Fri, 13 Dec 2019
| Usbed Usbed  |  Experts  |  About SO  |  Executive Board  |  Advisory Board  |  Collaborating Bodies  |  Contact Us  |  CALL FOR PAPERS  |  Policy Brief


Economic Collapse of Southern Cyprus
The Republic of Southern Cyprus, which has remained the term presidency of the European Union since 1 July 2012, jioned among the countries in Eropean Union support mechanism declairing its bakrupt as 5 December 2012. This declaration of Southern Cyprus indeed was a formal expression of a situation that had been guessed to be happen for a long time. Because it is realtively a small country among others struggling against crisis in the borders of Europen Union and has an integrated economy only with Greece of countries affected by the crisis, the situation Southern Cyprus has has not attracted very much attention. However, once Southern Cyprus took over the term EU presidency for 6 months, taking control of legislative and decision-making process revealed the rapidly deteriorating condition of the country. Finally, the explosion pushed the Greek Cypriot administration to he long-awaited bankruptcy declaration took place with the bankrupt of the Cyprus Popular Bank known as “Laiki Bank” in the country.
Road to the Crisis
Southern Cyprus has been a country with serious economic problems for a while. Such that, when it took over the term presidency of the European Union from Denmark, Southern Cyprus became the first term president country which applied to “Support Mechanism of the European Union”. This means that Southern Cyprus would run a presidency under the control of the countries it would be the president of.[1]
As Southern Cyprus took over the term presidency, especially Greece, Ireland, Spain and Portugal and many other Europen Union member countries had been struggling against crisis for a long time and Greece of these countries had already declared its bankrupt. Cyprus differed in terms of being the only country to bankruptcy because of external economic relations among these countries. Because the economies of Cyprus and Greece are highly integrated to each other, it was inevitable that crisis in Greece would affect Cyprus.
The banks became the agents of the economies of Greece and Cyprus in affecting each other. Known liabilities of the banking sector of Cypriot Greek banks were about eight times the size of the national income of the country in Southern Cyprus and Cypriot Greek banks were very active in the international arena in order to increase their profits. Of course, Greece was the first of these areas. Cypriot banks had taken the Greek government bonds. When the Greek government could not find a solution to Greece's financial crisis, the bonds Cypriot banks had were not paid. This was the most important reason of the crisis Cypriot bank faced with.
Beside the Greece state bonds originated dead end, there were also a large number of Greek citizens that had deposits in Cypriot bank. Because Greece’s crisis was not solved somehow, after losing confidence to Greece banks, Cypriot banks became an alternative shelter for Greek citizens. However, because Cypriot bank went bad in time, it decreased confidence to these banks, too, then both Greek depositors who fled from crisis in Greece, headed towards Cypriot banks and Cypriot Greek depositors, who saw that their country was heading towards a financial dead end, started to evacuate their assets in banks quickly. This situation was considered possible to be treated because it spreaded in more time compared to the impact Cypriot banks had received from Greek government bonds transactions carried out, however, neither Cypriot banks were able to do moves to put themselves together in this process, nor the Cypriot Greek government was able to implement regulations to ensure the safety of bank deposits. The government has raised the limits of public debt contract due to the losses recorded by banks.
Parallel to the banks’ situations, the start of the unemployment rate to rise rapidly in Southern Cyprus led the seriousness of the issue to much more dangerous dimensions. Until the unemployment reached to a serious dimension, Demetris Christofias management, which showing the banks and the Cypriot Greek Central Bank as target responsible for the crisis, had to face with the public with the unemployment problem. Not only the economic life in the country, crisis started to affect social and political atmosphere negatively. Anti-government protests led by civil servants' union PASİDİ and Right-wing Workers' Unions SEK sullied the image of the government highly. The trade unions even brought business boycott in the agenda by taking the issue more forward. Expectations about the government's planned austerity measures would began first with restricting public employees profits led to the destruction of faith in the consensus of the government and the trade unions, so of the broad masses of the people represented by unions.
Diagnosis of the Crisis from Outside
