Cyprus’ Daunting Greek Debt Divides
The Cyprus stock exchange and external bonds shuddered as Euro-zone authorities scrambled to salvage Greece’s unraveling rescue package agreed a year ago with missed fiscal targets and credit default swaps and 2-year market yields at ultra-distressed readings. The island heads into parliamentary elections with the economy “in grave risk,” according to the central bank head, following rating agency bank and sovereign downgrades during the first quarter on Greek public and private sector credit exposure and fiscal slippage. GDP growth was a meager 1 percent in 2010 after the double-digit tempo of the previous decade, as the budget deficit topped 5 percent and will again match that “worst-case scenario” range this year, in the words of the Finance Minister. Government debt is at the 60 percent of GDP Maastricht threshold, but excludes contingent liabilities at the two main listed financial groups Bank of Cyprus and Marfin whose capital could be erased with a sizeable haircut on Greek instruments and spike in nonperforming loans there. The sector as a whole has lines outstanding of $10 billion, equivalent to one-third of output, as of the end of last year, the BIS reports, with the stated capital/assets at 10 percent. To raise revenue and protect account-holders, the parliament recently approved a deposit tax to bring in $100 million and cushion potential system-support costs. Deposits are four times GDP, at almost EUR 70 billion, and have fallen in the past few months on the direct cross-Mediterranean fallout and as Russian offshore wealth is repatriated with booming commodities lifting currency and securities values at home. Nominally Cypriot firms have been among the largest foreign direct investors in Russia and Central Asia in recent years in transactions designed to avoid tax and ownership disclosure burdens.
Despite the extension of VAT to food purchases, the Q1 fiscal gap was over 1.5 percent of GDP on a 50 percent jump in interest payments and additional aid to the state airline which is still banned from flying in northern Turkish airspace. Opposition parties blame corruption for spending overruns which have already caused the government to backtrack on promised 2010 civil servant salary increases. An overlooked issue in reunification talks is the dual currency, with the euro adopted in 2008 and the lira still circulating in Turkey’s zone. Istanbul has reportedly taken some tourism business from Cyprus and Athens with their troubles, although banks there are also in prudential sights for breakneck consumer and mortgage activity as the ruling party goes to the polls with a comfortable lead and a ticket of identified overheating discomforts.
