CYPRUS AND THE FINANCIAL CRISIS The Controversial Bailout and What it Means for the Eurozone John Theodore Jonathan Theodore Cyprus and the Financial Crisis This page intentionally left blank Cyprus and the Financial Crisis The Controversial Bailout and What It Means for the Eurozone John Theodore and Jonathan Theodore Palgrave macmillan © John Theodore and Jonathan Theodore 2015 Foreword © Michael Sarris 2015 Softcover reprint of the hardcover 1st edition 2015 978-1-137-45274-0 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2015 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-55792-9 DOI 10.1057/9781137452757 ISBN 978-1-137-45275-7 (eBook) This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Theodore, John, 1945– Cyprus and the financial crisis : the controversial bailout and what it means for the eurozone / John Theodore, Jonathan Theodore pages cm Cyprus—Economic conditions—21st century Finance— Cyprus—History—21st century Banks and banking— Cyprus—History—21st century European Union countries— Foreign economic relations—Cyprus Cyprus—Foreign economic relations—European Union countries I Theodore, Jonathan, 1985– II Title HC415.2.T42 2015 330.95693—dc23 2015002670 This book is dedicated to all Cypriots and their hopes and aspirations for a better economic and united political future This page intentionally left blank Contents Foreword by Michael Sarris ix Preface and Acknowledgements xiv About the Authors xvi Introduction 1 Birth of a Nation The Road to Independence Nationhood, Its Costs and Consequences A Unified Country Breaks Down, 1963–1964 6 12 Forever Divided? The Turkish Invasion and Its Aftermath A Final Hope? The Annan Plan, 2002–2004 19 19 27 The Financial Crisis Spreads to Cyprus The Single Currency and International Finance AKEL: An Easy Target for Blame? Greece, the PSI, and Sacrifice of Cyprus Greek Fallout in Cyprus Casino Economics and Political Games From Bailouts to Bail-in 38 38 46 50 57 61 67 Bailouts and Bail-Ins The Cyprus Experiment International Reactions to the Bail-In The Piraeus Asset Transfer Austerity, Banking and Housing Bubble Parallels Cyprus and the Politicised ‘Russian’ Connection 71 71 82 92 95 99 Economic Recovery and Strategic Challenges Banking Confidence and the Eurozone The Rapid Recovery of Cyprus 102 102 105 vii viii Contents Natural Gas and the Strategic Conflict with Turkey 116 Bail-In and the Future of the Eurozone A Dream Undone? Monetary Union: Stability or Systemic Weakness? 123 123 134 Conclusion 138 Notes 145 Bibliography 163 Index 170 Foreword Several years after the onset of the world economic crisis, the eurozone economy continues to stagnate, with unemployment especially high in the periphery With weak average economic growth and overall prospects uncertain, the cost of serious policy-making and crisis management failures is rising fast, both in terms of economic welfare and political polarization The book in your hands makes an important contribution to the kind of reflection and analysis that is needed to help in charting a sustainable way forward This debate about the origins and the management of the eurozone crisis needs to be carried out along three different axes, which have not always received the merited equal attention First, and most frequently discussed, is the narrative of policy-making failures at the national member-state level in terms of heavy public and private indebtedness and declining external competitiveness Second, the shortcomings in the design of the monetary union which the crisis brought to the surface but whose share in the blame for the crisis has attracted relatively little attention; and third, the mismanagement of the crisis by the eurozone leadership that has sent the necessary correction the wrong way The origins and management of both the Greek and Cypriot crises provide vivid illustrations in all three areas In the fifty years since independence in 1960, Cyprus had avoided major economic policy errors In the context of a sound public/private sector partnership, Cyprus took advantage of external opportunities to build a strong service-oriented economy based on export In parallel, during the process of joining institutions with sound economic practices such as the WTO, the EU and the eurozone, Cyprus implemented several much needed economic and structural reforms But the arrival of the eurozone crisis found the country with serious pre-existing and homegrown imbalances The substantial increase in capital inflows, encouraged first by the prospect and then by the actual entry into the EU