Rear view: Cyprus in February 2014
What was Sapienta Economics writing about just over a decade ago?
This week I thought it would be interesting to take a peek into what I was writing in my flagship monthly report, Sapienta Country Analysis Cyprus, just over a decade ago. These monthly reports were launched in December 2012, right before the Cyprus financial crisis in March 2013, and back then Sapienta Economics had a different logo.
It was February 2014. It was 11 months after the Cyprus financial crisis. There were some “green shoots” on both the fiscal situation, the economy and the Cyprus problem. However, the then president Nicos Anastasiades, of the Democratic Rally (DISY), had just lost his coalition partner, the Democratic Party (DIKO), because he had signed up to the joint declaration that launched the next round of negotiations to solve the Cyprus problem. There were also troubles over the privatization law required by the bailout programme.
The privatization that never came
On the immediate impact of DIKO’s resignation , I wrote the following.
“The key impact in terms of political stability was parliament’s rejection the following evening of the bill that would set the framework for privatization. The rejection did not come from Mr Papadopoulos, who has repeatedly said that DIKO would be a responsible opposition and would support the bailout programme, but from the rival he ousted in December, the former leader DIKO leader, Marios Garoyian. Since Mr Garoyian is closer to Mr Anastasiades than Mr Papadopoulos, Mr Garoyian’s rejection might have been a bargaining tactic to keep some of his loyalists in the cabinet.”
Mr Garoyian’s people did indeed stay on in cabinet. On privatization itself, which had led to protests, I wrote that the next bill should be passed in March. Indeed it was, even if the telecoms and electricity were ultimately never privatized.
“The next tranche under the bailout programme is dependent on the privatization framework bill being passed, leading some politicians to suggest that Cyprus would run out of money by April—a claim that might not be entirely accurate (see Fiscal performance and forecast). Nevertheless, it resurrected bad memories from the crisis days of 2013 and was probably enough to ensure that a slightly revised bill will pass when it is put to parliament on 4 March.”
[…]
“Privatization plans led Cyprus to experience its first taste of any significant social unrest in the last two weeks of February, when workers at the Electricity Authority of Cyprus (EAC) clashed with police outside parliament and all three organizations slated for privatization. EAC, the Cyprus Telecommunications Authority (CYTA) and the Ports Authority, went on strike in the final week of February, leading to intermittent electricity blackouts and the closure of the ports.”
The Cyprus solution that never came
On the joint declaration, I was upbeat but still put the chances of a settlement at only 40%. It did indeed lead us the closest we have ever been (and maybe ever will be) to a comprehensive, federal settlement of the Cyprus problem. But then that all fell down the drain in Crans Montana in July 2017. I have broken up the original paragraph for ease of reading.
Some elements relating to the resumption of the talks suggest that these talks have a better chance of succeeding than in the past. For example, the joint declaration, which runs to just over one page, is the most substantive joint declaration by any Greek and Turkish Cypriot leaders in the long history of the Cyprus problem, covering important issues in the areas of sovereignty and power-sharing (but not in the other key areas, such as security, territory and property).
It gives the Greek Cypriots the “three singles” (single sovereignty, single international personality and single citizenship), which they demanded in order to bolster the international legitimacy of the state.
It gives the Turkish Cypriots the residual powers (meaning, as in most federal systems, that any powers not granted by the constitution to the federal government will fall to the constituent states), which they demanded in order to gain as much autonomy as possible.
By including a ban on secession (“Union in whole or in part with any other country or any form of partition or secession or any other unilateral change to the state of affairs will be prohibited”) but also asserting that the “constituent states will exercise fully and irrevocably all their powers, free from encroachment by the federal government” and that “[n]either side may claim authority or jurisdiction over the other”, it addresses some of the ghosts of the past, namely the Greek Cypriot fear that Turkish Cypriots will secede and the Turkish Cypriot fear that Greek Cypriots will try to dominate or take over the state.
The gas that never came
At that time natural gas was being explicitly linked to a solution of the Cyprus problem. Some think that maybe the reason why Aphrodite has never been developed (and in my February 2025 Country Analysis report I go into why it still might never be) is because the Cyprus problem remains unsolved.
