Category Archives: Cyprus

20/9/15: Euromoney: "Cyprus almost as safe as Portugal"

"The Cyprus risk score has steadily improved this year in Euromoney’s crowdsourcing survey, rebounding in Q2, and is seemingly on course for further improvement in Q3 as economists and other risk experts make their latest quarterly assessments. Chalking up almost 53.1 points from a maximum 100 allotted, Cyprus has managed to climb one place in the rankings to 56th out of 186 countries surveyed, leapfrogging India and closing in on Portugal into a more comfortable tier-three position:"

Read more here.

Here are my notes on the topic (to accompany the quote in the article):

In my view, Cypriot economy recovery after 3 years of deep recession and banking sector devastation is still vulnerable to growth reversals and deeply unbalanced in terms of sources for growth. Firstly, the rate of growth is hardly consistent with the momentum required to deliver a meaningful recovery. Cypriot GDP rose 0.2% y/y in 1Q 2015 and 1.2% y/y in 2Q 2015. This comes on foot of 14 consecutive quarters of GDP decline. Quarterly growth rate in 2Q came below flash estimate and expectations.

Positive growth was broadly based, but key investment-focused sector of construction posted negative growth. Deflationary pressures remained in the Cypriot economy with HICP posting -1.9% in August y/y on top of -2.4% in July. Over January-August 2015, HICP stood at -1.6% y/y.

Despite some fragile optimism, the Cypriot Government has been slow to introduce meaningful structural reforms outside the financial sector. The economy remains one of the least competitive (institutionally-speaking) in the euro area, ranked 64th in the World Bank Doing Business 2015 report - a worsening of its position of 62nd in 2014 survey. This compares poorly to the already severely under-performing Greece ranked in 61st place.

Thus, in my view, any significant improvements in the country scores relate to the policy-level post-crisis normalisation, rather than to a measurable improvement in macroeconomic fundamentals.

1/4/15: H-W Sinn "Europe’s Easy-Money Endgame"

A very interesting op-ed by Professor Hans-Werner Sinn of German Ifo Institute for Project Syndicate:

The problem outlined by Professor Sinn is non-trivial.

"...for countries like Greece, Portugal, or Spain, regaining competitiveness would require them to lower the prices of their own products relative to the rest of the eurozone by about 30%, compared to the beginning of the crisis. Italy probably needs to reduce its relative prices by 10-15%. But Portugal and Italy have so far failed to deliver any such “real depreciation,” while relative prices in Greece and Spain have fallen by only 8% and 6%, respectively".

As Professor Sinn notes, there are four possible solutions:

  1. "Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it." 
  2. "The south can deflate." 
  3. "The north can inflate." 
  4. "Countries that are no longer competitive can exit Europe’s monetary union and depreciate their new currency."

So here's the problem, correctly identified by Professor Sinn: "Each path is associated with serious complications. The first creates a permanent dependence on transfers, which, by sustaining relative prices, prevents the economy from regaining competitiveness. The second path drives many debtors in crisis countries into bankruptcy. The third expropriates the creditor countries of the north. And the fourth may cause contagion effects via capital markets, possibly forcing policymakers to introduce capital controls".

Now, note: Ireland has opted for the second path. Any surprise we are driving people into bankruptcy in tens of thousands (once current legal queue is taken into account), along with multiple businesses?

But back to Prof Sinn's analysis. Remember the ECB QE? Ok, says Prof Sinn, suppose it delivers on target inflation of just under 2%. What does it mean for internal devaluations in the 'peripheral' Europe?

"If, say, southern Europe kept its inflation rate at 0% and France inflated at a rate of 1%, Germany would have to inflate by a good 4%, and the rest of the eurozone at 2% annually, to reach a eurozone average of slightly less than 2%. This pattern would have to continue for about ten years to bring the eurozone back into balance. At that point, Germany’s price level would be about 50% higher than it is today."

The problem, thus, is an unresolvable dilemma, since with that sort of arithmetic, we are in a tough bind:

  • Either Germany runs mild inflation, while the 'periphery' runs outright deflation, allowing - over a painfully long period of time (decade or more) to devalue the imbalances, or
  • Eurozone pursues Mr Draghi's objective of 'just under' 2% inflation across the entire Euro area at the expense of Germany (and the rest of the already shrunken 'core').
Do note, I have argued before that deflation in the 'periphery' is not a bad thing, as it allows for the interest rates to remain low (servicing cost of household and corporate debts is lower) and deleveraging of the households and companies to be less painful, while sustaining some domestic demand through increased purchasing power of incomes. So I agree with Professor Sinn's criticism of the ECB QE programme. 

The problem is that this means, as Professor Sinn rightly suggests, continued suppression of demand (the 'austerity' bit).

