The Greek debt crisis threatens the financial system of Cyprus. The largest bank in the country, Cyprus Popular Bank, requires a minimum of 1.8 billion euros to recapitalize. During the restructuring of Greek bonds the bank had to write off 2 billion euros. Analysts believe that the Cyprus Popular Bank rescue is unlikely without financial help from outside.
The Cyprus government is considering providing assistance to the banking sector, and the matter must be resolved no later than June 30. The high degree of dependence on the Greek financial market puts the country's banks in an extremely difficult position. The share of loans received by Greek borrowers in Cyprus is very high. Therefore, from the beginning of the financial turmoil in Athens, Nicosia inevitably faced the consequences of the crisis.
After the recent adoption by the EU of the decision on granting another tranche of assistance to the Greek, the Parliament this spring approved the transaction on the exchange of old bonds for the new ones. The losses of private lenders have been impressive - up to 70 percent of the value of assets. The world's media was talking increasingly more directly or indirectly about the upcoming Greek default. At the same time, the international rating agency Fitch downgraded Greece to P, which corresponds to pre-default conditions.
For the Cyprus financial system already under the influence of negative external background, the restructuring of the Greek debt has become a serious shock. As Figaro newspaper reported on June 4, Cypriot banks have lost 3 billion euros in the partial cancellation of the Greek debt. The dependence of the Cyprus economy on Athens can be summarized in the following numbers: the Greeks received loans totaling 19 billion euros, representing about one third of the Cypriot loans associated with the Greek banks. At the same time, the budget deficit last year stood at 6.3 percent of GDP, and in 2012 it was to be reduced to 2.5 percent. This number will likely not be achieved.
However, according to Figaro, the president of the republic Communist Christofias Dimitrias believes that the larger number of the budget deficit is not the end of the world. It is possible that Cyprus will be forced to take further austerity measures. Public investment in the banking sector may lead to an increase in the budget deficit to 10 per cent of GDP.
In December of last year, Russia has provided a soft loan to Cyprus in the amount of 2.5 billion euros. Economic ties between Moscow and Nicosia significantly strengthened during the reign of President Christofias. It is not ruled out that under the circumstances of the future growth of the budget deficit Cyprus debt will be restructured.
Credit ratings of Cyprus continue to decline. In the summer of 2011, Moody's has downgraded the rating by two grades. In late October of 2011 the agency Standard & Poor's also downgraded the long-term sovereign credit rating, with a negative outlook. On June 13, 2012 Moody's lowered the credit rating of Cyprus by two grades - to the level of Ba3 from Ba1.
The general prognosis of the International Monetary Fund (IMF) on Cyprus for the next two years could be called moderately positive. IMF analysts believe that the Cyprus economy will shrink this year by 1 percent and will grow in 2013 by 0.8 percent. Overall inflation in the country should not exceed 2.8 per cent in 2012 and 2.2 percent - in 2013. According to expert forecasts, the deficit of current account surplus of Cyprus will be about 6 percent of GDP and will remain at the same level in 2013.
At the same time, Greece is expecting an even more significant reduction in the economy this year - 4.7 percent. The country has maintained a high level of unemployment, especially among young people. All these factors directly or indirectly affect the economic situation in Cyprus. However, the upcoming parliamentary elections in Greece may become the real nightmare for the small island nation. Supporters of radical left parties speak in favor of rejection of the financial arrangements with the EU. If such a scenario is implemented, the consequences for Cyprus might be extremely negative.
In recent months, Nicosia is increasingly expressing concern about the difficult situation in the banking sector. The Cypriot government says plainly that the country will be forced to seek financial assistance from the EU. Recently the Minister of Finance Vassos Shiarli recognized that the time to rescue the banking sector is almost gone. Cypriot leadership has exactly two weeks to adapt a coherent policy related to the possible provision of financial assistance from the EU and the IMF.