and the eurozone, together with the narrow emphasis of the Maastricht criteria on fiscal performance rather than on also monitoring the potentially ix Bibliography 165 Higgins, R United Nations Peace Keeping 1946–67 Documents and Commentary (Oxford: Oxford University Press, 1969) Hill, George A History of Cyprus (Cambridge: Cambridge University Press, 2010) Hill, Sir George A History of Cyprus (4 Vols) (Cambridge, Cambridge University Press, 1940–1952) Hirsch, Fred Money International (London: Penguin, 1969) Hitchens, Christopher Hostage to History: Cyprus from the Ottomans to Kissinger (London: Verso (orig pub 1984), 1997) Holland, Robert Britain and the Revolt in Cyprus 1954–1959 (Oxford: Oxford University Press 1998) Issing, Otmar The Birth of the Euro (Cambridge: Cambridge University Press, 2008) James, A The Politics of Peacekeeping (London: Chatto and Windus, 1969) Joseph, Josef S Cyprus: Ethnic Conflict and International Politics (London: St Martin’s Press, 1997) Koumoulides, John T.A (ed) Cyprus in Transition (London: Trigraph, 1986) Lindley, Dan ‘The Military Factor in the Eastern Mediterranean’, in Dodd, Clement H (ed).Cyprus: The Need for New Perspectives, (Huntingdon: Eothen Press 1999) Luard, E The United Nations (London: Macmillan Press, 1979) Mallinson, William Cyprus: A Modern History (London: I B Tauris, 2008) Marsh, David The Euro: The Politics of the New Global Currency (New York: Yale University Press, 2009) Mayes, Stanley Makarios: A Biography (London: Macmillan, 1981) Moran, Michael Cyprus: A European Anomaly (Istanbul: Kindle Edition 2011) O’Malley, Brendan and Craig, Ian The Cyprus Conspiracy (London: I.B Tauris, 2001) Pantelis, Stavros A History of Cyprus (London: East-West Publications, 2000) Papadakis, Yiannis Divided Cyprus (Indiana: Indiana University Press, 2006) Pentzopoulos, Dimitris The Balkan Exchange of Minorities and Its Impact Upon Greece (Paris: Mouton & Co, 1962) Polyviou, Polyvios G The Tragedy and the Challenge (Cyprus, 1975) Polyviou, Polyvios G Cyprus in Search of Constitution (Nicosia: Nicolaou & Sons Ltd, 1976) Porter, A N and Stockwell, A.J British Imperial Policy and Decolonisation 1938– 1964 (London: Macmillan, 1987) Pringle, Robert The Money Trap (London: Palgrave Macmillan, 2012) Reddaway, John Burdened with Cyprus: The British Connection (Weidenfeld and Nicolson: 1986) Richard, Oliver P Mediating in Cyprus (London: Portland, 1999) Rogoff, Kenneth The Global Fallout of a Eurozone Collapse (Financial Times, October 4, 2011) Seyersted, Finn United Nations Forces in the Law of Peace and War (The Netherlands, Sijjthoff-Leyden, 1972) Seymour, Hersh The Price of Power: Kissinger in the Nixon White House (London: Summit Books, 1983) 166 Bibliography Sonyel, Salahi R Cyprus: Destruction of a Republic: British Documents, 1960–65 (Huntingdon: Eothen Press, 1997) Sonyel, Salahi R ‘New Light On the Genesis of the Conflict’, in Dodd, Clement H (ed.) Cyprus: The Need for New Perspectives (Huntingdon: Eothen Press, 1999) Svolopoulos, Konstantinos Greek Foreign Policy, 1945–1981 (Estia: Athens, 2002) Theodhoropoulos, V., Lagkakos, E., Papoulias and Tzounis, T., Reflections and Considerations about our Foreign Policy (Athens, 1995) Tocci, Nathalie EU Accession Dynamics and Conflict Resolution – Catalysing Peace or Consolidating Partition in Cyprus? (London: Ashgate Publishing Ltd, 2004) Trimikliniotis, Nicos and Bozkurt, Umut (eds.) Beyond a Divided Cyprus: A State and Society in Transformation (London: Palgrave Macmillan, 2012) Tunkin, G Theory of International Law, Vol 12 (Washington DC: Dept of State Publication, 1971) Vanezis, P.N Makarios: Life and Leadership (London: Abelard-Schuman, 1979) Varnava, Andrekos, and Faustmann, Herbet (eds.) Reunifying Cyprus: The Annan Plan & Beyond (London: I.B Tauris, 2009) Yakinthos, Christalla Political Settlements in Divided Societies: Consociationalism and Cyprus (London: Palgrave Macmillan, 2009) Articles Bank of Cyprus Group Economic Research Divison, Report entitled ‘The Cyprus Economy’, published July 2012, pp 7–8 ‘Banks on the Brink: ECB May Cut Emergency Funding to Cyprus’, Der Spiegel (March 20, 2013), available online at http://www.spiegel.de/international/ europe/ecb-may-cut-emergency-funding-to-cypriot-banks-after-refusal-a889967.html Bernanke, Ben ‘The Macroeconomics of the Great Depression: A Comparative Approach’, Journal of Money, Credit, and Banking , XXVII (1995), pp 1–28 Bleicher, S ‘Legal Significance of Re-citation of General Assembly Resolutions’, American Journal of International Law, LXIII (1969), pp 