The rebirth of Cyprus

Nicosia, March 2013: Cyprus is on the verge of bankruptcy. The two main banks of the Country – the Bank of Cyprus and Cyprus Popular Bank – went bankrupt. Brussels bails out an extraordinary rescue package worth €16bn: the Government freezes bank deposits and only those under €100,000 are assured, above this threshold a brand-new tool is implemented: the bail-in, the forced money levy from bank deposits. On one night only, shares, bank bonds and money amounting to €9.4bn were levied; Cypriots come out into the streets to demonstrate against an uncertain future.

Today, less than three years later, the situation is totally different and this small Mediterranean island is on its way to a sound economic recovery. Cyprus has turned the crisis into its opportunity/necessity to correct its own weak points, thanks to three key tools: sound reforms, bank reorganization and tax consolidation. These are the three hinges that have allowed Nicosia to exit the international rescue plan two months earlier than established. Cyprus is now the fourth country in the Eurozone to shake off the European rescue plan after Ireland, Spain and Portugal, while Greece still remains under careful observation.

This controversial three-year period has shown significant results: in 2015 Cyprus’s GDP expanded of 1.5% and Nicosia’s data on the last quarter of the year outrun Germany’s; unemployment rate, ticking up to 15.5%, is still high, but it has decreased in the last two years while above all fiscal deficit is improving and this year it is expected to become 0.1% of the GDP (2016 forecast) against the 7% in 2013. Even though public debt is still 106% (this value is however lower than Troika’s forecast, that assumed it would be higher than 125% in 2015), tax balance virtually ends in a draw and the ghost of default is a far away memory. The bank system is recovering too after the severe crisis; before 2013 Cypriot banks featured a turnover six times higher than Cyprus’s GDP: when the crisis struck the two main Cypriot banks (namely due to an excessive concentration of Greek state bonds, that had plummeted after the notorious haircuts of 2012), all Cypriot economy collapsed. Today banks are less exposed and greater attention is dedicated to protect liquidity: 52% of loans are insured by a renegotiation system, and last September Standard&Poor’s affirmed its rating on Cyprus to BB- with a positive outlook. In addition, Cypriots’ confidence in their own economy is increasing: domestic consumptions are growing again at such a rate that family consumptions represent 70% of GDP and domestic investments coming from the Government represent almost 16%. Cyprus’s economic sentiment indicator climbs higher than 100 and domestic consumptions are expected to grow further this year, benefiting from the low price of oil and from Euro weakness and last but not least, the growth of some key sectors, such as tourism, services, infrastructures and trades. This island is no longer the favorite destination for Russian and English tourists only: thanks to new airlines, new tourist berths, new casinos in resorts and more general investments for infrastructures, in 2015 the number of tourists expanded more than 8% and if trades show positive results with a 3% rate higher than one year ago, especially the IT and electronic sectors, services are growing at a 5% rate every four months.[1] Therefore, Cyprus is winning its challenge of diversifying its real economy and streamlining the weight of its banks. Cyprus’s reform program is credited to Nicos Anastasiadis’ Government, since it has reduced both the burden of fiscal pressure and civil service and has started privatizing services.

The top authorities in the International Monetary Fund maintain that Cyprus’s recovery is “a success,”[2] as its deputy managing director Mitsuhiro Furusawa has defined it. The Japanese economist seems virtually warm, if compared to the “impressive”[3] adage used by the head of IMF, Christine Lagarde. However, IMF underlines that now comes the difficult part. Public debt amounts to 106% and this means that it is essential to be prudent in terms of investments and public expenditure. The Government still has to reduce the burden of civil service, reform the legal system, finish the liberalization program and put the finances in order.

At all events, Cyprus’s economic recovery does not depend on reforms only; in the next future, some further factors are going to play a key role. First of all, recovery perspectives could remarkably be affected by the internal negotiation for the reunification of this Mediterranean island, divided in 1974 into two distinct territorial entities: the Republic of Cyprus and the Turkish Republic of Northern Cyprus (internationally recognized only by Turkey).

The Greek Cypriot and the Turkish Cypriot leaders have recently reasserted their commitment to solve the division of the island by this year, but the expected agreement to be undersigned this spring and the new referendum to be held in July do not seem so realistic.

