Economic Cooperation

Cyprus' bumpy road to economic recovery

March 26th, 2013 - by Dr. Patrick Leblond, University of Ottawa

After a week of intense negotiations and facing the threat of having to leave the euro, Cyprus has finally agreed to a bailout package from its eurozone partners and the International Monetary Fund. This package will force the liquidation of the country's second largest bank (Laiki), which will see its major creditors (bondholders and depositors with deposits above €100,000) take significant haircuts (20-40%) while smaller depositors will be spared as their deposits will be transferred in full to Bank of Cyprus. Creditors and depositors in other Cypriot financial institutions will also avoid paying the price for there bailout, unlike the previous bailout agreement where all depositors were to be subject to a tax on their deposits. This deal is certainly better for Cypriot residents and foreign depositors who do not hold deposits in Laiki; however, it remains to be seen if additional bank restructuring will not have to take place in the future, as the size of banking assets and deposits remain too large for the Cypriot economy. This will depend on three things: (1) the Greek economy can get back on its feet relatively quickly, (2) the Cypriot economy can quickly become less reliant on the banking industry, and (3) natural gas reserves potentially available to Cyprus can be successfully exploited in the not-so-distant future.