444–478 ‘Buiter on Europe’s secret liquidity operations’, Financial Times (January 24, 2011), available online at http://ftalphaville.ft.com//2011/01/24/466731/ buiter-on-europes-secret-liquidity-operations/ Caritas Europe, ‘The European Crisis and its Human Cost’, 2104 report, published online at http://www.caritas.eu/sites/default/files/caritascrisisreport_ 2014_en.pdf Central Bank of Cyprus, Economic Research ‘Concise Monetary Policy Report’, February 2005 ‘Concise Monetary Policy Report’, the Central Bank of Cyprus, Economic Research Department, published February 2005 Bibliography 167 Criton, Tornaritis (Attorney- General of the Republic of Cyprus), Constitutional and Legal Problems in the Republic of Cyprus (Nicosia: Public Information Office, 1969) Curry T and Shibut, L (eds.) ‘The Cost of the Savings and Loan Crisis’, FDIC Banking Review, XIII (2000), pp 26–35 ‘Cyprus Financial Crisis: the framework for an economic recovery within the eurozone’, Speech by Panicos Demetriades, Governor of the Central Bank of Cyprus, at a discussion organised by the Hellenic American Bankers Association and the Cyprus–US Chamber of Commerce (New York, December 11, 2012) Data from the ‘World Travel and Tourism Economic Impact Report on Cyprus’, World Travel and Tourism Council, 2014 Delia Velculescu speech at The Economist Conference entitled ‘Cyprus on the Mend?’, November 25, 2013, published online at http://online.wsj.com/ news/articles/SB10001424127887324492604579082843940362678 Draper G ‘The United Nations Force in Cyprus, Military Law and Law’, War Review, V-VI (1996) Economic and Financial Affairs Council ‘Single resolution mechanism: Council reviews the state of play of the negotiations’, report published February 18, 2014 Engelen, Klaus C ‘From Deauville to Cyprus’, The Magazine of International Economic Policy (Spring 2013), pp 50–53, 73–76 European Banking Authority 2011 EU-Wide Stress Test Aggregate Report, published on the July 15, 2011, available online http://www.eba.europa eu/documents/10180/15935/EBA_ST_2011_Summary_Report_v6.pdf/ 54a9ec8e-3a44-449f-9a5f-e820cc2c2f0, p 36 European Central Bank ‘Annual Report’ (March 7, 2000), available online at http://www.ecb.europa.eu/pub/pdf/annrep/ar1999en.pdf European Central Bank ‘Results of the 2011 EBA EU-wide stress test: Summary, Marfin Popular Bank Co Ltd’, available online at http://www.eba europa.eu/documents/10180/15935/CY006.pdf/e2f3605e-359a-4519-b15b296ba0d0d2fd European Central Bank ‘Results of the 2011 EBA EU-wide stress test: Summary, Piraeus Bank’, available online at http://www.eba.europa.eu/ documents/10180/15935/GR033.pdf/b8f02648-4beb-4efa-8d61-f02acbc 5b666 European Commission ‘Report on Greek Government Deficit and Debt Statistics’, January 2010, p 4, pp 27–28 European Commission of Human Rights, ‘Report of the Commission’, (Council of Europe, Application Numbers 678074 and 695075 Cyprus against Turkey Adopted 10 July 1976) European Commission report ‘Proposal for a Single Resolution Mechanism for the Banking Union’, published on the July 10, 2013, available online at http://europa.eu/rapid/press-release_MEMO-13-675_en.htm European Banking Authority ‘The European Banking Authority 2011 EU-Wide Stress Test Aggregate Report’, published on the July 15, 2011, 168 Bibliography see http://www.eba.europa.eu/documents/10180/15935/EBA_ST_2011_ Summary_Report_v6.pdf/54a9ec8e-3a44-449f-9a5f-e820cc2c2f0a, p 36 Fouscas, Vassilis ‘Reflections on the Cyprus Issue and the Turkish Invasions of 1974’, Mediterranean Quarterly, XII (2001), pp 98–127 Higgins, R ‘Basic Facts on the United Nations Force in Cyprus’, The World Today, 1964 International Monetary Fund, ‘Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement’, report published in Washington DC, June 2013, available online at http://www.imf.org/ external/pubs/ft/scr/2013/cr13156.pdf International Monetary Fund, ‘IMF Statement on Cyprus’, published March 24, 2013, available online at https://www.imf.org/external/np/sec/ pr/2013/pr1391.htm James, Alan ‘Recent Development in United Nations Peace Keeping’, Yearbook of World Affairs, XXXI (1977) Keen, Steve ‘Finance and economic breakdown: modelling Minsky’s Financial Instability Hypothesis’, Journal of Post Keynesian Economics, XVII, pp 607–635 Leventis, Yiorghos ‘The Politics of the Cypriot Left in the Inter-War Period: 1918–1940’, Synthesis – Review of Modern Greek Studies, II (1997), p 13 Orphanides, Athanasios ‘What Happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe’, MIT Sloan School of Management research paper (May 2014), pp 