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cyprus, EU, Politics

Cyprus has caught the Greek disease

While the President of Cyprus visits Moscow to negotiate with Putin, the leftist opposition calls for support for a Syriza-style anti-austerity policy, says  Dimitri Deliolanes

In late February, while in Ukraine the truce was imposed with difficulty and in Washington there was talk of new sanctions, the President of Cyprus Nikos Anastasiades made a three-day trip to Russia. It was the first visit by a Western leader to Moscow since the crisis erupted in Ukraine. The visit has produced twelve bilateral agreements, the most important of which is surely the one that concerns the extension and widening of the military cooperation between the two countries. The new agreement extends the validity of a previous agreement, signed in 1996, which allows ships Russian military access to Cypriot ports and particularly in Limassol, the most important harbour.

While Anastasiades was staying in Moscow, the Russian Duma also took steps to restructure the loan offered at the time by the Putin of Cyprus to the previous Greek communist President Demetris Christofias, of 2.5 billion euro. The repayment of the debt was postponed from 2018 to 2022 and interest cut from 4.5% to 2.5%. A generous gift. During the meeting with the leaders of the Duma, the President of Cyprus also received thanks for the fact that at in European circles Cyprus had repeatedly aligned itself against sanctions against Moscow, considered a boomerang for the economies of the countries with the deepest economic links with Russia.

Another important area of ​​cooperation under the agreement is in energy. Cyprus is actively exploring the energy deposits (particularly gas) in its Exclusive Economic Zone  and  long ago started an intensive collaboration with two neighbours, Israel and Egypt. Actively participating in the exploration of the reserves is Italian energy giant ENI, which was awarded two exploration blocs in the sea.

The visit of the president of Cyprus gained a visibility and exposure that went far beyond its actual importance. It was a message to European Union of intolerance: while Europe plays the strict stepmother, old friends help financially, sending millions of tourists to our beaches (+ 5% in 2014), they buy our agricultural products and, if needed, they can also protect us against Turkish aggression. It should not be forgotten that Turkish Armed Forces have held under military occupation the northern part of the island since 1974, despite repeated condemnation by the UN Security Council.

Cyprus is a member country of the European Union (since 2004) and the euro (since 2008) but not NATO. When elected in 2013 Anastasiades, leader of the center-right party Adunata democrarica (DISY), proposed that the island abandon its traditional not aligned policy (Cyprus was among the founders of the movement in the early sixties) to join NATO’s Partnership for Peace  The reasoning of the new president was that Cyprus’s accession to NATO would be an important step towards achieving the security of Cyprus, making it ally of the uncomfortable neighbour Turkey. The proposal provoked strong objections from the powerful communist party AKEL, which recalled that the Turkish invasion of 1974 took place with NATO weaponry under a NATO plan for the division of the island with Greece of the Colonels. In the end, even Anastasiades has tacitly shelved PfP.

Its the economy stupid!

But the real reason of the recent reboot of the friendly relationship between Moscow and Nicosia lies in the tough economic crisis that hit Cyprus two years ago. The Cypriot crisis is closely linked with that of Greece, although it has a completely different character: in summary, in the case of the Cyprus problem is closely related to the banking system, while in Greece the intervention of the Troika in 2010 was justified by excessive public spending.

In Cyprus the crisis broke out in March 2013, just a week after the election of Anastasiades as President. One of the largest Cyprus banks, Laiki Bank, was under the control of Greek banker and entrepreneur Andreas Vgenopoulos, former owner of the Marfin bank in Greece. Taking advantage of the lack of control of the central banks of Greece and Cyprus, Vgenopoulos had invested much of the capital of the Cypriot bank in Greek bonds, which, with the spread (cost of borrowing) soaring, offered mind boggling interest. According to press reports, he also used the shares of Laiki to finance the sale of shares in Marfin. All with a policy of generous loans to politicians in Greece and in Cyprus. With the Greek debt haircut to private bondholders, decided at the beginning of 2012, the Bank of Cyprus found itself lacking liquidity. In the same period, the second largest bank of the island, the Bank of Cyprus, had unjustifiably extended its activities, buying in banks and opening branches in Romania and Russia. The sudden collapse of Laiki overwhelmed even the Bank of Cyprus and threatened the entire island.

The crisis broke out in 2012 but the then President Christofias did not sound the alarm. Later, he placed responsibility on to the then Governor of the Central Bank of Cyprus Athanasios Orfanidis. In the end, while for the Greek courts the case is closed, the Cypriot magistrates continue to investigate the case and the political responsibilities.

