Rear View: Cyprus in April 2020 (part 2: economy)
Cyprus is wisely cautious; Europe finds its feet
Last week I looked at the political impact of the first few weeks of Covid-19 and what I was writing about it in my flagship monthly report, Sapienta Country Analysis Cyprus. This week I shall look at the economic side. Sapienta Country Analysis Cyprus is my independent deep-dive into Cyprus that has been published every month since December 2012.
First, let’s look at my forecast in April 2020. Normally I do not give more than one number when forecasting real GDP growth. Why? First, because forecasting is honestly a mug’s game when historical figures are revised so often. Second, because I believe business clients are more interested in the direction of travel (getting better/getting worse, doing so rapidly/slowly) than in specific numbers.
But these were strange times, businesses were bound to be having to make their own predictions, therefore I produced a sector-by-sector outlook with three forecasts: low, baseline and best-case scenario.
My baseline scenario (see chart above) was for a contraction of 6.4% in 2020 followed by a bounceback of 5.7% in 2021. My best-case scenario was for a decline of 4.7% in 2020 and a bounceback of 8.4% in 2021.
The first official estimate for real GDP growth in 2020, produced in March 2021, was a contraction of 5.1%. It therefore came between my best-case scenario and my worst-case scenario. The first official estimate for real GDP growth in 2021, produced in March 2022, was a positive 5.5%, so it was closer to my baseline scenario.
However, referring to the mug’s game above, the national accounts historical figures have undergone two or three significant revisions since that time, mostly in an upward direction. As of 2 May 2025 the official figures were that real GDP declined by only 3.2% in 2020 and shot up by 11.4% in 2021. Well at least my direction was right!
Government borrowed more than it needed: for good reason
In April 2020 the Republic of Cyprus government rushed to the markets to borrow a great deal more than it technically needed.
“Government stocks up by issuing €3bn in bonds and Treasury bills—
The government borrowed €3bn from international and domestic markets within the space of nine days during April, presumably to ensure that it had enough funds to weather the economic contraction brought about by the Covid-19 crisis. On 7 April it issued €1.75bn worth of international bonds (European Medium Terms Notes, or EMTNs) and on 16 April it issued €1.25bn in 52-week Treasury bills under a private placement in which eight banks took part. As would be expected, the government received a lower level of bids for the EMTNs and paid more in terms of yield than in the recent past.
[…]
The latest bond issues would bring the total cash to €3.6bn—enough to pay all the remaining debt due from April 2020 until the end of 2022.”
Some academic economists in Cyprus criticized this move because, just a few days later, the European Central Bank (ECB) cut interest rates. They said that the government spent more than it needed to by rushing to the market. I defended the move. First, we were within living memory of the 2008 global financial crisis (GFC), when financial markets seized up. You don’t take chances waiting to see if the ECB might cut rates in those circumstances.
Second, because we were only seven years away from the 2013 Cyprus financial crisis: in February 2013 Central Bank of Cyprus data show that the government had cash reserves of less than €500,000. Yet it was facing debt redemptions of nearly €2bn in the coming 15 months and was unable to borrow. The finance minister in April 2020, Constantinos Petrides, did not want a repeat of this.
Third, as I explained here, EU support was still not certain and parliament was stalling on the guaranteed loans, which in the April 2020 report I was rather worried about. (They ultimately came up with another plan.) Last, but not least, as I explained in the article linked in this paragraph, a lot of rubbish was being talked about Cyprus abroad, including by distinguished institutions such as the European Bank for Reconstruction and Development (EBRD). (Shameless plug: they would be less vulnerable to making mistakes if they joined other institutions in subscribing to my monthly Sapienta Country Analysis Cyprus!)
The EU big bazookas
In this period I also had running boxes keeping abreast of all the EU support measures for banks and governments:
the recovery fund which had been agreed in principle and became the Recovery and Resilience Facility (RFF);
the easing of rules to allow countries to borrow from the European Stability Mechanism (ESM);
the Support to mitigate Unemployment Risks in an Emergency (SURE) programme to support jobs;
looser Growth and Stability Pact (SGP) rules;
looser state aid rules;
the “CRII Plus” involving more flexibility in using EU structural funds;
the ECB pandemic emergency purchase programme (PEPP);
ECB easing collateral requirements;
more favourable ECB rates for long-term financing operations (TLTRO III and PELTROs); and
European Banking Authority (EBA) easing of capital requirements.
More generally, the EU’s swift and massive response to the pandemic is why I am an EU optimist. Back in the eurozone crisis, when few in northern Europe seemed to understand the wider security risks of throwing a small, divided Cyprus with a lot of money-laundering infrastructure out of the EU, I felt that the eurozone was still a cantankerous teenager when it came to geopolitics.
Now I think differently. Even before the new US administration started mass shooting at the world economy, when the prevailing opinion was that the EU was a spent force economically and politically, the EU’s co-ordinated response to Covid-19, to Ukraine and now to an unpredictable US government give me succour that the EU will turn out to be a resilient old beast after all.
Wishing you all a happy Europe Day next week on 9 May.
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