The Cypriot people dig in for the long haul

More than one month after the now infamous Eurozone meeting, where it was decided that Cypriot local depositors would take a large haircut on balances over 100,000 euro’s, the situation in the country remains fragile and the uncertainty continues to strangle the economy. It is certainly doubtful that any Russians will be parking their offshore money there anytime soon, that’s for sure!!

Similarly, any international businesses looking within Europe for a favorable business environment will most likely be giving Cyprus a wide berth. The Cypriot economy will probably take more than a decade to recover.

Even though we personally haven’t had the opportunity to go to Nicosia, people has been reporting that the city is now full of “For Sale”, “Closed”, and “For Rent” signs in windows where  shops used to be – the engine of the Cypriot economy. Small businesses are closing due to liquidity problems and a lack of demand for their products. In fact, after the haircut on deposits was announced and after capital controls were imposed, many businesses are reporting difficulties paying bills and replenishing stocks.

After observing what happened in other European countries like Greece and Portugal, the Cypriot people are in no doubt that that difficult times are ahead. The country will most likely enter a very sharp contraction, more jobs will be lost and more tough austerity measures will be applied – measures that have only exacerbated  the troubles in the other Southern European regions. Those fortunate enough to still have a job are hunkering down and saving for the future which means purchasing only the essentials and so creating further difficulties for businesses….

At the European level, it has been claimed that the measures applied, more particularly the “bail-in” model, haven’t triggered massive withdrawals from the country. That’s a half truth. Withdrawals haven’t happened in the country quite simply because capital controls are in place. They haven’t been lifted so far because the central bank isn’t confident enough, still concerned with the possibility of people wholesale withdrawing their money from banks. Even though massive withdrawals are currently being restricted, the worst of the damage is already done.

The Cypriot middle-class has real reasons to be concerned at the turn of fate in their country. In 1974, following the Turkish invasion of the island, many lost their homes and now, many of them will likely suffer once more through an inability to pay their mortgages. At the same time, no one knows just what will happen to their retirement funds as the Government may be forced to use that seemingly sacrosanct pot of public money.

Kathimerini Cyprus published a poll last week about what the Cypriot people think in the aftermath of the banking sector collapse. The poll shows that 84% of Cypriots attribute the burden for this crisis to the country’s political, economic and social systems, and not any foreign institutions like the troika. The poll also shows other important points:

54% said it was a mistake for Parliament to vote against the first loan deal. That’s a really interesting outcome given the second deal spears people with less than €100,000.

68% said bankers were the most responsible for the crisis, followed by politicians and then the central bank.

The central bank is in trouble regarding public opinion. 92% said they no longer trust the central bank. That’s not unexpected given the central bank has tried to reinstate confidence in banks just prior to the haircut announcement, leading people to take the wrong decision of keeping their money at the banks. People were deceived by the central bank and lawsuits will follow.

79% said previous President Demetris Christofias and his government is more to blame than the current administration led by President Nicos Anastasiades.

68% said they don’t have enough money to meet their direct needs and to pay for financial obligations. This is a direct consequence of the liquidity problem created by capital controls.

70% feel their personal economic situation will worsen over the next 12 months. Unfortunately, and looking at recent history, they have reasons to believe that way. This is just the beginning of an economic collapse.

66% believe government actions to beat the crisis aren’t enough.

73% said faithful implementation of loan agreement won’t lead the country out of crisis. We guess they’re looking at Portugal when saying that.

Finally and interestingly, 64% are against an exit from the euro area. This result surprises us at first glance. With all the mess created by the troika’s policies, why do 64% still believe that they are fine inside the eurozone? Only through looking at Greece and Portugal will we find an answer to this.

Troika interventions were accompanied with Government changes in all these countries. The new governments then tried to place the blame on past Governments as a means to justify implementing the toughest of austerity measures. Those governments have been terrorizing people about the consequences of leaving the euro and of trying to find alternatives to the troika. Propaganda is alive and well!