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Greece exit from Eurozone would hit Cyprus hard

Experts agree that Greece leaving the Eurozone would hit Cyprus hard; the Island will be plunged into a deeper recession, the entire population will have to make sacrifices and we will end up in an EU bailout.

GREECE leaving the Eurozone would be a nightmare for Cyprus, and it won’t matter much what steps the government is currently taking to save the banks or the economy, experts agree.

On Friday parliament approved legislation that could part-nationalise the Popular Bank, the island’s second-largest lender and heavily exposed to Greek debt, in a bond-for-equity swap if attempts to raise €1.8 billion privately fail by a mid-year deadline.

It followed efforts by the bank itself to find investors who were however discouraged by the lender’s exposure to Greece and the uncertainty in the country.

The bank’s chairman Michalis Sarris said approval of the bill gave the lender room to “do what needs to be done to put the banking system back on a healthy base.”

However, whatever Cyprus does may not mean anything if Greece leaves the Eurozone in a disorderly manner, dragging down with it other weak economies like Spain and Portugal and of course Cyprus.

Experts warn that such a development would be followed by chaos – banks and businesses will go bankrupt in Greece, unemployment going through the roof, shortage of basic commodities, to name but a few.

The real problem for Cypriot banks is not their exposure to sovereign debt but the loans given out to Greek businesses and households.

The three big banks have around €24 billion on their Greek loan books – Popular has €13 billion, followed by the Bank of Cyprus with €10 billion.

Thinking the unthinkable

A Greek exit – dubbed Grexit – and a return to the drachma – dubbed Drachmageddon – is expected to hit Cyprus hard, if it happens, and reports on Friday said the EU was now ‘thinking about the unthinkable’ on that score.

“We are now looking at the possibility that the large portfolio we have in Greece could become doubtful,” Sarris told BBC’s HARDtalk. He did say a Greek exit was not inevitable but “it is a clear possibility.”  “I think the Europeans are quite firm that they need Greece to stick to the adjustment plan, tough as it is.”

Sarris said the Greeks seem to think there is a way to stay in the Eurozone without implementing the measures they have to in exchange for the EU’s support.

“Now unless somebody blinks, this is the kind of situation that could lead to an unpleasant outcome but Greece has a history of going to the brink of disaster and then pulling back,” Sarris said.

His belief is that a way will be found for the country to remain in the Eurozone with perhaps some changes to the programme “in ways that the result can still be what is expected but perhaps some of the pain can be spread over a longer period.”

The worst case scenario for Cyprus would be Greece exiting the euro and returning to the drachma, which would certainly be devalued.

For the banks, it would mean a substantial loss of value on their assets, prompting the government to seek a bailout.

We are bound to end up in an EU bailout

“We are bound to end up in an EU bailout,” said Fiona Mullen, director of Sapienta Economics. “Basically we are faced with a second (banking) capital crisis.”

One way to avoid this is by isolating the banks’ operations in Greece.

An effort towards this has been undertaken by the Popular Bank but with no result, so far at least.

If this is unsuccessful, Mullen suggests going to the EU and asking them to bail out the banks in the event of a Greek exit in order to restore confidence.

“So we need a provisional EU bailout. It will come with tough conditions but probably conditions that the government has not had the courage to implement itself,” Mullen added.

Cyprus must also seek to dispel any suggestions that it would be following Greece out of the Eurozone as it has been reported recently.

“The government seems to have done the right thing by moving quickly on Laiki (Popular) this week but it also needs to start saying very loudly that we are not leaving the euro,” to prevent any jitters, Mullen said.

The extent of effects of a Greek exit on Cyprus or the Eurozone for that matter, are difficult to predict, though the consensus is they will be very negative. More so for Cyprus, which prefers the exit to come later rather than sooner – if it comes – so that it has more time to sort out the Greek loans issue.

Economist Symeon Matsis expects the whole Eurozone to be affected, forcing the EU to take measures that will of course include Cyprus.

“They will be forced to bolster the support fund or create a new one,” Matsis said. “It’s not just Cyprus.”

Matsis expects such a development to plunge the island into a deeper recession, pushing back recovery by a couple of years.

“It is clear we will have a lot of negative effects. And considering that the Cypriot economy is already in recession, you understand what this thing means.”