7–8 Pashardes, Panos and Pashaourtidou, Nicoletta ‘Output Loss from the Banking Crisis in Cyprus’, Cyprus Economic Policy Review (VII), pp 3–24 Petmesidou, Maria ‘Cyprus: Annual National Report 2010, Pensions, Health and Long-Term Care’, The European Commission (May, 2010), p 10, http:// socialprotection.eu/files_db/886/asisp_ANR10_Cyprus.pdf Petmesidou, Maria ‘Cyprus: Annual National Report 2011, Pensions, Health and Long-Term Care’, The European Commission (May, 2011), available online at http://socialprotection.eu/files_db/1100/asisp_ANR11_ Cyprus.pdf Petmesidou, Maria ‘Cyprus: Annual National Report 2010, Pensions, Health and Long-Term Care’, The European Commission (2010), available online at http://socialprotection.eu/files_db/886/asisp_ANR10_Cyprus.pdf PIMCO ‘Independent Due Diligence of the Banking System of Cyprus’, (February 2013), available online at http://www.centralbank.gov.cy/media/ pdf/CyprusIndependentDueDiligenceReport_18April.pdf Rehn, Ollie ‘Statement on Cyprus in the European Parliament’, Strasbourg, April 17, 2013, published online at http://europa.eu/rapid/press-release_ SPEECH-13-325_en.htm Savvides, Philippos K ‘Cyprus at the Gate of the European Union’, ELIAMEP Policy Paper no 1, Athens, June 2002 Stark , Jurgen Speech at the Institute of Risk and Regulation, Hong Kong, April 12, 2011 Theodorides (Theodore), John ‘The Legal Aspects of United Nations Peace Keeping in Cyprus’, War Law Review (1977) Bibliography 169 Theodorides (Theodore), John ‘The United Nations Peacekeeping Force in Cyprus’, The International and Comparative Law Quarterly, XXXI (1982) Theodore, John ‘Guidelines for Peacekeeping’, British Army Review, LXV (1980) Tocci, Nathalie ‘Reflections on Post-referendum Cyprus’, The International Spectator: Italian Journal of International Affairs (2008), published online at http://www.tandfonline.com/doi/pdf/10.1080/03932720408457082 Troika, ‘Memorandum of Understanding on Specific Economic Policy Conditionality’, published April 12, 2013, available online at http://static cyprus.com/troika_memo_final.pdf United Nations, Yearbook of the United Nations, Volumes 27–29 (New York: United Nations Public Information Office, 1973–75) Wood, Duncan, and Campbell, Alexander ‘Greek Woes Focus Attention on Role of Eurostat’, (Risk magazine: 2010) United Nations Security Council Documents – Reports of the Secretary General: UNFICYP: Document S/5575 186 (1964) Document S/5950 – September 10, 1964 Document S/6228 – March 11, 1965 Document S/5634 – March 31, 1964 Document S/6102 – December 12, 1964 Document S/9521 – December 3, 1969 Document S/11468 – August 26 – 8th September 8, 1974 Document S/12093 – December 1975 – June 5, 1976 Document S/12323 – April 30, 1977 Document S/12463 – April 30, 1977 Document S/12946 – December 1, 1978 Index Acheson, Dean, 17 Administration of Justice (Miscellaneous Provisions) Law (1964), 13 AKEL (Progressive Party of Working People), 25, 46, 144 economic adjustment programme, 68–9 public spending expansion, 46–7 welfare reforms, 46 wins presidency (2008), 46 Allied Irish Bank (AIB), 95 Alpha Bank, 93 Anastasiades, Nicos, 76, 85, 118, 121 Anglo Irish Bank, 95 Annan, Kofi, 28, 32, 34 Annan Plan, 8, 27–8 citizenship, 30 compensation, 30–1 criticisms of, 32 difficulties in reaching settlement, 31–2 ethnic rebalancing, 30 Greek Cypriot concerns, 29 Greek Cypriot opposition, 31, 32, 33 Greek Cypriot support for, 34 international reaction to rejection of, 34–6 psychological analysis of Greek Cypriot rejection of, 36 referendum, 28, 33 security issues, 33–4 terms of, 28–9 Turkish Cypriot concerns, 29–30 Turkish Cypriot support for, 32, 33 Turkish settlers from Anatolia, 31 anti-money laundering (AML) measures, 79 Antoniou, Michalis, 87–8, 91, 92 Apostolides, Alexander, 43 Argentina, devaluation and default, 130 Asmussen, Jörg, 76 austerity basic idea behind, 124 contraction of economic output, 128 failure of, 129 impact in eurozone, 124 internal devaluation, 124, 126, 129, 136 key weakness of, 127 problem of debt servicing, 129–30 purpose behind bailout terms, 128–9 questioning of, 102 supporters of, 128 see also unemployment bailout of Cyprus, 1–2 anti-money laundering measures, 79 bail-in of depositors, 2, 55: criticisms of, 82–5, 96, 99–100; Cypriot rejection of proposed levy, 76; European Commission’s reservations, 74–5; favourable treatment of Greek depositors, 94; financial losses of Cypriot expatriates, 91; impact on businesses, 87–8; impact on pensions, 92; litigation over, 79–81; options for levy on bank deposits, 75–6; precedent set by, 