Mythbusters: Special Cyprus Edition

A cursory glance at any of the stories coming from the major news outlets may lead you to believe that the little island in the eastern Mediterranean, which has hitherto gone under the radar, is coming apart at the seams. No need to rehash the events of the past week here - you can get the complete lowdown practically everywhere else. But I do want to set the record straight on a number of issues. Based in Cyprus, I can tell you that while the facts being reported in the world’s media are correct, the tone of the pieces, as well as many of the underlying assumptions, are skewed.

Cyprus’s banking system is being described as a bloated hotbed of decadence, incompetency and profligacy. While the banking sector is indeed large for its size (the EU average being 3.5% of GDP, Cyprus’s being 7.1%), it is in line with countries like Malta and Ireland, and much smaller than, say, Luxembourg whose own banking sector is 21 times its GDP. In the latter half of 2012, Cyprus’s sovereign debt was just a smidge over 70%, lower than Germany’s. Cyprus’s debt problems arose from the wider bailout of the banking system, for which residents have already paid a steep price in terms of record unemployment and a reduced standard of living that has meant austerity in all but name. Also, the island’s Russian connection is being played up to such a degree that it makes Cyprus look as though it were firmly lodged in the breast pocket of a Russian mobster’s mink coat. Not so. Deposits on the island total 70 billion Euros, with only 20 billion originating from non-EU nations.

Now to the issue of money-laundering. While it would be naïve to think that it does not take place in Cyprus, this aspect of the story has been wildly over-emphasised. Cyprus’s status as tax haven is not tantamount to it being an oasis of money-laundering, any more than Luxembourg, Ireland, the Netherlands, the British Virgin Islands, Nevada and Delaware are. Let’s not forget that a few large western banks have also been found providing liquid soap to grubby money (HSBC’s connection to Mexican drug cartels seems to have conveniently slipped from memory over the past couple of weeks). And not only wealthy Russians take advantage of tax-havens: if it’s big and has shedloads of money, then it has accounts in the above-mentioned countries, whether it’s called Apple, Google, Lord and Lady so-and-so, or possesses a Russian surname.

Arguably too, Cyprus has been bound because of the island’s exposure to Greek sovereign debt. Laiki Marfin (formerly Laiki Popular until it was purchased by the Greek Marfin group) is fatally exposed to Greek debt. That said, the Bank of Cyprus, while still quite highly exposed, was more conservative in its Greek bond purchases and can conceivably survive the current situation. Keep in mind that in the spirit of solidarity, both Hellenic and pan-European, Cyprus signed up for the Greek Government bond restructuring program on the assurance that there would be some measure of protection to this exposure from the EU.

Turn to the events of the last week. The proposed levy that has precipitated the global financial turmoil was a direct result of newly elected Cypriot president Nicos Anastassiades being ambushed by the troika during his recent visit to Brussels. He was to agree to a depositor bail-in, or liquidity to Laiki Marfin would be severed and it would fail on Tuesday morning. While he certainly appears to be at fault for wanting to protect large investors at the expense of the very people who elected him, it’s important to remember that the levy was an uncalled for imposition, albeit one that Anastassiades handled woefully. The agreement that was finally reached (9.9% over €100,000, 6.75% below it) was a necessity at the time even if it was politically suicidal, and one which Cyprus’s parliament was perfectly within its rights to reject yesterday. Furthermore, the Tuesday deadline is completely arbitrary, Cyprus’s bailout application was made nine months ago and the country’s first repayment isn’t due until this summer.

Finally, Cyprus isn’t falling apart. The cashpoints are still providing citizens with money. People are not rioting in the streets. They are still turning up at work bright and early as usual. The world hasn’t in fact stopped turning. There is, however, a palpable sense of unease, confusion, and a common feeling that something has to give. But we will keep calm, carry on, and see how it all plays out.