Many investors seek to find parallels between Cyprus and Ireland, trying to convince themselves that the V-shaped recovery of the Cyprus economy and of the real estate market are fast approaching.
Both countries are island-states, ex British colonies, have a small population, and a significant portion of foreign direct investment. They also have over-borrowed households, an overleveraged real estate sector and bust banks; all a result of a speculative, credit-fuelled property boom. Then again, fingers and toes are at the end of our limbs, but no one expects them to behave in a similar manner.
Cyprus has sunshine, the Mediterranean, halloumi, souvlakia, Terlikas, and zivania. Ireland has rolling hills, sheep, Connemara, The Dubliners, and Guinness. It also has U2, the European headquarters of Facebook, Dropbox, LinkedIn and Google, potato cakes, and Kehoe’s pub.
Ireland has a GDP of €185bn and a population of 4.5 million, of which 27 per cent are under the age of 20. In contrast, Cyprus has a GDP of €17bn and a population of 840,000, of which 23 per cent are under the age of 20. Furthermore, Dublin is a financial centre that attracts investors from across Europe and the USA, and has more recently proven to be a magnet for IT companies who wish to operate across Europe. The Cyprus Stock Exchange has an average transaction volume of €350,000 per day, banks close at 14:30, and a streamlining of processes in the government sector remains a pipedream. The countries may be similar, but there are significant differences in ethos and in the drivers of the people and of the economy.
Looking at the sources of their respective economic crisis, the Irish sovereign debt crisis was based on the state guaranteeing the six main Irish-based banks who had financed the property bubble. Part of the solution, was the formation of a National Asset Management Agency (NAMA) which was created to acquire large property-related loans from the six banks at a market-related “long-term economic value”. This allowed banks to focus on their banking operations, whilst the government worked with them to reform the public sector and attract overseas investment.
The economy of Cyprus was hit by several huge blows in and around 2012 including, amongst other things, the €22bn exposure of Cypriot banks to the Greek debt haircut, the downgrading of the Cypriot economy to junk status by international rating agencies and the inability of the government to refund its state expenses. Cyprus’ bail-in caused ripple effects across the banking sector, NPLs have skyrocketed to over 50 per cent, and banks are effectively turning themselves into asset management companies. As time has passed, the will to modernise the workings of the state has waned and politicians have increasingly engaged in populist posturing instead of facing up to responsibilities.
Unfortunately “it is often that a person’s mouth broke his nose”, which is why Cyprus is now faced with multiple investigations and accusations against the governor of the Central Bank, the attorney-general, the deputy attorney-general, etc and it took nine months to reach a consensus to pass an insolvency law that will rely heavily on the judicial system, where courts stop at 14:30 and are closed for Christmas, Easter and Summer vacations, making it ineffective and inefficient.
A journey of a thousand miles must begin with a single step. Cypriots have been let down by their politicians and they have let themselves down by expecting too much from them.
With that, we say to John Hourican go n-éirí an bóthar leat.
Pavlos Loizou is a Partner for Greece and Cyprus of Resolute Asset Management