139; preference for, 74; psychological impact of, 98–9; punishment of Russian oligarchs, 73, 99, 131, 139; 170 Index rationale for, 71; suitability of Cyprus for new approach, 71, 82; as template for future bailouts, 2, 74, 133, 140; unprecedented nature of, 73–4; violation of sanctity of bank deposits, 138–9 banking sector restructuring, 77–9, 89, 107: disposal of Greek branches, 92–5; recapitalisation of Bank of Cyprus, 77–8 capital controls, 87, 88 cooperative banks, 88, 89 criticism of: Economist, 83–4; European Parliament, 82–3; Ollie Rehn’s response to, 86–7; Russia, 84, 99–100; Spain, 96; United Kingdom, 84–5 Cypriot Parliament’s approval of, 79, 81 decision not to bailout banks, 72–3 delay in implementing, 69–70 delay in requesting assistance, 72 economic and political consequences of, 121, 138–9 erosion of trust in Cyprus’ banks, 87, 88 fears and insecurity generated by, 91 financing needs of Cyprus, 72 government request for, 69 lessons to be learned from, 104–5 likened to Turkish invasion, 91 mistakes in handling of, 104 pension funds, 92 pressure on Cypriot President, 77 protection of Greek banking system, 95 public sector finances, 88–9 terms of, 78–9 banking and financial sector, Cyprus, asset-based lending practices, 41, 107 171 capital flight, 49 casino banking accusations, 61–3, 64, 139 comparison with Luxembourg and Malta, 98 credit boom after joining eurozone, 39 crisis in, 44–5 deposits, inability of state to guarantee, 66 disproportionate losses of, 58–9 Emergency Liquidity Assistance programme, 66, 67: threatened withdrawal of, 76 expansion of, 40–1, 43 foreign deposits, 40 Greece: expansion in, 41, 43: exposure to Greek bonds, 58 impact of Greek bond haircut, 57–61, 131: lack of protection for Cypriot banks, 59–60 impact of growth of public deficit, 66 impact of Tax Amnesty, 42 inattention to debt-service capacity, 41–2 interest rates, 40 non-performing loans, 108 post-bailout growth of, 113 pre-crisis external assessments of, 43, 45 property boom, 41, 42 restructuring by rescue package, 77–9, 89, 107: disposal of Greek branches, 92–5 Russian deposits, 40, 99, 113: escape from ‘haircut’, 99 scapegoating of, 61–3, 64, 87 shrinking of deposits, 112 size of, 43 two-tier system after bail-in, 113 Bank of Cyprus capital raised by, 113 disposal of Greek branches, 92–5 emergency liquidity assistance, 67 expansion in Greece, 43 172 Index Bank of Cyprus – continued exposure to Greek debt, 58 litigation by depositors over bail-in, 79–81 recapitalisation of, 77–8, 89 Russian board members, 113 Bank of Cyprus UK, 86 Bank of Ireland (BOI), 95 bank runs, 75, 85, 101, 103, 132 Basel Committee on Banking Supervision, 65 Biden, Joe, 119–20 Bowles, Sharon, 83 Callaghan, James, 23, 24 capital flight, 49 carry trading, 65 casino banking Cypriot banking sector, 61–3, 64, 139 global financial crisis, 64–5 Central Bank of Cyprus (CBC) recapitalisation of, 68 warnings over fiscal conditions, 47–8 central banks, maintenance of confidence in banking system, 103–4 Childers, Nessa, 82–3 China Glory National Investment Group, 111 China, interest in Cyprus’ natural gas, 119 Christofias, Demetris, 50, 69 Clerides, Glafcos, 17–18, 31–2, 34, 118 Communist Party of Cyprus, see also AKEL competitiveness difficulties in achieving, 127–8 in eurozone, 125 nature of, 127 confidence and banking system, 103 role of state institutions, 103–4 Cyprus campaign for independence, 7, 8, ceasefire line, 20 Constitution of (1960): Article 185, 11; breakdown of, 12–13; complexity of, 11–12; guaranteeing powers, 22; perpetuation of Greek/Turkish divisions, 13; problems created by, 11 coup d’etat against Makarios, 19, 20 deterioration of public finances, 48, 62–3 downgrading of credit rating, 63–4 economic adjustment programme, 68–9 economic crisis, 44–5: scapegoating of banking sector, 61–3, 64, 87 economic recovery, 105, 108, 144 enosis, ethnic composition, 9, 11 European Union: accession to, 8, 39; applies for membership, 27 failure of Greek/Turkish cypriot talks (1968–74), 17–18 financialisation of, foreign businesses in, 39–40 geopolitical importance, 3–4 healthcare system, 109 impact of global financial crisis, 43–4 independence of: negotiations, 9, 10–11; proclamation of, 9; Treaties underwriting, 9–10 inter-communal violence (1963–64), 13, 14 internal divisions, joins single currency, 38, 39: consequences of, 39 naval base explosion, economic effects of, 49–50 pension system, 47, 92, 107–8 Index Plaza Report (1965), 14–16 political system, 46 pre-independence period, 6–7 privatisation, 79, 108, 111 public debt: calls