Weekend Economists Volvemos a Puerto Rico May 22-25, 2015

[Demeter]

9. WHERE IS CYPRUS TODAY, ECONOMICALLY?

As Cyprus Recovers From Banking Crisis, Deep Scars Remain NYTIMES

http://www.nytimes.com/2015/03/17/business/international/as-cyprus-recovers-from-banking-crisis-deep-scars-remain.html

The financial world has pretty much moved on since Cyprus was briefly the epicenter of market anxiety. Two years ago this month, the country's banks failed en masse, A.T.M.s were rationing cash, and the integrity of the eurozone hung in the balance. But after a contentious, internationally brokered “bail-in,’’ in which for the first time many bank depositors were forced to help pay for a eurozone rescue, Europe’s policy makers soon found other things to focus on.

Yet Christos Savvides, managing director of an advertising agency in Nicosia, the once booming capital, does not have the luxury of forgetting. Daily reminders include the rows of downtown shops that once sold luxury clothing brands but now stand empty. At one defunct auto dealership, a Renault Laguna sedan, in a thick layer of dust, is still on display behind dirty windows. Mr. Savvides lost hundreds of thousands of euros that he had deposited in Cyprus banks — money seized in the rescue program to cover bank losses. Two years later, Mr. Savvides’s experience, and that of tens of thousands of other Cypriots caught up in the crisis, offers lessons that could soon apply to Greece if that country is unable to reach agreement with its creditors.

In retrospect, it is clear that European leaders, international creditors and bank regulators could have done more to limit the economic upheaval caused by seizing portions of depositors’ money above the level of 100,000 euros covered by deposit insurance, a threshold equivalent to roughly $105,000 at the current exchange rate. In fact, a new European Union law written after the crisis would probably have exempted Mr. Savvides, since the deposits in his case actually belonged to his clients. But that law comes too late for him and other Cypriots. One surprising lesson may be that capital controls — restrictions on withdrawals and on money transfers out of the country — were not as disruptive as feared, but did help prevent even more money from leaving Cyprus. If anything, some economists say, the restrictions should have been applied sooner, before many of the biggest and most sophisticated investors had already fled. More recently, foreign money has been trickling back into Cyprus, including a big bet by Wilbur L. Ross Jr., the American investor known for his appetite for tough cases.

Cyprus also represents what many Europeans see as insensitivity in Brussels, Frankfurt and Berlin toward the people like Mr. Savvides who must suffer the consequences of eurozone crisis management. Among Cypriots, the feeling is widespread that as a country of fewer than one million people, geographically closer to the Middle East than to Europe and with a reputation as a haven for Russian cash, they were used as lab rats to test new and poorly conceived policies.

“It was an experiment,” said Antonis Paschalides, a Cyprus lawyer and former government minister who is suing the European Commission and the European Central Bank on behalf of Mr. Savvides and others who say their deposits were seized illegally.

“We make an example,” Mr. Paschalides said, describing what he believes was the attitude of European leaders. “‘If worst comes to worst, Cyprus will collapse.’’

The parallels with Greece are not perfect. For one thing, the Greek economy, though small by eurozone standards, is more than 10 times the size of Cyprus’s. And banking played a far bigger role in the Cypriot economy — with assets valued at six times gross domestic product before the crash — than it does in Greece. In Cyprus, eurozone officials argue, the size of the banking system meant that depositors — many of them foreigners — had to share the burden because otherwise the country could not afford it. In Mr. Savvides's case, though, the deposits seized were not even his. They belonged to clients of his agency, Ledra Advertising. When the crisis hit, Mr. Savvides was in the process of using the money to buy local television time on their behalf. Mr. Savvides, whose customers include the consumer products giant Unilever, had to absorb the cost. “The client says, ‘I sent you the money,’” Mr. Savvides said in Nicosia last week. “'What you did with the money was your problem.’”

The financial blow, along with the recession that followed the banking crisis, forced Mr. Savvides to lay off several of his employees, who now number 22. Mr. Savvides said his firm survived only because his clients and creditors were understanding and gave him time to make up the deficit.

Cyprus, too, has managed to survive, and by some measures is doing better than expected. But the economic situation remains dire. Unemployment, though falling from a peak of 16.6 percent in December, is still above 16 percent. The economy shrank 0.7 percent in the fourth quarter of 2014, compared with the previous quarter, the worst performance in the European Union. And more than half the outstanding bank loans in Cyprus are classified as nonperforming — a legacy of the crisis and a huge obstacle to growth.

THE MORTGAGE FORECLOSURE CRISIS HAS YET TO OCCUR.....MORE AT LINK