Cyprus: catch 22 has a silver lining

by George Hatjoullis

Ledra Street, Nicosia

Ledra Street, Nicosia (Photo credit: Wikipedia)

Sipping coffee in Ledra street there seemed no evidence of crisis. Many a new cafe and restaurant has opened up in the surrounding streets and around the old church, Phaneromenis. They were all heaving. However, it is not tourists but young Cypriots that sit sipping Frappuccinos. Back at the flat, Euronews TV kept flipping from one demo to another in countries far and wide; Peru, Brazil, Bulgaria, Egypt, Turkey, Greece. In Cyprus, however, the main reaction to the devastating haircut on uninsured bank deposits and harsh terms of the Memorandum of Understanding seemed to be to sip Frappuccinos. No chanting, no banners and no rock throwing here. Perhaps it is the heat.

Move away from Ledra Street and the crisis begins to materialize. Cafe bars that used to buzz with Nicosia’s beautiful people are either closed or empty. Shop-to-let signs dominate. Perhaps many go to Ledra and surround because there is nowhere else anymore. Meeting family and friends there were only two topics of conversation; the crisis and immigrants. On the roads evidence of pent-up aggression was in abundance.

Driving a hire car in Cyprus is very distinct because of the red ‘Z’ number plate. Aggression towards hapless tourists seems to have gone up a notch. If you do not shoot away from the lights instantly, expecting a good honking. Moving along at the speed limit? Expect to be overtaken however dangerous the manoeuvre. Jumping red lights is now de rigueur ( nine occasions in three weeks observed). Creeping forward at the lights appears to be compulsory. Two most alarming incidents were observed. First, a car behind mounted the payment and drove along a line of around 20 cars, on the pavement, to avoid slow changing lights. Second, on a section of two-lane highway, a Mercedes tried to overtake between a truck and a lorry that were moving in parallel. Something is very wrong in the state of Cyprus methinks.

Family and friends happily condemned immigrants without any sense of irony and expected agreement. There are at least as many people of Greek Cypriot origin living abroad as in Cyprus and much the same was probably said of them at some point. It is no more true of them. The point seemed not to register. For that matter there are a lot of English people living abroad (as a % of population more British people live in Cyprus than Cypriots in the UK) as well and they too can be demanding. In Larnaca they wanted their children educated in English and not Greek, a senior education ministry official once confided. It does not stop th BNP, EDL or UKip either.

The big issue however was job losses and banks. The job losses are only now beginning to accelerate it seems. Every family had at least one and generally more than one either unemployed or on part-time working. Moreover wages had either been slashed or were about to be. The sense of gloom was all-pervading and many spoke, again with no sense of irony, of going abroad to work. The job losses seem set to accelerate between now and year-end.

The really telling issue is the banks. There is no confidence in the banks. People are taking out what they can and stashing it at home. The institutions must be hemorrhaging deposits. If capital controls were lifted tomorrow the banking system would see a complete flight of deposits and fail. Yet the longer the capital controls persist, the more entrenched the loss of confidence becomes. It is Joseph Heller’s catch 22. The problem is that it is hard to have confidence in the banks.

The banking system has accumulated loans based largely on collateral and cross-guarantees, and not on ability to service debt. The property market has ceased to function and the guarantors are losing their jobs and businesses. The proportion of bad debt in the system is likely to be much higher than estimated because the impact of the crisis has been far more severe than the Troika appears to have grasped. Many of the businesses that have failed have not done so because Cypriots are not spending their savings but because they lost their working capital in the bank resolution. The spending would have slowed as savings were run down but the effect has been instantaneous. Foreign capital inflows cannot yet save the day because of capital controls and the uncertainty surrounding the banking system. Cyprus is in serious trouble and the situation can only get worse.

The ray of hope is the gas. The pumping of gas is some years away and is unlikely without a resolution of the Cyprus Problem. The good news is that necessity is making a resolution of the Cyprus Problem that much more likely. The people at least are ready for a resolution even if the government is prevaricating. The silver lining in the black cloud hanging over Cyprus.