for control of, 88–9; control of, 44; future predictions of, 112; growth of, 46–7, 48, 49, 66, 106; limited attempts to address, 68–9 recession, 44, 105 renewed efforts on unification, 120 requests European Union bailout, 69 Russia: emergency loan from, 67–8, 100; seeks further loan from, 69 shipping, 4, 44, 121 small and medium-sized enterprises, 121–2 strategic importance of, 24, 25, 119, 121 structural reforms, 107 Tax Amnesty, 42 tourism, 4, 44, 89, 105–6, 109–12 Treaty of Establishment (1960), Turkish invasion (1974), 19, 20, 21–2: American reaction to, 24–6; British response, 23–4; casualties, 26; impact of, 2–3, 7–8, 26; lack of international opposition, 16–17, 22–3; legal aspects, 22; population displacements, 21, 26 unemployment, 1, 44, 57, 87, 105, 122 see also Annan Plan; bailout of Cyprus; banking and financial sector; natural gas Cyprus Airways, 111 Cyprus Tourism Organisation (CTO), 109 Danish People’s Party, 141 Darling, Alistair, 66, 84–5 Deloitte Financial Advisory, 79 173 Demetriades, Panicos, 60, 62–3, 64, 93, 94–5 Denktash, Rauf, 17, 30 deposit security guarantee schemes, 103, 104 violation of, 138–9 De Smith, S A, 11–12 devaluation, impossibility in eurozone, 128 Dijsselbloem, Jeroen, 74, 140 Directive on Bank Recovery and Resolution (BRRD), 132–3 Draghi, Mario, 134, 135 Dutch Freedom Party, 141 Economist, criticism of Cyprus bailout, 83–4 Emergency Liquidity Assistance (ELA) programme, 66 stringent terms of, 67 threatened withdrawal of, 76 ENI, 119 enosis, Cypriot accession to European Union, EOKA, 8, 9, 19, 20 Erdogan, Recep Tayyip, 32, 34 European Bank for Reconstruction and Development, 113 European Banking Authority, 58 European Central Bank (ECB), 43, 124, 134–5, 142 concerns over Cypriot fiscal position, 52 concerns over levy of bank deposits, 75 Greece, support for, 52 interest rate policy, 39, 135 monetary policy, 125, 134–5 national central bank assistance, 66–7 price stability, 125, 134 quantitative easing, 135, 143 European Commission, 142 Cyprus bailout, 74–5, 76: defence of, 86–7 174 Index European Commission – continued on increased social spending in Cyprus, 47 positive assessment of Cypriot financial sector, 43, 45 proposed Directive on Bank Recovery and Resolution, 132–3 European Commission Directorate General Economic and Financial Affairs, 58–9 European elections (2014), success of populist and dissident parties, 141 European Financial Stability Facility (EFSF), 96 European Parliament, 142 reaction to Cyprus bailout, 82–3 European Regional Development Funding (ERDF), 112 European Resolution Fund (ERF), 133 European Social Fund (ESF), 112 European Stability Mechanism (ESM), 108 European System of Central Banks (ESCB), 54 European Union abandonment of bank deposit safety, 138–9 admission of Eastern European countries, 125 centralisation of authority, 142 contradiction at heart of, 141 Cyprus: accession of, 8, 39; applies for membership, 27; expectations of reunification, 27; impact of Greek membership on policy, 26–7 disconnect between political class and public, 128 existential crisis of European project, 140–1 lessons to be learned from Cyprus crisis, 104–5 narrative on Cypriot debt crisis, proposed Directive on Bank Recovery and Resolution, 132–3 punishment of debtor countries, 131 unemployment, 124, 142 European Union Capital Requirements Directive, 65 eurozone austerity: contraction of economic output, 128; failure of, 129; impact of, 124; key weakness of, 127; purpose behind bailout terms, 128–9; questioning of, 102; supporters of, 128 contradiction at heart of, 141 decoupling sovereign and bank debt, 132–3 deflationary threat, 128, 137 difficulties in restoring southern competitiveness, 127–8 divisive impact of euro, 133–4 encouragement of sovereign debt holding, 65, 66 existential crisis of European project, 140–1 impossibility of devaluation, 128 inflationary credit bubble, 124–5 loss of competitiveness in southern Europe, 125 monetary policy, 125, 134–5 North-South divisions, 124–7 poor economic performance, preferential treatment of government bonds, 65 purpose behind bailout terms, 128–9 rationale for single currency, 123, 134 recession, 102 Single Supervisory Mechanism, 132–3 sovereign debt crisis, 38 stagnation, 133 Index structural problem with, 125 unemployment, 124, 142 Evangelos Florakis Naval Base explosion, 49–50 extremist political parties, 141 Featherstone, Kevin, 53 Federation of Employers and Industrialists, 87, 88–9 Fitch, downgrading of Cyprus’ credit rating, 63–4 Foot, Hugh, fractional reserve banking system confidence, 103: