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Will Cyprus collapse?

Contributed by Laveco Ltd
10 October, 2012

Contributed by Laveco Ltd. [www.laveco.com]

Even before the onset of the recession I noticed on several occasions that people tend to confuse Cyprus with Greece, considering the island country to be part of the larger nation. However, although they share a common language and, to a certain extent, culture, financially the two countries are totally independent of one another. Naturally, here we are talking about the southern or “Greek” part of Cyprus, as opposed to the northern part, which, since the split of 1974, the Turks have formed into the Turkish Republic of Northern Cyprus.

The friendly relationship between Greece and Cyprus is completely understandable, as a result of the “Greek brotherhood.” A significant part of the Cypriot intelligentsia studied, and still studies today, in Greece, and there are close economic links between the two. It would be pointless here to mention the spread of the Greek recession and their possible exit from the eurozone, as this has been covered in so much detail in the press over the last two years. Cyprus became the centre of international attention in July 2011 when the power station between Larnaca and Limassol supplying the island’s electricity exploded one morning. In addition to the fatalities, there were also serious economic consequences, as the island lost some 50% of its electricity production and had to spend more than a billion euros repairing the damage. Although they planned to complete the reconstruction last December, the end is still not in sight.

Following the explosion, events seemed to speed up around Cyprus. And, as if the country had suddenly appeared in the financial world’s gun sights, the international credit rating agencies repeatedly downgraded the Cypriot banks, attaching significant risk factors to the country. Panic set in, and the international public pricked up its ears, saying “Aha, so here is Greece No. 2.” Some investors started taking their money out of the island. Cypriot political leaders and bankers made matters worse with their statements, some of which immediately asked for foreign bailouts. This probably sent the wrong message to the outside world, who had difficulty as it was distinguishing between Cyprus and Greece, where the major problems surrounding the euro occurred and where they held elections in spring this year. It’s no surprise that many people got cold feet, and I was constantly being asked what would happen in Cyprus and whether they would go bankrupt.

In my opinion, that is a very long way off, and I, here in Hungary, would gladly swap places and have the “huge problems” that they have in Cyprus! What I am about to explain below is basically very subjective. This isn’t going to overflow with statistical data or be interwoven with cross references, and I admit that I myself am tired of all the expert explanations of the last 4 years; tired of those theories which they develop one day, only for reality to shoot down the prophecies of the super-economists the next, as events very often take a very different turn to those expected by the “gurus”.

So, what exactly does Cyprus live on? Basically 2 things. One of them is tourism, as the country’s main export is “sunshine”. And here we could justifiably put a “smiley”, as anyone who has visited the island will have seen, this is not the Garden of Eden. Basically, we are talking about a sparse, rocky territory, with relatively little vegetation, but a clear blue sea and a friendly, hospitable population, who are delighted to welcome foreign visitors year after year. And the foreign visitors do come. Although there was a sharp drop in numbers at the start of the recession, they have now recovered from the loss and, thanks in particular to tourists from Russia, are about to close a very good year. The other main branch of the economy is the financial sector, which includes the “company industry”, banking services and the real estate market. If we look at tourism and the financial sector as percentages of the economy, then, from the point of view of income, the proportion of the financial sector is considerably larger than that of tourism; that is, it contributes more to the economy than all those millions of tourists all together. If anything were to happen to this, then this would literally mean the end of Cyprus financially. They would not be able to survive on tourism alone.

Everybody on the island, from the president to the last hotel porter or taxi driver, is quite aware of the significance of this. This national consensus is no accident; some three quarters of the parliament is made up of lawyers and solicitors, who are 100% involved in company registration, which forms such an integral part of the financial services. So it is impossible to even speak about matters which may be detrimental to the industry without involving them. There is currently legislation which they have been unable to pass for 7 years, despite pressure from the EU, as this would have an effect on lawyers’ confidentiality rules.

Cyprus has been present in the international financial arena since 1974 – almost 40 years. In those 4 decades such interests have been concentrated here as would be able to save the country from bankruptcy by themselves. Russia alone has records of around 70 billion euros worth of investments direct from Cyprus. Although the majority of this money is probably of Russian origin, there is no alternative to the agreement for the avoidance of double taxation between the two countries: Cyprus can’t be “replaced.” Little wonder, then, that when the Cypriots gave their cry for help last year, Russia immediately threw them a 2.5 billion dollar lifebelt. Then this year, when they again asked for money, the Russians again promised a package worth 5.5 billion euros. And all “for peanuts.” It is true that the value of the gas field discovered on the seabed, and belonging partly to Cyprus, has been estimated at 100 billion euros, which is roughly equal to the GDP of Cyprus for 5 years, so there would be more than ample collateral. This was probably the motivation behind the Russian loans. Oh, of course, not to forget the increasing of the power of the “new rich” Russians living there and the nurturing of the financial relationship between the two countries which has always been good. The Cypriot president, who also happens to be the current EU president as well, studied in Moscow, so language is never a problem when he negotiates with the Kremlin. Although he is often criticised at home, Christofias has very good standing with the Russians. The Russians are key players here, and who knows what additional motives they may have in unconditionally helping this small country.