Sacrifices will have to be made

“We will be talking about sacrifices from the entire population,” Matsis said, noting that the government – possibly with the exception of the decision to support Popular – has not yet taken the necessary measures that will allow it to intervene. “We’ll be forced to lower salaries to subsistence level so that we can become competitive and be able to re-enter international markets.”

EU policymakers insist they want Greece to remain in the Eurozone but EU trade commissioner Karel De Gucht said the European Commission and the European Central Bank were working on scenarios in case it has to leave.

“A year and a half ago there maybe was a risk of a domino effect,” De Gucht told Belgium’s Dutch-language newspaper De Standaard.

“But today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldn’t make it. A Greek exit does not mean the end of the euro, as some claim.”

Speculation about such planning has been rife, but de Gucht’s comments appeared to be the first time an EU official has acknowledged the existence of contingencies being drawn up.

But the European Commission’s top economics official, Olli Rehn, later dismissed De Gucht’s comments.

“Karl De Gucht is responsible for trade. I am responsible for financial and economic affairs and relations with the European Central Bank.” Rehn said. “We are not working on the scenario of a Greek exit. We are working on the basis of a scenario of Greece staying in.”

Germany making plans for Greek exit

Germany said on Friday that it had started making plans for a possible Greek exit.

“For the last two years we have been doing everything possible to keep Greece in the Eurozone… We have a programme and we stand by this. Greece must also stick by this. Everyone is prepared to go forward with it. Brussels has also emphasised this,” a German finance ministry spokeswoman said.

But she added: “The German government naturally has the responsibility to its citizens to be prepared for any eventuality,” she said without elaborating.

She was echoed by the head of the International Monetary Fund Christine Lagarde who said it is their job to be “technically prepared for anything.”

Lagarde stressed that this was not the desirable solution.

“I think what we should look at is the optimal scenario where the country has the political resolve to actually observe the commitment, comply with the undertaking, stay within the zone, which seems to be the desire of the population,” Lagarde told the BBC. “But it goes with the effort to abide by the program, which has been put in place.”

German Chancellor Angela Merkel meanwhile spoke with Greek President Karolos Papoulias on Friday and told him of Germany’s hope for a functioning government in Greece.

“She repeated the German government’s position that we are waiting for the new elections and it is our wish and that of all European partners to see a new, functioning government,” a spokesman for Merkel said.

This hope is certainly shared by Cypriot officials who are anxiously watching developments in Greece.

Speaking in parliament after approval of the bill to support the Popular Bank, Finance Minister Vassos Shiarly urged Greek politicians to display the same level of unity and responsibility shown by Cypriot MPs.

“We hope that logic will prevail at the end of the day and what would happen in Greece is something like what you saw [in parliament] – politicians uniting and putting the country’s interest before anything else,” Shiarly said. “If Greek politicians also show the same responsibility … I believe they will succeed and not drag our country into more difficult times”.

Readers' comments

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  • sam london says:

    Cyprus would be ruined as a tourist destination if Greece leaves the euro and returns to its previous currency. This would make it the cheapest country to visit in Europe and would see countries like Cyprus Spain and Portugal struggling to get tourists if they continue in the euro. everyone I know has said that if Greece leaves the euro then they would take their holidays and spending money there. The nonsense in Cyprus that people would still visit there to holiday whilst they could go to a far more beautiful and very cheap Greece is delusional.

    Roll on Greece next year whilst the Cyprus economy goes further down the pan like its corrupt property market.

  • marktyler says:

    Russia! Yep, that sounds right. This is where Cyprus can escape the noose already tightening; by exploiting its strategic geographic location once again, as time immemorial, before and since Alexander. And why the Cypriot leadership can thumb their noses at EU notions of “fair” commercial practices, so that in Cyprus they practice a legal system that doesn’t function as Plaintiffs would want it to, and why people often pay for their homes then live in them (and swim in their swimming pools) but minus the property title deeds. Seems grossly uncivilized, but they get away with it for the reason of strategic geo-location. Hideous real-politik. But all the more reason for us doomsayers to keep the message upfront – to warn others who might fall into the trap of “this island of fraud and deception”. Heads up all those who might invest here in Cyprus – Don’t!

  • Odd_Job_Bob says:

    In answer to marktyler’s last question: Russia!