maintenance of, 103–4 deposit safety, 1–2 Gabriel, Sigmar, 62 Gazprom, 101 Georgiades, Harris, 106–7 Germany average working hours, 127 as beneficiaries of euro, 125–6 competitiveness of, 125 Cyprus bailout, 72, 73, 74, 75, 140 decline in economic growth, 136–7 impact of Russian sanctions, 114 role in debt crisis, 126–7 global financial crisis, 38 casino banking, 64–5 impact on Cyprus, 43–4 Goldman Sachs, 50, 128 Great Depression, 103 Greece austerity, 51–2: doubts over effectiveness of, 56; failure of, 129, 136; impact of, 129; protests against, 52, 53, 128; underestimation of effects of, 55 average working hours, 127 bailout of, 51, 53: debt-restructuring/default, 53–5; mistakes in handling of, 175 55–7; unproductive use of funds, 130 credit rating downgraded, 53, 54 Cypriot banks’ expansion in, 41, 43 debt-restructuring deal, 53–5 election of SYRIZA government, 142–3 European Central Bank support, 52 exit from single currency option, 130 hides debt to join eurozone, 50 military Junta: American support for, 19–20; collapse of, 20; coup d’etat against Makarios, 19, 20 political atmosphere, 106 Private Sector Involvement programme, 54–5, 140: impact on Cyprus, 1, 4, 57–61, 131; protection of Greek banks, 59–60 privatisation, 51, 55 public expenditure, growth of, 50 recession, 53, 142 return to growth, 136 small business closures, 130 sovereign debt crisis, 51 stereotypical depictions of Greeks, 127 stimulus spending, 136 tax evasion, 51 true extent of deficit revealed, 51 Turkish invasion of Cyprus: limited military assistance, 21–2; response to, 23 unemployment, 129 Greenspan, Alan, 65 Hadjisoteriou, Chris, 21, 88 healthcare system, 109 Hellenic Bank, 93 Russian stake in, 113 Hellenic Financial Stability Fund, 59, 94 176 Index Iceland, 44 interest rates Cypriot banking sector, 40 eurozone, 39, 135 internal devaluation, 124, 126, 129, 136 International Monetary Fund (IMF) change in policy, 135 Cyprus bailout, 72, 74, 75, 76, 81–2 Greek bailout, 51 Irish bailout, 96 mistakes in handling Greek bailout, 55–7 modification of exceptional access rules, 56–7 positive assessment of Cypriot financial sector, 43, 45 questioning of austerity, 102 International Swaps and Derivatives Association (ISDA), 54–5 Investment Bank of Greece (IBG), 93 Ioannides, Andreas, 49 Ireland, bailout of, 95–6 Israel, 116 Kasoulides, Ioannis, 48, 116, 120 Khrushchev, Nikita, 14 Kissinger, Henry, 25–6 Kutchuk, Fazil, Lagarde, Christine, 56–7, 81–2, 135 Laiki Bank capital flight, 49 closure of, 77, 78–9 disposal of Greek branches, 92–5 emergency liquidity assistance, 67: threatened withdrawal of, 76 expansion in Greece, 43 exposure to Greek debt, 58 government bailout, 68 litigation by depositors over bail-in, 79–81 Laiki Bank UK, 86 Lakkotrypis, George, 119 Lambrou, Lambros, 49 Lausanne Treaty, Lehman Brothers, 44, 66, 71 Loizou, Angelos, 109 London, as centre for tax avoidance, 115 London Conference (1959), 9, 10–11 Luxembourg, 39–40, 64, 98, 139 Makarios III, Archbishop, 6, attitude towards independence agreement, 10–11 constitutional amendment proposals, 12 coup d’etat against, 19, 20 rejects Dean Acheson’s plan, 17 Malta, 3, 64, 98, 139 Marfin Popular Bank, see Laiki Bank Medvedev, Dmitry, 84, 99–100 Merkel, Angela, 61, 73, 92, 134 Moneyval, 79 moral hazard, 102–3 Moscovici, Pierre, 62 National Bank of Greece, 93 National Front (France), 141 NATO, 23 natural gas, and Cyprus Chinese interest in, 119 Cypriot-Israeli cooperation on drilling, 116 discovery of, 116 financial challenges of exploiting, 116–17 impact on Cyprus-Turkey relations, 117–18 international cooperation on drilling, 116 potential impact on unification, 120 potential size of reserves, 118–19 Netherlands, 39–40 Noble Energy, 116, 118 non-performing loans (NPLs), 42, 108 Northern Rock, 103 Index Organisation for Economic Co-operation and Development (OECD), 51 Orphanides, Athanasios, 50, 60 warnings over fiscal conditions, 47–8 Osborne, George, 85–6 Ottoman Empire, 6–7 Pacific Management Investment Company (PIMCO), 40, 41–2, 57 Panayotou, Theodore, 69 Pantelides, George, 113, 121–2 Papadopoulos, Nikos, 66 Papadopoulos, Tassos, 34, 42, 44 Papandreou, George, 51 pensions, 47, 92, 107–8 Piraeus Bank, 78 acquisition of branches of Cypriot banks, 92–4 exposure to Greek debt, 58, 93 Plaza, Galo, 11, 14–15 Plaza Report (1965), 14–16 Poland, 125 Polyviou, Polys, 50 populist movements, 141–2 Pringle, Robert, 125 Private Sector Involvement (PSI) programme for Greece, 54, 140 impact on Cyprus, 1, 4, 57–61, 131 protection of Greek banks, 59–60 privatisation Cyprus, 79, 