Why Cyprus isn’t the same as Ire­land

Financial Mirror (Cyprus) - - FRONT PAGE -

Many in­vestors seek to find par­al­lels be­tween Cyprus and Ire­land, try­ing to con­vince them­selves that the V-shaped re­cov­ery of the Cyprus econ­omy and of the real es­tate mar­ket are fast ap­proach­ing.

Both coun­tries are is­land-states, for­mer Bri­tish colonies, have a small pop­u­la­tion, and a sig­nif­i­cant por­tion of for­eign di­rect in­vest­ment. They also have over-bor­rowed house­holds, an over­lever­aged real es­tate sec­tor and bust banks; all a re­sult of a spec­u­la­tive, credit-fu­elled prop­erty boom. Then again, fin­gers and toes are at the end of our limbs, but no one ex­pects them to be­have in a sim­i­lar man­ner.

Cyprus has sun­shine, the Mediter­ranean, hal­loumi, sou­vlakia, Ter­likas, and zi­va­nia. Ire­land has rolling hills, sheep, Con­nemara, The Dublin­ers, and Guin­ness. It also has U2, the Euro­pean head­quar­ters of Face­book, Drop­box, LinkedIn and Google, potato cakes, and Ke­hoe’s pub.

Ire­land has a GDP of EUR 185 bln and a pop­u­la­tion of 4.5 mln, of which 27% are un­der the age of 20. In con­trast, Cyprus has a GDP of EUR 17 bln and a pop­u­la­tion of 840,000, of which 23% are un­der the age of 20.

Fur­ther­more, Dublin is a fi­nan­cial cen­tre that at­tracts in­vestors from across Europe and the USA, and has more re­cently proven to be a mag­net for IT com­pa­nies who wish to op­er­ate across Europe.

The Cyprus Stock Ex­change has an av­er­age trans­ac­tion vol­ume of EUR 350,000 per day, banks close at 2.30pm, and a stream­lin­ing of pro­cesses in the gov­ern­ment sec­tor re­mains a pipedream. The coun­tries may be sim­i­lar, but there are sig­nif­i­cant dif­fer­ences in ethos and in the driv­ers of the peo­ple and of the econ­omy.

Look­ing at the sources of their re­spec­tive eco­nomic cri­sis, the Ir­ish sovereign debt cri­sis was based on the state guar­an­tee­ing the six main Ir­ish-based banks that had fi­nanced the prop­erty bub­ble. Part of the so­lu­tion was the for­ma­tion of a Na­tional As­set Man­age­ment Agency (NAMA) which was cre­ated to ac­quire large prop­erty-re­lated loans from the six banks at a mar­ket-re­lated “long-term eco­nomic value”. This al­lowed banks to fo­cus on their bank­ing op­er­a­tions, whilst the gov­ern­ment worked with them to re­form the public sec­tor and at­tract over­seas in­vest­ment.

The econ­omy of Cyprus was hit by sev­eral huge blows in and around 2012 in­clud­ing, amongst other things, the EUR 22 bln ex­po­sure of Cypriot banks to the Greek debt hair­cut, the down­grad­ing of the Cypriot econ­omy to ‘junk’ sta­tus by in­ter­na­tional rat­ing agen­cies and the in­abil­ity of the gov­ern­ment to re­fund its state ex­penses. Cyprus’ bail-in caused rip­ple ef­fects across the bank­ing sec­tor, NPLs have sky­rock­eted to over 50%, and banks are ef­fec­tively turn­ing them­selves into as­set man­age­ment com­pa­nies.

As time has passed, the will to mod­ernise the work­ings of the state has waned and politi­cians have in­creas­ingly en­gaged in pop­ulist pos­tur­ing in­stead re­spon­si­bil­i­ties.

Un­for­tu­nately “it is of­ten that a per­son’s mouth broke his nose”, which is why Cyprus is now faced with mul­ti­ple in­ves­ti­ga­tions and ac­cu­sa­tions against the Gover­nor of the Cen­tral Bank, the At­tor­ney Gen­eral, the As­sis­tance At­tor­ney Gen­eral, etc. and it took nine months to reach a con­sen­sus to pass an in­sol­vency law that will rely heav­ily on the ju­di­cial sys­tem, where courts stop at 2.30 and are closed for Christ­mas, Easter and Sum­mer va­ca­tions, mak­ing it in­ef­fec­tive and in­ef­fi­cient.

A jour­ney of a thou­sand miles must begin with a sin­gle step. Cypri­ots have been let down by their politi­cians and they have let them­selves down by ex­pect­ing too much from them.

With that, we say to Bank of Cyprus CEO John Houri­can

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