  • marktyler says:

    Might Geuro beget Ceuro? Deutsche Bank is recommending Greece have a parallel Euro called Geuro, to mitigate the carnage that outright ejection would entail. Might Cyprus therefore adopt a Ceuro? This onomatopoeic word somehow suits Cyprus – island of shame, corruption and dishonesty. It’s not unpleasurable watching this unfold, the bad guys being slowly brought down for a change.

    How Christofias is going to help I don’t know. Who wants to listen to a self-announced lame-duck president begging for money, cap in hand?

  • Odd_Job_Bob says:

    Hi Mbeyes,

    The Latin Monetary Union (1865 – 1927) has been written about before on this forum. Check this bit out: “(Greece’s) chronically weak economy meant successive Greek governments responded by decreasing the amount of gold in their coins, thereby debasing their currency in relation to those of other nations in the union and in violation of the original agreement. Greece was formally expelled from the Latin Monetary Union in 1908. It was readmitted in 1910”.

    Isn’t history fun!

    As stated below though, I don’t think Greece will leave before Germany does a runner. ALL the G8 pressure is being heaped on the ECB to be the lender of last resort and to issue Eurobonds. The ECB has no money and only gets it from contributing countries. The only solvent Eurozone country is Germany, so this means German taxpayers will have to write a blank cheque for God knows how long to: 1) countries who have run their economies well but have been caught out by the inherent structural problems of having a single currency (say Ireland) and 2) those who have been profligate (say Greece).

    The North-Rhine Westphalia and Schleiswig Holstein regional elections have rung the bells as clear as a Cyprus property developer’s conscience(!) that German taxpayers are fed up with bankrolling profligacy (and being called Nazis at the same time, to boot!), so if the Christian Democrats and their rapidly disintegrating alliance don’t insist on a “you get no more money unless you play by the rules” hard-line approach, there will be a new party in power after the German general election next year.

    So, Merkel is in between a rock (everyone outside of Germany calling for her to give and give and give to countries who LIE and will just waste the dosh – did you know Germany only finished paying reparations from WORLD WAR ONE two years ago?! Estimated Euro bailout funds have been put at MORE than that!) and a hard place (electoral and political suicide).

    What will she do? Have a butcher’s at this (admittedly a bit left field) article:

    Germany ordered printing of Deutsche Marks, advisor

    All hail the new Euromark!

  • mbEyes says:

    Apologies for being late to this thread, but in all the gloom and doom spoken by most including those on this forum, remember one thing: the figures were manipulated to allow Greece to enter the EU & Euro; so its a high probability that exactly the same will be done again in order to keep Greece in the same position. Who will end up paying for all this? You already know the answer to that.

  • Adonis_Joannou says:

    Το βέβαιο είναι ότι τίποτα δεν συμβαίνει δίχως λόγο.
    Κάποιος πρέπει να μάθει κάτι, κάποιος πρέπει να χάσει κάτι ή να κερδίσει…
    Η ΜΟΙΡΑ ΤΟΥ ΚΑΘΕ ΑΝΘΡΩΠΟΥ ΥΠΑΡΧΕΙ ΑΛΛΑ ΕΙΝΑΙ ΣΤΟ ΧΕΡΙ ΜΑΣ ΝΑ ΤΗΝ ΑΛΛΑΞΟΥΜΕ…Όλα συμβαίνουν για κάποιο λόγο

  • Matthew Ring says:

    Greece may well withdraw from the single currency, but it won’t be leaving the EU. This will leave other members, together with the IMF, liable to a far more extensive bail-out than seen hitherto – in the the short-term, at least – to prevent precisely the dire scenario unfolding in the way that Odd-Job-Bob describes – surely..?

  • alex g grant says:

    The public service and the Cypriot goverment need a very stiff whiff of reality, hopefully they’ll get it now in the form of wage and pension cuts. Let’s hope the cuts are very stiff and are immediate, the private sector in Cyprus have been subject to these cuts for the last couple of years. We can do without at least half of the public service as well.

