| 13 October 2011
These past few days some concerns have been voiced regarding the financial situation of Cyprus and her government. Critics raise fears regarding the size of government debt and Cyprus´ economic ties with Greece. While these fears seem justified at first glance, there are some major differences between the Cypriot economy and the PIIGS´ economies.
It is certainly true that government spending has reached record levels and the government should make efforts to reduce it. But a 7% deficit in 2011 and a debt to GDP ratio of 80% is not unique among Euro states. Besides, the spike in government spending is mainly caused by the accidental explosion of an ammunition depot that pretty much destroyed the country’s main power station. Repairs are expected to cost between €700 and €800 million, not to mention the economic damage caused by power blackouts; a huge expense for the small island nation.
Cypriot banks are heavily involved with Greece, that is true as well. Outstanding loans to Greek customers and holdings of Greek sovereign and bank debt held by privately owned Cypriot banks are equivalent to a staggering 160% of GDP. But Cypriot banks are just as much involved in the UK, Russia and the Middle East economies. After all, Cyprus is a large financial center with several banks holding more assets than the total size of the country’s GDP. Moreover, both credit agencies who downgraded Cyprus´ credit rating acknowledge that the banks are well capitalized and can weather the sovereign debt crisis.
Having said that, Cyprus government does not always follow healthy economic policies. Last month the largest bank, Bank of Cyprus, released an official statement urging the government to reduce spending, in exchange for financial support. At the same time, the cabinet resigned over the public outcries following the ammunition explosion and new elections are likely to be held. After three years of progressive rule the country is ready to return to more sensible politics.
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