SINCE the start of the year the country has had a change in government, has experienced the closing down of its second largest bank and the loss of all Cypriot-banks’ Greek operations, and a large part of its population has lost at least part of their savings that was held in its two largest financial institutions.
The knock-on effect has been a further increase in unemployment (now at 15.6%) and a series of pay-cuts in the private sector (from 10 to 30%), with various pay reductions and structural changes being planned for the public sector.
The “funny” part has been the reaction of the local population. There have been no demonstrations and no mass strikes. None. There is no notable moaning from the trade unions, as they seem (for now at least) to appreciate that they cannot be demanding in light of what has happened. They are in “damage limitation” rather than a “we won’t take this” mode. Most of the people, especially those in the private sector who have been “living the crisis” for more than two-three years now, are taking things in their stride.
The reaction of the politicians has been sub-par. Politicians are supposed to be leaders; elected representatives of the masses who are there to guide them. In contrast to the masses, the political parties seem interested only in squabbling amongst themselves and laying blame on one another for what happened. The relationship between government and the masses is based on trust; the masses put their trust in government for it to set the rules and regulate how they go about their daily lives. In the case of Cyprus, this trust has been lost. And it is this trust that needs to be rebuilt.
Let’s look at the due diligence report on the banking system of Cyprus prepared by PIMCO. The report cost the Cypriot tax payer in excess of €11m which was the original budgeted amount; at 103 pages, this equates to circa €100,000 per page (including the cover page). Nobody seems to have read it. The report makes some excellent comments as to the weaknesses of the local banking system, namely the way loans were granted and how these were reported by the banks. However, the only thing that politicians seem to care is whether or not the PIMCO report is based on false assumptions or methodology, rather than trying to learn from what it says so that they can implement a stricter, more transparent framework going forward. It’s the same “push-it-under-the-carpet” way of dealing with things that got Cyprus into trouble in the first place.
Despite the squabbling at the political level, or perhaps because of it, local property entrepreneurs have been quick to respond to the crisis by restructuring their businesses, aggressive marketing and price reductions, and targeting new markets (a Russian friend recently told me that she doesn’t feel “special” any more because all the signs are now in Chinese).
Various investors from overseas have already started arriving to the island, looking at opportunities in anything from large-scale real estate projects, operating hotels, acquiring non-performing loans, etc. They have seen this scenario play-out elsewhere and they know that in two/three years the economy will start growing again, provided that the country streamlines its public sector, strengthens its supervisory bodies, and restructures its banking industry.
When the economy does begin to grow, this time around the boom will not go to the Cypriots. The overseas investors will have bought a large chunk of the most profitable trophy assets and are likely to be selling them on to other foreigners at higher prices as locals will continue to be priced-out of the market due to low salaries and a lack of credit availability. The locals have seen this scenario play out before; only the last time round they were the ones gaining from the upside, as they were offloading their assets at inflated prices to foreigners.
Cypriots will now be left to benefit from providing services to these new foreign end buyers, and, in time, are likely to realise that had they spent more time scrutinising their government and dealing with their problems rather than pushing them under the carpet, Cyprus would be a much better place to live.
About the author
Pavlos Loizou MRICS is the Managing Partner at Leaf Research
Leaf Research is a real estate consulting firm, providing high quality real estate market research, strategic consultancy, valuation, and financial modelling.