While all eyes are on Greece’s endless talks with its creditors, Cyprus has been trying to finalise its own rescue package with the troika (officials from the IMF, the European Central Bank and the EU).
Cyprus is the fifth state, after Greece, Portugal, Ireland and Spain, to need propping up by the rest of the continent. As in Spain and Ireland, it’s been a case of reckless lending by bloated banks bankrupting the country.
The island’s geographical and cultural ties to Greece led to close economic links. In the boom, loans to Greece soared to €24bn, 133% of the island’s GDP. Around a fifth of these loans have gone bad, notes Wirtschaftswoche, and that’s on top of losses on Greek bonds worth over €4bn following Greece’s debt rescheduling earlier this year.
As government bond yields soared amid fears over the Cypriot banking system and the resultant overwhelming bill for the public sector, Nicosia called for help. The upshot, says Finanz und Wirtschaft, is an aid package of around €10bn.
Negotiations haven’t been exactly straightforward. The troika has apparently complained that the government’s reform and money-saving efforts lacked ambition.
There has also been talk of Cyprus having to raise its corporation tax rate of 10% – lower even than Ireland’s – but this is now deemed unlikely. It is a key reason the banks attracted so many deposits to lend recklessly in the first place, as Wirtschaftswoche points out.
So far, so typical for a European rescue, but there’s one feature of the emerging Cyprus bail-out that is rather unusual. Germany’s Der Spiegel notes that, according to one of Germany’s intelligence agencies, the BND, Russian citizens have deposits in local banks worth €26bn. Plenty of that looks dodgy. It is easy for Russians to launder money in Cyprus because gaining local citizenship is so simple.
Cyprus will only get its aid money if Germany’s parliament votes it through. The main opposition party, the Social Democrats, has now raised concern over Cyprus’s “business model”, says Der Spiegel. We can’t have German taxpayers being forced to secure dodgy Russian money by propping up Cypriot banks, insists one party spokesman.
So watch this space: while the eurozone attempts to shore up Greece and Spain, Cyprus may provide an interesting sideshow.