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Cyprus pulls back from abyss after traumatic bailout

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Two years after its failing banks nearly pushed cash-strapped Cyprus over the edge, sending shockwaves through the eurozone, the country has pulled back from the abyss, saved by painful austerity and a multi-billion euro rescue package.

Indeed, Finance Minister Harris Georgiades says the economy is responding so well to adjustments that accompanied the European Union/IMF bailout that Cyprus may not need to draw the full 10 billion euro ($10.6 billion) loan.

The economy "is much better, but I'm not saying that it is good," he told AFP.

"The economy is recovering. We are still on a negative growth rate, but each quarter is seeing an improvement," he said, predicting a return to "very mild" growth this year.

He did not give a figure, but the EU recently forecast a 0.4 percent uptick, and University of Cyprus economics professor Michael Michalis said he expects a figure of between zero and 0.5 percent growth.

As Cyprus was clinching the loan in March 2013, it feared a run on the banks, so it closed all the country's lenders for nearly two weeks. It imposed draconian capital controls when they reopened, but most of them have now been lifted.

Georgiades said Cyprus had made "significant progress".

"Unemployment is starting to come down, public finances are under control... and crucially our banking sector has been stabilised," he said.

"We do not have a deficit, which is an achievement as many other EU member states are still struggling to bring their deficit under control."

- Full bailout not needed -

Cyprus' Minister of Finance Harris Georgiades pauses during an interview with AFP at the Minist...
Cyprus' Minister of Finance Harris Georgiades pauses during an interview with AFP at the Ministry of Finance on March 12, 2015 in the capital Nicosia
Maria Christodoulou, AFP

Because of all this, the minister said Cyprus would not need the full bailout that was offered.

"We do not expect our banks, for instance, to need any new capital through state money," Georgiades said.

"Some of the 10 billion which was, let's say, reserved for this purpose... will not be needed."

So far, Cyprus has received "just over six billion" euros, he said, without being drawn on how much more might be needed.

As it stands, Nicosia's rescuers stopped payout of the loan's latest tranche because parliament failed to adopt one of the measures required and streamline the legal process of foreclosing on non-performing loans.

Georgiades said he hoped that "over the next weeks" lawmakers would do so.

That was just one of many requirements imposed in exchange for bailing out the already recession-hit economy, and which deepened the decline.

The measures included stiff tax hikes, the sell-off of state-owned assets and sharp cuts in government spending.

But they also involved a step unprecedented in the eurozone -- a "bail in" of the bloated banking sector.

Second-largest lender Laiki Bank was to be wound up, and all deposits there above 100,000 euros lost. Its good assets were folded into also-struggling Bank of Cyprus, where large depositors suffered a haircut, with part of their cash forcibly converted into shares.

- Staying the course -

Cyprus Airways flight stewardesses during a protest against the closing down of Cyprus airways at th...
Cyprus Airways flight stewardesses during a protest against the closing down of Cyprus airways at the Ministry of Finance in Nicosia on January 12, 2015
Patrick Baz, AFP/File

The shock from the banking crisis and the austerity measures took their toll. Businesses closed, unemployment skyrocketed and many of those who kept their jobs saw their salaries slashed.

GDP plunged 5.4 percent in 2013 and fell another 2.4 percent last year.

But as Michalis points out, that was "much better" than the nine percent contraction that had been forecast for 2013 and the 4.8 percent for 2014.

Georgiades also promised Cyprus would "continue the same policy" towards long-term recovery by focusing on structural reform, including privatisation and reducing bureaucracy.

"There is still work which needs to be done before we can safely say that we're back on viable and sustainable growth," the minister said.

Michalis noted that there are still problems -- including high levels of non-performing bank loans, heavy business and household debt, a weak housing sector and falling prices -- but he is cautiously upbeat.

"We expect the economy to stabilise this year," with "public finances better than the European Union average."

And with the economy recovering, "once the foreclosure bill is passed... this will create confidence."

That can't come too soon for Filio, a 50-year-old who was let go from her secretarial job 18 months ago.

"Since then, I've tried to find something, but I can't... There are so many young people unemployed, they hire them first."