Although Christofias government managed to stall its own citizens with Mediterranean natural gas reserves drilling operations and matters on the agenda created by presidency of the European Union throughout the crisis, it was not able to prevent the international credit rating agencies from realizing the bad trend of Southern Cyprus. On November 21, 2012, credit rating agency Fitch, by making a statement revealing this bad trend, lowered Southern Cyprus' credit rating from BB to BB- by reducing it 2 notches at once.[2]Fitch showed the country's poor macroeconomic appearance, the country budget's remaining too below the expected level and uncertainty in costs related to the strengthening of bank capital as the reasons for the decision.
Fitch's description exposed that the main factor underlying the economic meltdown of Southern Cyprus is the bank activities we have tried to explain above. At this point, as Cyprus Popular Bank of these banks seems went bankrupt, the Bank of Cyprus and Hellenic Bank are also in danger of going bankrupt in case of Cypriot Greek government is not able to receive 17 billion euros aid expected from the European Commission called as "Troika", the Central Bank of the European Union and IMF. The three banks seem in risk of not to be able to pay their debts As of the present notes. Because of the sectoral characteristics of banking, it is estimated that the crisis in these bank will drag the country to a general collapse through other banks.
The desperate situation Southern Cyprus is in also caught the eye of the organs of the European Union's term presidency it is carrying out. In "the Alert Mechanism Report" published by the European Commission within the framework of 2013 "Macroeconomic Imbalances Procedure", it was given a place widely to the situation Southern Cyprus money-finance sector is in and the collapse that the situation will drag the country. In the report, as it was stated that Southern Cyprus was "Over the limit" about the issues such as current operations, transferring of loans to the private sector, general government debt, it was underlined that continuing of Cypriot Greek banking sector to be significantly affected from the economic crisis in Greece could take the country to much worse points. It was emphasized that the current account balance of the country's net international investment position is due to the deficit, it was implicitly highlighted that there is also an important share of Cypriot Greek government's weaknesses in the crisis.
The European Commission has also suggested Southern Cyprus some solutions about the crisis.[3]Solution suggestions primarily were focused on the financial sector and included some suggestions in terms of employment. Some of the remarkable suggestions were like "the standards applied to all the credit environments should be harmonized with the standards applied to commercial banks, regulatory provisions created in order to ensure the effective capitalization of financial institutions should be strengthened, labor force that will be used to be redirected high value-added economic activities should be supported/developed and in accordance with national practice, competition strengthening studies throughout the country should be carried out and price index should be reorganized". This report of the European Commission was a declaration carrying great meaning in terms of understanding the point Southern Cyprus crisis reached.
Towards the Bitter Prescription
Troika's reservations do not disappear in helping Southern Cyprus due to the uncertainties the country facing. Estimates that Troyka will not do the desired help in case of not applying the programs expected to attract a great response from the Cypriot Greek people put Greek rulers and people -at least for now- to a dead end. Among measures that will attract responses, there were critical decisions such as the reorganization of the free health services and revision of the 13th salary given to officers, however, the Christofias administration, fearing more and more serious reactions, had to explain that the 13th salary would continue.
As a result, the Greek Cypriot administration, which began European Union term presidency with "contribute to all citizens of the European Union" promises, first failed to organize its own economic environment and the Cypriot Greek banks came close to go bankrupt. Credit rating agency Fitch and the European Union revealed the seriousness of the country reached with an official decision and their reports. As the Greek Cypriot administration -eventhough Christofias does not consider to be a candidate for the next election- caused the country's political environment to be shaken, beside that, during its European Union term presidency, failed a class to fulfill their duties in the international politics in a sense by not playing a role as an "actor" in almost any international issue except bringing Turkey-European Union negotiations to a deadlock.
Access Date: 06/12/2012
[2], Access Date: 05/12/2012
Access Date: 05/12/2012
Oğuz ÖZDAŞ* - Analyst, Strategic Outlook
*Selcuk University, Department of International Relations, Research Assistant
12.12.2012 - Hit : 2401

  • Find us on Facebook


    Call For Papers

All Rights Reserved - 2012 © Strategic Outlook | Editored By ertugruloztarsu