The choice faced by Europe are ugly. All of them. And there are no guarantees for any of them to actually work. And the cause of this problem is singular: creation of a political currency union. For anyone who says that Greece, Italy, Portugal, Cyprus, Ireland and Spain have caused their own problems, the replies are both simple and complex: 
  • The simple one: absent the euro, their problems would have been by now solved by a combination of the old-fashioned defaults and devaluations. 
  • The complex one: absent monetary transfers (lower interest rates and ample bank liquidity flowing cross-borders) with the EMU from the late 1990s through 2007, the imbalances generated in the 'peripheral' economies would never have been this large. Which means that the simple reply above would have been even more easy to apply.

Cyprus, Russia and a geopolitics chess amateur

by Kakaouskia

It was with interest that I saw the Saker mentioning today that the government cabinet in Cyprus is actually considering granting Russia's "wish" for an air force base on the island.

Being a Cypriot, I would like to take this opportunity to provide a - very brief - history lesson for the community as well as some thoughts on the matter.

Brief history

Cyprus became "independent" from being a UK colony (since 1878) in 1960 following a 5 year guerrilla-type resistance movement which had the peculiarity of seeing more Cypriots being killed by the rebels as "traitors to the cause" - read Communists and leftist in general - than British troops.

Cyprus Republic was then imposed with a British-made constitution, which under the guise of equality made things completely unworkable and allowed Greece and Turkey to each legally have about thousand soldiers on the island. In an attempt to find stability, Cyprus joined the Non-Aligned Movement in 1961. Things collapsed within three years, resulting in one of the longest missions of the UN to date as both sides formed militias (guided by the respective “Motherlands”) and attacked each other. In 1974, following a coup-d’état against the Cypriot president carried out by Greek Junta-guided elements of the Cyprus Army, an all-out war broke out between Turkey and Cyprus which resulted in Cyprus losing about 38% of the island to Turkey. This is the only war so far where forces from two NATO countries (Greece and Turkey) openly fought each other; although formal war was not declared.

Military interests and a fine middle-east deadlock

Parting Cyprus, apart from being a guarantor to Cyprus's independence (along with Greece and Turkey), the UK kept a few pieces of prime real estate around the island namely:

- R.A.F Akrotiri, an all important Sovereign Base Area. In the words of UK's MOD, "RAF Akrotiri is an extremely busy Permanent Joint Operating Base that supports ongoing operations in Afghanistan as well as support for the Sovereign Base area on the Island of Cyprus. It is used as a forward mounting base for overseas operations in the Middle East and for fast jet training." Akrotiri is only 50Km away - in a straight flight line - from Paphos base.

True to that, Eurofighter Typhoons are stationed there as well as Tornado jets conducting sorties all over the Middle East plus the occasional U2s flights - see video (

- R.A.F Troodos, formally a signals station, effectively a big radar and intelligence gathering facility.

- Dhekelia army base

Note that Akrotiri and Dhekelia are called Sovereign Base Areas and have their own police force, even courts.

Apart from the British, almost everybody else in the area is or was involved with Cyprus militarily one way or the other. Cyprus was caught in the Arab-Israeli wars with terrorist attacks rocking the island in the early 80s. In 1978, Egyptian commandos attacked Larnaca Airport in an attempt to rescue hostages taken by Palestinians; this resulted in a heavy firefight between Cyprus National Guard and the Egyptian commandos. Syria was also involved in this by sending their military attaché to help negotiate then surrender of the Egyptians.

Israel has been warming up to Cyprus in recent years after the discovery of adjoining gas reserves. Military exercises between the two countries have taken place involving substantial forces (in Greek). These exercises were prompted in part by Cyprus being equipped with similar Russian armaments like Syria. Two years ago the then defence minister was pushing for the purchase of two Israeli-made gun boats.

United States is of course claiming a stake in the island, mostly utilising British military bases and largely staying in the shadow, pulling strings from their embassy. It was noted in the local press that some key right-wing politicians were getting marching orders from the US ambassador.

Cyprus has tried over the years to decently equip its armed forces but every time it turned to the East, something has happened. The first attempt was in the mid-60s, early 70s, when then president Archbishop Makarios turned to the Soviet Union. While some old armaments were delivered like T-34 tanks and a few torpedo boats, the big item which was the SA-2 SAM system was not, despite Cypriots being trained in Russia. This had the effect of the Cyprus National Guard fighting the 1974 war against Turkey using the T-34s and Marmon Herrington armoured vehicles dating back to the battle of El-Alamein in 1943.

After that, France was quite helpful in providing decent armaments until the collapse of the Soviet Union. Then president Glafkos Klerides (founder of the current governing party) saw an opportunity and ordered among other things: T80-U battle tanks, BMP-3 IFVs, BM-21s, a dozen or so Mil-Mi-35Ps and S300-PMU1 batteries. While the armour was delivered quite fast (I personally saw spare parts for the BMP3s that were inscribed with 'CCCP') and National Guard personnel regularly visits Russia for training, history repeated itself and the S300 system was never allowed by NATO to arrive; instead batteries were transferred to Crete island in Greece where they remain partially operational due to lack of funds and maintenance. They were "exchanged" with TOR-M1 batteries.

