Fast and Glorious

29 April 2016

Euro Symbol at the European Central Bank (ECB) in Frankfurt, Germany. Patrick Poendl/Shutterstock
 
A much needed success story for the Eurozone, Cyprus exited the bailout program early and having borrowed only 70 percent of the allocated financial package.
 
On March 7th 2016 Cyprus successfully exited the three-year international financial assistance program, also known as the Economic Adjustment Program for Cyprus, agreed in the form of a Memorandum of Understanding (MOU) between the Government of Cyprus and the European Commission, the European Central Bank, and the International Monetary Fund (IMF).
 
Only three years prior, in March 2013, the country’s economy was in shambles because of the toxic mixture of bankrupt banks, record unemployment, a sky-rocketing deficit and the inability to access financial markets, having its bonds downgraded to junk status. Cyprus was heavily affected by the exposure to Greece, which represented almost 150 percent of its Gross Domestic Product (GDP), and saw its local real estate bubble burst.
 
The MOU imposed tight capital controls and a haircut on all deposits higher than EUR 100,000 in the country’s two biggest banks (Bank of Cyprus, later recapitalized, and Laiki Bank, which was allowed to go bust and then merged with Bank of Cyprus). Cyprus became the first and only nation to have had such strict measures imposed on its depositors and naturally, as a consequence, the move led to record-low investor confidence. In the words of John Hourican, CEO of Bank of Cyprus, “the system had had a cardiac arrest; it was a moment of chaos for the country”.
 
"I wish to congratulate the people and the Government of Cyprus on their accomplishments under the economic adjustment program, which has delivered an impressive turnaround of the economy during the past three years." 

Christine Lagarde, Managing Director of the International Monetary Fund

Fast forward to present day, the leaders of global financial institutions have nothing but words of praise for the “impressive turnaround” of the economy in such a short period of time. On the eve of the exit, Christine Lagarde, Managing Director of the IMF, issued a statement emphasizing her admiration for the country’s evolution: “I wish to congratulate the people and the Government of Cyprus on their accomplishments under the economic adjustment program, which has delivered an impressive turnaround of the economy during the past three years.” She assessed that “the economy returned to positive growth last year, expanding by about 1.5 percent. The banking system is on a much more solid footing and workouts of nonperforming loans are accelerating, opening space for new productive lending. The fiscal position has been restored to a sustainable path, and public debt is now firmly on a downward trajectory. In addition, Cyprus regained access to international capital markets and successfully issued three Eurobonds during the past 21 months.” 
 
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According to Eurostat, Cyprus had a 1.6 percent GDP growth in 2015 and currently the country’s economy is faring well, with a 0.9 percent GDP increase in the first quarter of 2016, the second largest growth of the 28 European Union countries. It now represents a much needed success story for what has become known as the troika, the crisis intervention team for the Eurozone, consisting of the International Monetary Fund, the European Central Bank, and the European Commission. The troika has often been criticized for its harsh austerity measures imposed during the previous bailout packages for Eurozone countries in dire straits, such as Ireland, Spain, and Portugal, which exited the deal more or less successfully. Greece is currently the only country of the monetary union to remain part of the financial rescue program. Cyprus did not only exit the European Union bailout component on time, with almost 30 percent of the entire funds not utilized, but also two months ahead of the IMF component deadline.
 
The systemic banks have been recapitalized and have successfully passed the imposed stress tests. Hellenic Bank, the first bank to receive the investors’ interest in the post-crisis period, was capitalized with the help of the American-based hedge fund Third Point and Wargaming, a Belarusian gaming company. 

"I set an ambition for a billion euros of new equity, which is 6 percent of the country’s GDP, a big number, and we delivered that during the summer of 2014.  It was the major fix moment for the banking system in Cyprus, because more than 30 international investors, including Wilbur Ross, validated our story." 

John Hourican, CEO, Bank of Cyprus

Bank of Cyprus was also successful in attracting big names to the table, most prominently American investor Wilbur Ross who invested a whopping EUR 400 million in the bank. The European Bank for Reconstruction and Development was brought in for governance, followed by investors such as Renova (the Swiss-based Russian investment vehicle) and a number of asset managers from London and New York. John Hourican explains: “I set an ambition for a billion euros of new equity, which is 6 percent of the country’s GDP, a big number, and we delivered that during the summer of 2014.  It was the major fix moment for the banking system in Cyprus, because more than 30 international investors, including Wilbur Ross, validated our story.”

 

Challenges like the high level of non-performing loans (45.8 percent of total loans) and the high unemployment (12 percent, a significant drop from the 16 percent of last year) still remain. Cyprus has also failed to comply with a final bailout requirement, the privatization of the state-owned telecommunications company, Cyta, because of the major political price that would have had to be paid ahead of the parliamentary elections that took place at the end of May 2016, which caused the loss of the final EUR 275 million of agreed European loans. Since Cyprus only accessed EUR 7.25 billion of the EUR 10 billion allocated under the MOU, the overall performance of the economy was not affected by this turn of events. The privatization is now seen as a growth factor rather than a way out of the crisis.
 
 
 
 
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