After Rebound, Cyprus Gets ECB, IMF Scrutiny

Both the European Central Bank and the International Monetary Fund visited Cyprus to identify opportunities to stimulate growth in the once-depressed economy.

Both the European Central Bank and the International Monetary Fund visited Cyprus to identify opportunities to stimulate growth in the once-depressed economy.

Cyprus, which the ECB recognizes as the southern Greek-controlled nation, was visited by staff from both the IMF and the ECB, who came to Nicosia for over a week “to review Cyprus’s economic reform program,” as the European Union put it. The teams acknowledged that Cyprus has returned to growth but also has pointed at consistently high default rates for loans and low lending that is keeping the country back. The ECB concluded that it would make efforts to stimulate more banking activity in the island state.

Cyprus has received several bailouts from the IMF and from the ECB after the country underwent a severe financial crisis in 2012 and 2013, which cultivated in a one-time bank deposit levy on all uninsured deposits and nearly half of all insured deposits in the country.

Insured deposits, guaranteed in their entirety by the Bank of Cyprus, actually saw 10% of their value disappear overnight on order of the European Commission. In exchange for taking 10% of depositors’ funds, Cyprus received an emergency bailout from the European Union that helped keep the banks solvent by injecting euros into the country.

The move was particularly controversial because some argued it targeted the deposits of hardworking Cypriots, and not tax-dodging foreigners as the EU claimed. Many middle class workers saw 10% of their savings disappear overnight, leading to protests and cries against the EU throughout the country.

Despite the turmoil at the time, the country has since returned to strong aggregate growth, posting 3 quarters of growth in the 3rd quarter of 2015, with GDP rising 2.2% year-over-year, a strong acceleration from the 0.6% year-over-year rise Cyprus saw in the second quarter.

Manufacturing, trade, hospitality, transport, technology, and financial services all saw growth. Few small industries saw a contraction

Cyprus Finance Minister Harris Georgiades was optimistic on the results, saying, “our efforts show that the real economy is starting to move, but we must continue with the same effort.”

The European Commission’s view is less rosy, however. In their statement on the Cypriot economy, the EC said, “non-performing loans (NPLs) remain high and the pace of lending is subdued,” although they also acknowledged “fiscal targets for the 3rd quarter of 2015 were met with substantial margins. In addition, the authorities are making progress on their structural reform agenda.”

The “structural reform” agenda imposed on Cyprus remains intensely controversial in country, and some economists argue it has been a headwind to growth. Nonetheless, the EC insists “sound public finances are needed to ensure that the public debt ratio returns to an acceptable level,” indicating that it wants to see a continual curtailing of public debt even as it encourages more private debt in the Cypriot economy.