Political map and power bases

Before proceeding to comment on the military base deal, it would be prudent to give a brief picture about the political landscape. Cyprus is a presidential republic with the president having great power and the parliament controlling budget. Currently the parliament composition looks like below:

Democratic Rally (DHSY) – 20 seats: Governing party, Pro-West, right-wing with some members hating everything non-west while others being typical capitalists will not mind any deal as long as there is profit. Also have 2 members in European Parliament under the Group of the European People's Party (Christian Democrats) – same party like Merkel. Controls one of the two biggest worker union (SEK).

Progressive Party of Working People - Left - New Forces (AKEL) – 19 seats: The evolution of the Communist Party of Cyprus, pro-Russian, most of the old guard studied in Soviet Union and speaks Russian to some degree. In identity crisis, members behaving increasingly like pure capitalists. Also have 2 members in European Parliament under the Confederal Group of the European United Left - Nordic Green Left. Controls the other big worker union (PEO).

Democratic Party (DHKO) – 9 seats: Centre-right, pro-West but mostly pro-money. Usually allies with the governing party, whoever that might be.

Movement for Social Democracy (EDEK) – 5 seats: Centre party with a modest left wing. Also have 2 members in European Parliament under the Group of the Progressive Alliance of Socialists and Democrats in the European Parliament. Although not exactly pro-Russia, it will be difficult to turn the other way.

European Party – 2 seats: Apostates from Democratic Rally, pro-West and heavily right-wing.

Green Party (Ecologists) – 1 seat: No real politics, go wherever the wind is blowing.

Other players include the Church of Cyprus, one of the biggest businesses, heavily pro-Russia and hard-core Capitalist and ELAM, our equivalent to Right Sector.

Current situation and the road to being obedient in EU

As to the base deal, I wish our government realises that the EU is not the alliance we dreamed it to be but a wolf pack which keeps a few spare lambs around for dinner. BBC is already posting news that according to our foreign minister, Cyprus has denied the deal. This is the same foreign minister who was quoted saying "Cyprus belongs and has always belonged to the West". Furthermore, the majority of the Cyprus "elite" was cultivated and nurtured with the mantra "West good - Russia bad" to paraphrase Orwell, despite the cultural and religious links Cypriots and Russians share. A few examples:

- Current president, Nikos Anastasiades was actively supported by Merkel in his bid for presidency two years ago and his party, Democratic Rally, is headed by a neon-liberal hardliner which would make the 1%s proud. During his election campaign, Anastasiades pledged to apply for membership into the Partnership for Peace, the gateway to NATO. Parliament members from his party at some point stated that the Mil-Mi-35s are junk and should be replaced, prompting a serious rebuff by the Russian embassy; the first time I recall an embassy officially protesting for such an event.

- In addition, a former president, Tassos Papadopoulos, was rumoured to have attempted to sell a TOR-M1 battery to the US and that his law office helped Milosevic do some serious money laundering of Serbia's money during the NATO attacks in 1999. According to CIA documents, he was funded in the 1960s in order to create a union of right-wing workers as the one created by the Communist Party of Cyprus was getting too strong. His son is now the head of the centre-right Democratic Party.

Also, when our government does help someone in the East, disasters tend to happen; for example the explosion of "confiscated" Russian ammunition bound for Syria that obliterated our only naval base and the adjoining main power plant. Cyprus does not have warships; the base was built using NATO standards and was intended for use by the Greek navy in the event of an emergency. The explosion was estimated to be almost 1 kiloton in power - a before and after image comparison here. You can see the crater of the explosion (centre-left of the image) and note that the damage to the power station was from the shockwave. Of course sabotage was ruled out immediately although how a fire in a munition depot could rage for some time while only a few meters from the sea was never answered.

To compare, Paphos airbase is located at the edge of Paphos international airport, is the only airbase in Cyprus and was also build using NATO standards. It houses our military helicopters and can support fighter planes; Greek F-16s are regular visitors.

In conclusion, I seriously do hope that this deal will go through but I will not hold my breath.

Kakaouskia is a man in mid-30s, software engineer in meat-space, avid reader of military history and fond of reading strategy analysis.

6/2/15: Cyprus AWOL on Troika ‘Reforms’

Yes, at some point, Troika won't be able to handle all the bad news flying its way... for now, however, a new alarm at the barbwire fence of European Reformism: Cyprus is heading off the Troika Reservation:

Whatever might have made Cyprus rush for the AWOL, I'll let you discover, but judging by the foreclosure and insolvency framework reforms approved by the Troika in Ireland, one can't be too much surprised if any country would have much of faith in Troika expectations on that front. Then again, Cypriots would probably remember how EU regulators first encouraged accumulation of Greek sovereign debt in Cypriot banks, then haircut that debt, causing instant insolvency crisis across the Cypriot banks. Why would anyone listen to the same people giving advice on 'structural' reforms next, puzzles me.