Sapienta Cyprus Selection, 21 Mar 2023
Regular Cyprus-relevant links
Welcome to Sapienta Cyprus Selection, a regular selection of links to articles of medium- to long-term relevance to people living and doing business in Cyprus. Topics marked with * will be or already have been analyzed in our monthly issues of Sapienta Country Analysis Cyprus. Sapienta Cyprus Selection is part of the Sapienta Cyprus Snippets series. Learn more about the different subsections here.
Swiss banks. Contagion from the failure of US-based Silicon Valley Bank spread to Switzerland last week. Credit Suisse was taken over by fellow Swiss bank, UBS, in an emergency deal that was brokered over the weekend. Click here for an explainer by Reuters. Bank analysts have been concerned that shareholders were treated by the Swiss authorities as more senior than bondholders. Unlike shareholders, bondholders took a 100% hit. The is the reverse of standard practice. Credit Suisse was already vulnerable, as it had been in trouble for a while and had been fined for all kinds of questionable behaviour listed here.
Relevance to Cyprus: Despite Credit Suisse’s record on probity, no one suggested haircutting its depositors, as was the case in Cyprus 10 years ago. On the other hand, the treatment of the “hybrid” bondholders—holders of additional Tier 1 (AT1) capital—was a shock and could mean that all banks, including those in Cyprus, will have to pay even higher interest rates on their AT1 bonds, which they are obliged to issue under eurozone regulations.
Cyprus banks*. At first, the Central Bank governor, Constantinos Herodotou, did not made any public statements about the banking sector turmoil and its impact on Cyprus. Instead, the government had clearly been messaging journalists so that they could report that everything was fine. The chief executive officer of Hellenic Bank, Oliver Gatzke, was also reported as saying there was no cause for concern. The Central Bank of Cyprus did finally issue a reassuring statement at 7pm on Monday evening. Relevance to Cyprus: the Central Bank of Cyprus is not exactly famous for timely messaging in times of crisis, therefore one might not have to read too much into the delay in any public statements. I shall be digging into bank data in the March issue of Sapienta Country Analysis Cyprus to see if I can spot any vulnerabilities.
Greece-Turkey relations. The thawing of relations between Greece and Turkey continues. This follows Greece sending earthquake rescue teams to Turkey after the earthquakes in Turkey and Syria in February. Defence ministers of Greece and Turkey held a phone call last week and could meet each other in the near future, according to an article from Greek Reporter. Relevance to Cyprus: my view is that Greece could potentially act as a positive interlocutor between the Republic of Cyprus and Turkey (or with the EU, Cyprus and Turkey). At the same time, it means that Greece will tread carefully in areas that might lead to a robust response from Turkey. For example, according to Katerina Eliades writing in Politis (premium paywall), Greece’s prime minister, Kyriakos Mitsotakis, has told the new president, Nicos Christodoulides, that now is not the time to revive Mr Christodoulides’ pre-election pledge to revive the “common defence doctrine” of the 1990s between Greece and Cyprus.
Egypt-Turkey relations. Relations between Egypt and Turkey are also thawing, following visits by foreign ministers to each other’s countries in February and March. Egypt has said they will work on a “full normalization of relations”. Relevance to Cyprus: Cyprus has spent a lot of effort building relations with Egypt (and Israel) in recent years and a statement by the Egyptian government in the past few days (my hunch: requested by Cyprus) suggests that relations will remain good. However, as with Greece, it means the emphasis of Cyprus’ friends in future will probably be on cooperation with Turkey rather than any confrontation.
Energy natural gas*. The European Commission announced a number of initiatives last week as part of its aim to achieve net-zero greenhouse gas emissions by 2050. In brief: it means lots of investment in renewables and a discouragement of natural gas. Relevance to Cyprus: Cyprus is currently stuck between a rock and a hard place: most of our electricity production is still based on fuels that are far dirtier and pricier than natural gas, the infrastructure for large-scale electricity production using renewables is not ready, and yet investing in natural gas as a stopgap is getting more difficult by the day given the coming EU rules. There is probably only a very small window for those involved in the natural gas sector to act and might explain Edison’s decision early this week to announce that it would make a final investment decision on the East Med pipeline this year.