Gold Magazine April - May 2013, Issue 25 | Page 29

Down But

Not Out

By Loucas
Marangos

THE CRISIS IN THE BANKING SECTOR AND THE
ISLAND’S TARNISHED IMAGE DO NOT MEAN THE
END OF CYPRUS AS A SERVICE CENTRE

T

he Chinese have a
very apt curse: “May
you live in interesting times”. We are
certainly living in
times of change with
the local economy
undergoing what is probably the biggest
shock that any developed economy has
experienced since World War II.
Cyprus is probably not an exception; it
is merely the first to experience the effects
of the new dogma of “bank resolution”.
The European Union has decided to kill a
sacred cow and, as a result, deposit safety is
no longer a given as depositors will be required to contribute to the bail-in of failing
banks. Our problem is that the bank resolution framework involves the two largest
banks on the island. Things will certainly
be different and significantly more difficult
from now on for the local economy.
There are immediate and obvious results
from the loss of savings and wealth, the
introduction of capital controls and the
contraction of economic activity. There
are also longer-term implications of the
gradual redistribution of deposits from the
low-rated peripheral banks to higher-rated
banks which will result in differentials in
interest rates and banking activity.
We now need to manage the aftermath
of the collapse of a sector that was the
foundation of our services-based economy.
Most commentators agree that, in the
shorter term, the local economy will un-

dergo a dramatic adjustment including
a significant contraction in demand and
investment, credit rationing, high unemployment and restricted capital flows.
But however bad our current predicament may be, it is urgent that as a country we define and implement a new strategy for an economy that will be based on
sounder foundations. It is interesting to
speculate about what part the professional
and financial services sector will play in
the new Cyprus economy.
The current state of our banking sector
and the emerging European Union strategy on the resolution of banks make it
extremely difficult for Cyprus to regain its
position as a banking centre. The future
landscape of Cyprus banking will probably be characterized by smaller banks
servicing local individuals and small corporates. The contraction in banking activity will adversely affect economic activity
both directly and indirectly.
Undoubtedly the crisis
in the banking
sector and the
tarnished image
of Cyprus as a
financial and
professional
services centre
will have significant repercussions on the
wider services
sector. It does not, however, necessarily
spell the end of Cyprus as a service centre.
One of the major factors driving the
expansion of the banking sector was
the existence of educated professionals,
lawyers, accountants, fiduciary services
firms, a competitive tax regime and a
sound legal framework. Despite the early

difficulties due to client defections, to a
large extent the advantages of Cyprus are
still intact and, although diminished, the
existing customer base can form the basis
for the reinvigoration of economic activity
in the sector.
Additionally, the financial services sector, which has experienced significant
growth and employment opportunities in
recent years, remains well-protected from
the immediate aftermath of the crisis as
most financial services firms act as transaction processors and generally use foreign
banks, which has protected them from
direct financial losses as a result of the
deposit haircut. Firms in this category are
more concerned with reputation risk due
to being headquartered in Cyprus.
The degree of success regarding client
retention will depend on private initiative
but also on the ability of the government
to quickly stabilize the banking system
and deal with uncertainty, as well as on
its willingness to
provide proper incentives for foreign
businesses to remain
in Cyprus. The economic strategy must
be a combined effort
by both the private
and the public sectors.
Undoubtedly there
are many challenges
and a great deal of
uncertainty ahead of us. The economic
impact of the crisis will be felt for a very
long time but no crisis, however devastating, can totally destroy economic activity. Economies adjust to new realities
and growth returns. Markets have short
memories and if we rebuild the economy
they will come back.

The financial services
sector remains
well-protected from
the immediate
aftermath of the crisis

info: Loucas Marangos is the Chief Executive Officer of TFI Markets

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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