue with the view that the IMF and the other eurozone countries decided to kill off the
main source of income and future prosperity
of the island – and may have succeeded.
Until very recently the IMF itself considered Cyprus’ economic model viable. The
preliminary findings of the IMF’s February
2011 staff visit stated that the “long-term
prosperity in Cyprus depends in large part
on its continued growth as an international business and financial centre, which
rests upon a foundation of sound public
finances”.
The truth is that the island’s 1.1 million people did not have a lot of options

Until very recently the IMF
itself considered Cyprus’
economic model viable.

14% to the state tax revenue on an annual
basis, around 8% to the country’s GDP
and almost 13,000 jobs, has been drastically downsized in line with the Eurogroup’s
stated goal of reaching the EU average
(around 3.5 times GDP) by 2018.
It is true that Cyprus largely brought
this upon itself, choosing to ignore the

beyond the financial sector which, with
35,300 jobs, is the major employer outside tourism. Cyprus may have oil and gas
wealth but it is, as yet, largely untapped.
The arrival of the Troika in early July
2012 – after Cyprus officially admitted
that it needed financial help fund its fiscal
and bank recapitalization needs – turned
into something of a nightmare as the

government – desperate to avoid austerity measures in view also of the upcoming
presidential elections – delayed negotiations
and sought a loan deal with Russia: a deal
which was never achieved.
The draft Troika memorandum which
was submitted for negotiations to the Cyprus government at the end of July – and
was ignored for more than two months –
proved inadequate when, around November 2012, the Presidential Palace decided to
restart negotiations and seek a compromise
with the European lenders and the IMF.
It was clear all along that the fiscal needs
of the island were about €6.5-€7 billion.
What was left for investigation were the
banks’ recapitalization needs. In late 2012,
in preparation for the upcoming EU-IMF
programme, the Cypriot authorities mandated PIMCO to conduct a thorough stress
test of the country’s banks. Conducting the
tests was a prerequisite of the draft memorandum and fixed Troika policy for all
ailing European countries (Greece, Ireland
and Portugal) receiving a loan.
The results of the PIMCO exercise were
not made public but press reports suggested
capital needs of up to €10 billion. The test
itself, the assumptions used and the methodology proved controversial and a number
of respected analysts and politicians questioned their accuracy and rationale. Nevertheless, the results were adopted by the
Troika and all the subsequent calculations
on the banks’ recapitalization needs were
based upon these test results.
In short, this is how Cyprus came to
require a massive loan of €17 billion, equal
to100% of its GDP which would raise its

18 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

cover_story.indd 18

09/04/2013 14:23