Last January, President of Cyprus, Nikos Anastasiadis, and President of Northern Cyprus, Mustafa Akıncı, attended the World Economic Forum in Davos, Switzerland, in the presence of the Secretary-General of the United Nations, Ban Ki-moon and during the Reuniting Cyprus panel,[4] the two leaders confirmed that they are sure and confident that a compromise will be reached by 2016, underlining that a reunified Cyprus could become a model to show how to solve conflicts as well as a cooperation model in the world and, above all, in a global political and economic situation that seem to require such models.

However, reunifying Cyprus represents a complex objective, not only for the negotiation commitment between the two parties, but also for the material investments that it implies. Both Presidents, therefore, took the opportunity offered by Davos forum to declare their trust in the support to be given from the international community. Back on the island and following the preparatory meetings of Thursday, Norwegian Espen Barth Eide, United Nations Special Adviser on Cyprus, declared that the international support for a solution has never been so strong.

The island arouses the interest of some important foreign investors and so Eide hinted that the image of a reunified Cyprus would be crucial to attract public and private investments. If, on one hand, the joint mission of the two Presidents in Davos could bear fruit, on the other hand still there are some elements that require the most optimistic advisers to be prudent.

During the meeting of January 29, 2016, the two Presidents agreed on the procedure to be followed for the negotiation of the next months, but they did not discuss any substantial point. Three at least are the elements to be taken into consideration to reach a solution: firstly, the parties who should bear the costs of the reunification; secondly, the political frame where the new possible Cypriot state should be set in; lastly, what Greek and Turkish Cypriot citizens think and say, before considering the progress of the negotiation.

The reunification costs include several elements, such as the compensation expenses for the owners of the lands and houses on one or the other side of the Green Line, the demilitarized zone established by the United Nations in 1974 along the ceasefire line created after the Turkish military intervention on Cyprus.[5] As said during these years, three are the possible criteria to handle the problem of property: restitution, exchange and compensation.

Considering the island’s situation, conditions and the new state’s double-zone and double-community reality, the third criterion will be the most adopted, but huge resources will be necessary, estimated in €30bn, according to some appraisals. Various studies[6] highlight the advantages that the reunification would bring to the Greek and Turkish Cypriot economy, but it will not be easy to have the two electorates thinking that a new burdensome joint effort is desirable for the sake of a common future, a scenario that still implies worries and uncertainties.

It remains, however, hard to imagine that the EU countries, still enduring the crisis we know, could decide to increase the EU taxation levels to finance Cyprus’s reunification costs.

Another crucial growth factor could be represented by the energy sector: Cyprus is ranking high to become the energy hub of the Mediterranean area and the most recent meetings between Commissioner for Energy Union Maros Sefcovic and Prime Minister Nicos Anastasiadis seem to show that now Brussels is available to start a special relation with Nicosia for energy. Cyprus can count on twelve exploratory drilling blocks and a 160bn m3 natural gas reservoir: the country can play an important role to free the EU of its dependence on Moscow for natural gas. It is a long time since some international investors, such as Chinese Cnooc, French Total and Italian Korean Eni/Kogas consortium, started drilling wells and exploration activities: soon new subsea gas pipelines and new regasification terminals could be built. The project to transport natural gas to Europe is already on the table: a pipeline connecting with the Trans Adriatic Pipeline in Greece. According to several analysts, here lies the future of the cooperation between the EU and Cyprus. Huge are the potentialities; the situation is a rich source of interesting prospects for Cyprus that has to find an agreement on the respective economic exclusion zones with its Egyptian and Jewish partners. The key to Cyprus’s definitive recovery can be energy and success goes through a pipeline named diplomacy.[7]


[1] The Economist Intelligence Unit,

[2]IMF completes 9th review, approves next disbursement for Cyprus’ EFF,” Famagusta Gazette, 27 January 2016.

[3] Shouler, Andrew. “Island in the sun outshines austerity enforced by Europe,” The Telegraph, 27 March 2016.

[4] Taylor, Paul. “Cyprus leaders to make joint Davos appeal for peace support,” Reuters, 19 January 2016.

[5] European Commission, Green Line Regulation.

[6] Mullen, Fiona. “The Cyprus Peace Dividend Revisited: A Productivity and Sectoral Approach,” PRIO Cyprus Centre Report 1,

[7] International Renewable Energy Agency, Renewable Energy Roadmap for the Republic of Cyprus, January 2015.