108, 111 Greece, 51, 55 professional services, 89 Progressive Party of Working People, see AKEL property bubble Cypriot banks’ lending practices, 41, 42 decline in property prices, 90 litigation over mis-selling of non-euro loans, 90 Putin, Vladimir, 99, 114 quantitative easing, 135, 143 177 Rehn, Olli, 74–5, 96 justification of Cyprus bailout, 86–7 lessons from Cyprus crisis, 104–5 Russia, 100–1 corporations in Cyprus, 39 criticism of Cyprus bailout, 84, 99–100 deposits in Cyprus, 40, 99, 113: escape from ‘haircut’, 99 emergency loan to Cyprus, 67–8 further loan sought by Cyprus, 69, 100 Russian money in Europe, 114–15 sanctions against, 114 Ryanair, 111 Sampson, Nikos, 19 Sarris, Michael, 43, 48, 59, 66, 68, 69–70, 74, 100–1 Savings and Loans crisis (USA), 104 Schäuble, Wolfgang, 67, 97–8, 136 Shiarly, Vassos, 60 shipping, 4, 44, 121 Simitis, Costas, Single Supervisory Mechanism (SSM), 132–3 Sinn, Hans-Werner, 133 small and medium-sized enterprises (SMEs) Cyprus, 121–2 Greece, 130 Social Democratic Party (SDP), 62 Soros, George, 133 Soviet Union, warns against Turkish invasion of Cyprus, 14 Soysal, Mumtaz, 32 Spain, 96–7 Stability and Growth Pact, 131 Standard and Poor downgrading of Cyprus’ credit rating, 63 downgrading of Greece’s credit rating, 53, 54 Strauss-Kahn, Dominique, 96 Straw, Jack, 34–5 178 Index Strzhalkovsky, Vladimir, 113 subprime mortgage crisis (2007–8), 38, 65 Supreme Court of Cyprus, 80–1 Swoboda, Hannes, 83 Sylikiotis, Neoklis, 116 Syriza (Coalition of the Radical Left), 106, 141–2, 142–3 Talat, Mehmet Ali, 32 Tax Amnesty, 42 tax regime competition, 115 Thomsen, Poul, 52, 56 Tocci, Nathalie, 33 tourism, 4, 44, 89, 105–6, 109–12 Treaty of Establishment (1960), Triantafyllides, Christos, 59–60, 61, 80, 82 Troika abandonment of bank deposit safety, 2, 138–9: reasons for creating precedent, 139–40 aggressive measures taken by, 55 bailout of Cyprus, 76, 79, 81, 82–3: bail-in proposal, 44–5; disposal of Greek branches of banks, 92–4; negotiations over, 73–4; post-bailout monitoring, 108 bailout of Greece, 51–2, 54–5: failure to deal with effects of, 61; mistakes in handling of, 55–7 imposition of losses on private bondholders, 55 withholding of information, 57–8 see also European Central Bank; European Union; International Monetary Fund Turkey bombing raid on Cyprus (1963), 10 Cyprus’ discovery of natural gas, 117–18 invasion of Cyprus (1974), 19, 20, 21–2: American reaction to, 24–6; British response, 23–4; casualties, 26; lack of international opposition, 16–17, 22–3; legal aspects, 22; population displacements, 21, 26 invasion of Cyprus thwarted (1963–64), 14 rejects Makarios’ proposals to amend constitution, 12 relinquishes claims on Cyprus, Treaty of Alliance with Greece and Cyprus, Turkish Republic of Northern Cyprus (TRNC) declaration of independence, 20–1 European Union ban on exports, 27 population displacements, 21, 26 UKIP, 141 Ukraine, impact of crisis in, 114 unemployment Cyprus, 1, 44, 57, 87, 105, 122 in European Union, 124, 142 Greece, 129 impact of austerity measures, 129 United Kingdom bank bailouts, 104 Cyprus bailout: criticism of, 84–5; impact on expatriates, 86; protection of service personnel, 85–6 deposit guarantee scheme, 104 foreign policy, 8–9 retention of military bases in Cyprus, Turkish invasion of Cyprus, 20; response to, 23–4 United Nations, mediation in Cyprus, 14: Plaza Report (1965), 14–16 Turkish invasion of Cyprus, response to, 21 see also Annan Plan Index United Nations Peacekeeping Force in Cyprus (UNFICYP), 14, 20 United States Biden’s visit to Cyprus, 119–20 Greece, support for military Junta, 19–20 housing bubble, 65–6 proposes Greek/Cyprus unity, 17 strategic value of Cyprus, 24, 25 thwarts Turkish invasion of Cyprus (1963–64), 14 179 Turkish invasion of Cyprus (1974), 24–6 Vassiliou, George, 34 Velculescu, Delia, 89, 107–8 Verhofstadt, Guy, 83 Wargaming.net, 113 Wilson, Harold, 23 Wolff, Richard D, 84 Zurich Agreement (1959), 9, 10, 11 .. .Cyprus and the Financial Crisis This page intentionally left blank Cyprus and the Financial Crisis The Controversial Bailout and What It Means for the Eurozone John Theodore and Jonathan Theodore. .. available from the British Library Library of Congress Cataloging-in-Publication Data Theodore, John, 1945– Cyprus and the financial crisis : the controversial bailout and what it means for the eurozone. .. into the EU and the eurozone, together with the narrow emphasis of the Maastricht criteria on fiscal performance rather than on also monitoring the potentially ix x Foreword destabilising activities