  • Odd_Job_Bob says:

    Dear Moni Layman,

    It’s impossible to say exactly what would happen, but this article gives a good general idea:

    Birth of new Greek drachma would be pained, rushed

    In summary: the Greek government would have no money, nor be able to borrow any and would not be able to pay its public workers, who will likely strike, then riot. Basic public services will grind to a halt. Many businesses would go bankrupt and unemployment would soar to incredibly high levels. The government wouldn’t be able to pay any employment benefits (firstly, cos they’d have no money and secondly, they’d have no currency to pay them in!) and people will turn to crime in order to survive. Note this bit: WESTERN EXPATS WOULD BE ATTACKED (at the moment, random German-looking like people are being attacked on the streets of Greece, as they are regarded as having caused the crisis). Any new currency would initially be forged (as no money to pay the people who would be printing it, so it would be crude and initially at least very forgeable) and any assets in Greece, which would now be denominated in the new currency, would be worthless. All banks would collapse or at least, suspend all operations.

    Eventually, the Greeks would find a balance, they’d get a currency that they could trade in and start producing goods again, initially for the domestic market but eventually for the outside world. Confidence would eventually come back and over time, new, initially state-owned Greek banks would gain access to international markets. Don’t know how long this would take (please google: “Argentina default” for a clue).

    Situation in Cyprus would be similar, but with the added complication of the British military areas (SBAs). It’s likely, as has happened before and some may say is already happening now, the Cyprus government will openly flirt with Russia (for bailout funds this time) in order to avoid the riots and anarchy that will happen to its Hellenic cousins. Knowing Christofias, he will take it too far and incur the wrath of his fellow Nato members, and some form of military action is BOUND to take place to prevent Cyprus being sold to Russia. Watch this space.

    Specifically for you though, and this sounds extremely harsh but is given with all the best intentions in the world: your property is worthless (with or without title deeds), get your money out of Cyprus Popular Bank THIS VERY MORNING and make sure your UK pension is paid in £ Sterling, preferably to a UK bank with cash machines available in Cyprus.

    Personally though, I believe that the above won’t happen quite in this way as Greece will not leave (well, not yet anyway). Germany is MUCH more likely to leave first (for reasons described on this forum many times before) and Greece (and many of the other eurozone countries) will be left with a valueless currency.

  • Moni Layman says:

    I know its pure speculation but could someone explain, to the ex-pat on the Cyprus street, the impact of Greece (and then probably Cyprus) ditching the Euro? I personally invested Cyp£150,00 in my property here in 2005, I have a few thousand Euro in Laiki together with a £7000 UK pension paid in Euro.

  • Mike says:

    Manipulating the accounts with ‘creative accounting’ was a way for Greece and Cyprus to enter the EU and Eurozone. The day of payment is drawing ever closer, we have received the benefit’s now we must play ball which we are not in a position to do.

    We have always considered ourselves to be immune at least in previous finance ministers rhetoric we have but reality has a habit of materialising in the end.

    What an opportunity for Turkey to bail Cyprus out, cement the partition with no compromise – in exchange for full and immediate EU membership. In effect control the whole of Cyprus economically. And still we insist on flying Greek national flags before we consider our own, teach Hellenism and only as a last resort consider ourselves Cypriots with a Sovereign Independent Island State. By all means acknowledge our Greek, Ottoman, Venetian past but we are Cypriots not Greek or Turkish.

    We reap what we sow and get the politicians and leaders we deserve.

  • Nick - Larnaca, Cyprus says:

    Cyprus is most definitely not an island, economically speaking.

    If one member of the Eurozone (Greece) has problems, the other member States cannot escape the ripple effect of those problems.

    Unfortunately, there are a few other countries trying to deal with their own financial demons – Spain, Portugal, Ireland, Italy. Understandably, each will be looking to the others to see if there’s enough room in the financial lifeboat to effect a rescue.

    This begs the question about whether Cyprus is sufficiently robust to withstand the impact of the economic tsunami created by several countries throwing their respective pebbles or boulders into the choppy waters of a worldwide recession.

  • Janner says:

    With all the controversy surrounding Cyprus I do not think the EU will want to provide a bailout. It would mean Cyprus opening its books to the EU and the true extent of the debt owed to banks would be seen. The Cypriot government has approved steps to bailout ‘Popular Bank’ if need be but with what. The ‘system’ in Cyprus is faltering. It is struggling already and that’s without the Greece problem.

    I think it is naive to think that Greece falling would not affect Cyprus enormously. Some people seems to think that economics can be isolated, compartmentalised. However, the Euro problem is a prime example that economics cannot be. It is a global problem which will require a global solution.

    We cannot continue to throw money at something which just does not work.

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