The president, Nicos Anastasiades, linked natural gas and a settlement in an interview with the Associated Press on 17 February while on 19 February the energy minister of Turkey, Taner Yıldız, said that developments on the Cyprus problem were significant for the energy sector and that a pipeline to Turkey was the best option for Cyprus gas. Certainly the energy companies involved in exploration are interested in a pipeline. Phileleftheros newspaper reported in late February that two unnamed Turkish companies had been in contact with the government about transferring gas by pipeline to Turkey. The partners in the Cyprus Block 12 licence, Noble Energy and Delek, which are also partners in the neighbouring Israeli Leviathan field, were also reported to have visited Turkey to have discuss exports of natural gas. However, the minister of commerce, industry and tourism, George Lakkotrypis, also made it clear in remarks to the press on 21 February that they will only consider building a pipeline to Turkey after a settlement.
The second fiscal crisis that never came
At the time of the bailout programme there were many sceptics who thought that Cyprus would need a second bailout. As I watched, and still do watch, the fiscal and banking-sector figures like a hawk, I was more optimistic that Cyprus would make it, even if the privatization bill did not go through (as it did the following month). By February 2014 Cyprus was already running a cash surplus.
“The government has some room if the second privatization bill does not pass
If the second privatization bill does not pass then the government will not receive the next €150m tranche due from the European Support Mechanism and around €85m due from the International Monetary Fund (IMF) on 10 March. While some politicians have suggested that the government will not be able to survive without the next disbursement, we believe this assessment to be exaggerated. The cash-basis budget in January reported a primary surplus of €176m, compared with €103m in January 2013, which gives the government some room for manoeuvre. Apart from €101.2m of Treasury bills, which have consistently been rolled over and which are due on 19 March, the government has no bond payments of any more than a few million until July.”
I was also upbeat more generally on the fiscal side, saying that the government should be running a primary surplus from 2015, which indeed it subsequently did, apart from a small deficit in 2018 owing to €1.5bn spending to close the Cyprus Cooperative Bank, and another deficit in 2020 owing to Covid-19 spending. A primary surplus is the general government budget balance excluding interest payments. When it is positive, it means that debt levels will go down.
“A less severe economic contraction in 2014 should bring the deficit down to 4.5% in 2014 and allow a primary surplus to be built up from 2015.”
If you are interested in my latest forecast for 2025, I have been saying for a while now that public debt will drop below 60% of GDP this year.
The Russian deposits that never came back
In the banking-sector section, I listed the latest change in capital restrictions, which were eased in stages over several months after first being imposed in March 2013. I noted that the stock of loans and deposits continued to decline, partly because of the bail-in—conversion of a portion of deposits over €100,000 into worthless shares. I also noted something which international journalists persisted in getting wrong for years and years afterwards, namely the rapid decline of Russian-origin deposits.
“One of the more political aims of the Eurogroup of eurozone finance ministers, namely to “shrink” a banking sector perceived to be too dependent on Russian funds, has thus been achieved extremely rapidly. Deposits from non-eurozone residents had dropped to €11.8bn at the end of 2013, compared with €21.5bn at the end of 2012, although they inched up for the first time in December, as did resident deposits.”
The economy recovery that did come
On the macroeconomy, I looked at the latest figures and said that the worst was over. Indeed it was and the decline in 2014 was even less than I thought it would be. The Cyprus economy was growing again by 2015.
“Pace of GDP decline eases in Q4 according to flash estimate
The pace of quarterly real GDP decline eased again in the fourth quarter of 2013 according to the initial “flash estimate”. Real GDP declined in seasonally adjusted terms by just 1.0% over the previous quarter—its mildest quarterly decline since Cyprus first applied for the bailout in June 2012. However, in year-on-year terms, the 5.3% decline was greater than in any quarter of 2012 although it was not as steep as in the previous two quarters of 2013, at least on a seasonally adjusted basis. Nevertheless, the figures suggest that Cyprus might already have passed the worst of the crisis, thanks to a combination of resilience, as well as moderate recovery in the eurozone and the UK.”
Ten years later, I am still doing a deep dive every month on the same five subjects, and to satisfy client requests, I have also added the economy of northern Cyprus (areas not under the control of the government of the Republic of Cyprus). Clients who pay the additional premium rate get access to the entire archive going back to December 2012.
Sections of Sapienta Country Analysis Cyprus
Political analysis and outlook
Energy and structural reforms
Fiscal performance and forecast
Banking sector
Macroeconomic trends and forecast
Economy of northern Cyprus*
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