Two years after its failing banks nearly pushed cash-strapped Cyprus over the edge, sending shockwaves through the eurozone, the country has pulled back from the abyss, saved by painful austerity and a multi-billion euro rescue package.

Indeed, Finance Minister Harris Georgiades says the economy is responding so well to adjustments that accompanied the European Union/IMF bailout that Cyprus may not need to draw the full 10 billion euro ($10.6 billion) loan.

The economy “is much better, but I’m not saying that it is good,” he told AFP.

“The economy is recovering. We are still on a negative growth rate, but each quarter is seeing an improvement,” he said, predicting a return to “very mild” growth this year.

He did not give a figure, but the EU recently forecast a 0.4 percent uptick, and University of Cyprus economics professor Michael Michalis said he expects a figure of between zero and 0.5 percent growth.

As Cyprus was clinching the loan in March 2013, it feared a run on the banks, so it closed all the country’s lenders for nearly two weeks. It imposed draconian capital controls when they reopened, but most of them have now been lifted.

Georgiades said Cyprus had made “significant progress”.

“Unemployment is starting to come down, public finances are under control… and crucially our banking sector has been stabilised,” he said.

“We do not have a deficit, which is an achievement as many other EU member states are still struggling to bring their deficit under control.”

– Full bailout not needed –

Cyprus' Minister of Finance Harris Georgiades pauses during an interview with AFP at the Minist...

Cyprus' Minister of Finance Harris Georgiades pauses during an interview with AFP at the Ministry of Finance on March 12, 2015 in the capital Nicosia
Maria Christodoulou, AFP

Because of all this, the minister said Cyprus would not need the full bailout that was offered.

“We do not expect our banks, for instance, to need any new capital through state money,” Georgiades said.

“Some of the 10 billion which was, let’s say, reserved for this purpose… will not be needed.”

So far, Cyprus has received “just over six billion” euros, he said, without being drawn on how much more might be needed.

As it stands, Nicosia’s rescuers stopped payout of the loan’s latest tranche because parliament failed to adopt one of the measures required and streamline the legal process of foreclosing on non-performing loans.

Georgiades said he hoped that “over the next weeks” lawmakers would do so.

That was just one of many requirements imposed in exchange for bailing out the already recession-hit economy, and which deepened the decline.

The measures included stiff tax hikes, the sell-off of state-owned assets and sharp cuts in government spending.

But they also involved a step unprecedented in the eurozone — a “bail in” of the bloated banking sector.

Second-largest lender Laiki Bank was to be wound up, and all deposits there above 100,000 euros lost. Its good assets were folded into also-struggling Bank of Cyprus, where large depositors suffered a haircut, with part of their cash forcibly converted into shares.

– Staying the course –

Cyprus Airways flight stewardesses during a protest against the closing down of Cyprus airways at th...

Cyprus Airways flight stewardesses during a protest against the closing down of Cyprus airways at the Ministry of Finance in Nicosia on January 12, 2015
Patrick Baz, AFP/File

The shock from the banking crisis and the austerity measures took their toll. Businesses closed, unemployment skyrocketed and many of those who kept their jobs saw their salaries slashed.

GDP plunged 5.4 percent in 2013 and fell another 2.4 percent last year.

But as Michalis points out, that was “much better” than the nine percent contraction that had been forecast for 2013 and the 4.8 percent for 2014.

Georgiades also promised Cyprus would “continue the same policy” towards long-term recovery by focusing on structural reform, including privatisation and reducing bureaucracy.

“There is still work which needs to be done before we can safely say that we’re back on viable and sustainable growth,” the minister said.

Michalis noted that there are still problems — including high levels of non-performing bank loans, heavy business and household debt, a weak housing sector and falling prices — but he is cautiously upbeat.

“We expect the economy to stabilise this year,” with “public finances better than the European Union average.”

And with the economy recovering, “once the foreclosure bill is passed… this will create confidence.”

That can’t come too soon for Filio, a 50-year-old who was let go from her secretarial job 18 months ago.

“Since then, I’ve tried to find something, but I can’t… There are so many young people unemployed, they hire them first.”

Written By

With 2,400 staff representing 100 different nationalities, AFP covers the world as a leading global news agency. AFP provides fast, comprehensive and verified coverage of the issues affecting our daily lives.

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