The fact is that the new President of Cyprus found himself in the hands of a large scandal that was threatening the island’s financial system, which underpinned the Cypriot economy. Suffice to say that in the banks of Cyprus capital circulated which amounted to double the country’s GDP. The request for help from Nicosia to the European Stability Mechanism amounted to around 10 billion euro. For several weeks we witnessed the same scenario three years earlier in Greece, with the addition of serious (but never proven) German accusations that Cyprus “laundered money” of Russian oligarchs. Nicosia reacted to capital flight closing the banks for a period of time and, when they were reopened, drastically limited transfers. In the end it is estimated that about 400 billion were transferred to Austrian financial institutions, or the Baltic countries. What was new was recipe of the bail-in, drawing on reserves inside the country. A 9.9% tax on bank deposits in excess of 100 000 euros was imposed, while accounts of  less than 20 thousand euro were exempt from the levy.

As in all other cases, Cyprus’ financial assistance had strings attached –  a programme of severe cuts to public expenditure. Like in Greece, in Cyprus the Troika’s drastic medicine caused a deep recession, although more moderate in size than expected: in 2013  a 9% fall in GDP was expected while the end the economy contracted by 5.4% and last year the forecasts were for -4% when instead GDP dropped by 2.8%. For the current year, the European Commission forecasts 0.4% growth while the European Bank for Reconstruction and Development is more optimistic, expecting 0.7%, the rate at which Cyprus closed the last four months of 2014. This has allowed Moody’s to raise its credit rating to B3. Cyprus returned to the markets for its financing in June 2014, issuing a 750 million euro bond. unemployment remains high, stuck 16%, however.

So all good? Not really. In the memorandum signed by the government austerity measures included privatizations to raise 2.8 billion euros by 2018 and foreclosures of primary residences where people default on mortgage payments. Both procedures encountered serious political problems. The government is taking its time on the privatisation program: Larnaca airport has long been in private hands, the publicly owned electricity company ATHK, in profit, may not be sold and the government is seeking to ensure the opening of the market by inviting private investment in renewable energy. Even ports will be auctioned, but only “some services”. Then there’s the state lottery, another important source of revenue for the Cypriot public purse.

The courthouse foreclosure auctions of primary residences have been twice rejected by the parliament of Cyprus. This resulted in the cancellation of the ritual Troika visit and a tough tussle between the executive (and in particular between the Minister of Finance Harris Georgiadis, a technocrat) and the house of representatives. The legislative body insists on regulations favourable to low-income families, while the Troika is very concerned about the rapid rise of Cypriot banks’ bad debts, now at half of the total. The happy exception is cooperative banks, which control about a third of the deposits of the island, which in late February announced they were lowering the rate of loans to their 132,000 debtors to 1%.

Impact of Syriza government

Bursting into this Cypriot dialectic is the electoral victory of the Greek left. The  anti-austerity policy of the new premier Alexis Tsipras could not but have an impact on Cyprus, a country of ancient, strongly rooted Greek culture. Already in the first meeting of the Eurogroup with the new Greek Minister of Finance Yanis Varoufakis, Cyprus found itself at the centre of the storm: the fact is that the ominous ultimatum delivered by the president of the Eurogroup to Varoufakis Dijsselbloem was approved by all 18 ministers unanimously, that is, including the Cypriot Georgiadis. Face with press attacks on the island, the minister replied that he had “not properly understood,” the  Greek government’s proposals. It was the signal anticipated by the left and centre  opposition to attack the government’s policy and demand the rapid adjustment of this policy in line with Athens.

Throwing oil onto the fire was the European Commission’s proposals that member countries provide details on bilateral energy deals struck with other countries. The Brussels plan relates to understandings, still partly secret, signed by Gazprom with other European member countries, such as Austria, Slovenia, Bulgaria, Hungary, Croatia and Greece. But in Cyprus it has been interpreted as an unacceptable interference in energy policy pursued by the enterprising Cypriot Energy Minister Yiorgos Lakkotrypis, who recently signed agreements for the export of Cyprus gas to Egypt and Jordan. But also a repudiation of the agreements signed in Moscow, involving the Russian involvement in the research and production of gas in Cyprus. The negative example is, again, from the Greek experience: twice the European Commission blocked the privatization of Greek gas companies DEPA and DESFA, but also the railways, despite Russian bids that were by far the best.

In Cyprus, in conclusion, the prevailing feeling is of disappointment with the European Union. The adhesion to the EU in 2004 was certainly not dictated by economic reasons, but rather by the search for security. In this decade, however, Europe has failed to exercise adequate pressure in Ankara even over a elementary request such as the recognition of all member countries – including the Republic of Cyprus – to move forward accession negotiations. No one, of course, is talking about exit from the eurozone. But here in Cyprus one no longer expects much from Brussels, while an active foreign policy [seeking allies] far and wide is being pursued.

Translated by Revolting Europe

www.sbilanciamoci.info

 

About revoltingeurope

Writer on Europe's Left, trade union and social movements @tomgilltweets or @revoltingeurope

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