So, where does all the money really disappear to in Cyprus? It’s a logical question, as on the credit side, with 2 sectors bolstering the economy, the situation wouldn’t be that bad. So the problem must be on the debit side. And here human fallibility, stupidity and failure to plan for the long term can be felt every step of the way. In a country with a population of 850 000 there are almost 100 000 civil servants. This in itself would not be a problem, but here the salaries and bonuses are significantly higher than in the private sector, not to mention the “job for life” guarantee. So everybody wants to be a civil servant, as a secondary school teacher can earn up to 4000 euros a month, which they also receive in the 3-month summer holiday. These sorts of salaries are obviously over the top and wasteful, as very often the individual doesn’t even spend the excess at home, but rather on ebay or in the casinos on the Turkish side. 2000 euros would be enough, but the logic is different here: everything depends on family ties and connections. Who knows who, and who is what to who. You can only get a good state job if you have the right connections. Allegedly, there are currently 40 000 unemployed Cypriots on the island. At the same time, there are 150 000 immigrant workers. So where, in fact, is the unemployment?

The list could go on and on, from the deficit of the local transport company to the problems of Cyprus Airways, the national airline. In short, they overspend and waste money, and have been doing so for decades. To be fair, they too are aware that this can not go on indefinitely, and they will have to give up at least part of their salaries and bonuses. But nobody wants to take the responsibility for the decisions which will have painful consequences. Especially not in the year before an election. And can they do this? It seems that the answer is yes… Why? At this point I’m sure you are expecting some concise, comprehensive conclusion, in which I give the final word on the future of Cyprus and whether or not they will go bankrupt. In my opinion, there is very little chance of bankruptcy, and even if the statistics tell a different story, in the case of Cyprus you can’t always believe the figures.

Back in July, while having dinner with the leaders of one of the large Cypriot banks, I asked them about the future, to which one of them replied:

“László, we are too big to be bankrupted..”

How should this be interpreted? The Bank of Cyprus has 29% of the market, Marfin Laiki 17% and Hellenic Bank 9%. That’s 55% all together. If these three banks have a problem, then that is the end of Cyprus, end of story. The Russians would also disappear and they would be left with serious financing problems. And I haven’t even mentioned all of the other countries with very close links to the Cypriot financial system, such as the UK, Israel and a significant number of Arab countries, to name but a few.

Think about it logically yourself. I’ve been spending several weeks a year on the island for 13 years now, and have a pretty good overview of events. When I established LAVECO Ltd. in Cyprus in 1999, it wasn’t by chance. I felt that this was a country which would be able to offer a stable home to our clients. And I still believe that today, in spite of the recession and all the horror stories. Cyprus is eternal. Despite the Greek mentality, the local elite are capable of getting on top of the situation and resolving all the difficulties caused by the recession.

I hope you will enjoy reading this, and wish you continued business success.

Warm regards

László Váradi

Managing Director


Contact LAVECO LTD.:

Web site: www.laveco.com

United Kingdom
3rd Floor, Blackwell House, 
Guildhall Yard, London 
EC2V 5AE United Kingdom 
Tel.: 44-207-556-0900 
Fax: 44-207-556-0910 
E-mail: london@laveco.com

33/a Raday street, 
1092 Budapest, 
Tel.: 36-1-456-72-00 
Fax: 36-1-456-72-01 
E-mail: hungary@laveco.com

Despina Sofia Complex 
Ap. 202, United Nations 8 
Drosia 6042, Larnaca, Cyprus 
Tel.: 357-24-636-919 
Fax: 357-24-636-920 
E-mail: cyprus@laveco.com

59 Buzesti Str., A5 Block 
1st Scale, 1st Floor, 62nd Flat, 
1st District, Bucharest, Romania 
Tel.: 40-21-311-61-76 
Mob: 40-747-595-132 
Fax: 40-21-311-61-82 
E-mail: office@optitax.ro

Porto Lagos No.1,Ent.2, Floor 5, Ap.42, 1463 Sofia, Bulgaria 
Tel.: 359-2-953-2989 
Mob: 359-888-126-013 
Fax: 359-2-953-3502 
E-mail: bulgaria@laveco.com

Suite 2, Oliver Maradan Bld. 
Oliver Maradan Street,Victoria 
Mahé, Seychelles 
Tel.: 248-4-322-261 
Fax: 248-4-324-932 
E-mail: seychelles@laveco.com


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