# Problems With the Cypriot Economy?



## Tonika (Jul 9, 2011)

Some reports on Satellite TV in the last few days regarding the poor state of the the Cypriot economy, just how bad is it?. Although, a Government spokesman did deny Cyprus would need any baleout, or IMF funds.


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## Veronica (Apr 5, 2008)

The Cyprus economy has been affected by the global recession although it was not as bad as many other countries. However the recent explosion of an Iranian arms cache and subsequent catastrophic damage to the main power station has added to any problems which the country had.


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## kimonas (Jul 19, 2008)

Veronica said:


> The Cyprus economy has been affected by the global recession although it was not as bad as many other countries. However the recent explosion of an Iranian arms cache and subsequent catastrophic damage to the main power station has added to any problems which the country had.


The repair bill for the widespread devastation caused by the explosion has a conservative estimate of 2 billion euros, which together with lack of reform and proper implementation of effective austerity measures (AND the continuing fines imposed for infringement of numrous EU directives) coupled with the considerable exposure to the Greek debt crisis of many Cypriot institutions makes a bailout inevitable. The Cypriot economy is in serious (but hopefully temporary) crisis.


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## Veronica (Apr 5, 2008)

Unfortunately the President refuses to step down despite the fact that he is responsible for what happened. I have no doubt he will be doing everything he can to amass as much of a personal fortune as he can before his term of office is over. I doubt very much that he will be going out of his way to sort out the mess he and his government have made of this lovely country.


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## WhiteMagick (Aug 28, 2010)

I don't usually post but I felt the need to inform you more accurately on the economic situation. Cyprus is entering a serious economic crisis that will last 5-10 years. 

The interests on the 5 and 10 year bonds are at 10% and 15% respectively so foreign borrowing is out of the question. The 2011 budget deficit was planned to be 4-4.5% but for the first semester it already was 3% which means that even before the Mari tragedy, the budget was way off. What will happen with the budget deficit in the second semester due to the Mari incident is therefore even grimmer (I predict it will be over 6-7%). It basically means that the state will need to borrow at least an additional 600 million euros before the end of the year but taking into consideration that foreign borrowing is not possible and that the internal market is running dry there is a good chance that Cyprus will default within the next 6-8 months.

Additionally, unemployment is climbing fast and stood at 7.6% in June. AHK, the power provider, will announce a price hike of over 20% in September in order to avoid bankruptcy due to the higher power production costs. The increased electricity prices in combination with the lost work hours due to the power cuts (for example now in August most factories were forced to shut down) in addition to many companies being forced to buy their own generators means that there will be a substantial rise in costs and a substantial reduction in earnings and profitability. Many companies are already negotiating wage cuts with their employees. Overall the fiscal position for the economy will grow worse. 

The only foreign currency earner in Cyprus now is tourism (Russian tourists more specifically). Construction is still contracting at a rate of 20% and property prices are falling. Industrial and agricultural production is hampered. The rating cuts by Moody's, S&P and soon Fitch have caused a flight of business for banks and financial services starting in June. Again this does not include the effects of the Mari incident.

Now if Cyprus turns to the EU like Greece, Ireland and Portugal did, it will mean that Cyprus will be forced to make extensive and deep cuts on the wages of the public servants, freeze all hiring, hike taxes and more crucially raise its low business tax upon which the economy depends. The University of Cyprus released a report saying that it will cost each household about 1,400 euros and the GDP will contract by 2.4%. Therefore, Cyprus' future looks poor and people will have to accept a lower standard of living over the next years (public schools and hospitals are already jammed with people who are fleeing the services of the private sector). This means that expats will have to live in a more expensive Cyprus and see their investments (housing) devalue substantially. If you work in Cyprus you will see your earnings fall significantly. Cypriots have their family system to fall back to but foreigners do not. Many expats and foreign businessmen are planning to make their escape soon. 

Once the tourist season is over the economy will go into a severe depression. 

PS: Of course like Veronica pointed out, our government is showing criminal incompetence and indifference to the situation. There will be political instability once the real crisis hits and taking into consideration that the largest generation of young Cypriots ever is now leaving university and entering the job market there might be some social strife as well.

That just my two cents and entirely my opinion.


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## totorama (Jun 12, 2010)

WhiteMagick said:


> I don't usually post but I felt the need to inform you more accurately on the economic situation. Cyprus is entering a serious economic crisis that will last 5-10 years.
> 
> The interests on the 5 and 10 year bonds are at 10% and 15% respectively so foreign borrowing is out of the question. The 2011 budget deficit was planned to be 4-4.5% but for the first semester it already was 3% which means that even before the Mari tragedy, the budget was way off. What will happen with the budget deficit in the second semester due to the Mari incident is therefore even grimmer (I predict it will be over 6-7%). It basically means that the state will need to borrow at least an additional 600 million euros before the end of the year but taking into consideration that foreign borrowing is not possible and that the internal market is running dry there is a good chance that Cyprus will default within the next 6-8 months.
> 
> ...


Well, that's cheered me up for the day...


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## Geraldine (Jan 3, 2009)

WhiteMagick said:


> I don't usually post but I felt the need to inform you more accurately on the economic situation. Cyprus is entering a serious economic crisis that will last 5-10 years.
> 
> The interests on the 5 and 10 year bonds are at 10% and 15% respectively so foreign borrowing is out of the question. The 2011 budget deficit was planned to be 4-4.5% but for the first semester it already was 3% which means that even before the Mari tragedy, the budget was way off. What will happen with the budget deficit in the second semester due to the Mari incident is therefore even grimmer (I predict it will be over 6-7%). It basically means that the state will need to borrow at least an additional 600 million euros before the end of the year but taking into consideration that foreign borrowing is not possible and that the internal market is running dry there is a good chance that Cyprus will default within the next 6-8 months.
> 
> ...


That is a dire prediction, but you seem very well informed. Every country you look at seems to be in a similar state.....but I don't live in 'every other country', I live here.


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## Veronica (Apr 5, 2008)

Geraldine said:


> That is a dire prediction, but you seem very well informed. Every country you look at seems to be in a similar state.....but I don't live in 'every other country', I live here.


It certainly does make things sound bleak. 
However as countries go I still would much rather live here than the UK or any other country where all you have to look forward to is wet, miserable weather for most of the year. 
Financially this country is no worse off than most others and better than a lot of them and at least we have the sunshine and the relaxed lifetstyle that goes with it.

Veronica


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## zin (Oct 28, 2010)

WhiteMagick, everything you've posted I've heard whilst being here the last couple of weeks, other than I heard the electricity would be a 30% hike and not 20%. 

I think a lot of people don't really know what is going to happen, the central bank apparently has high cash reserves, something like 7 times the GDP of the country which is very unusual for Europe. I think ultimately a deal will be struck where Russians will have even more influence over businesses in the country so more money gets pumped in.


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## steveg63 (Sep 5, 2010)

I believe their is a saving grace that has not been mentioned yet, as of 1st October drilling starts for the elusive gas and oil, the initial drilling will be for 4 weeks, after which the core sample is sent away to be tested to see who much these reserves are worth - this should take approx 3weeks before the results are back, when the results are back the country then has an asset they can borrow against, likely investors mentioned so far are Russia and China, I believe this is a major political move to 'balance the books' prior to the end of financial year end, 31st December.
Any 'loan against asset' would have a major positive effect on the deficit, should/will bring it under the 3% of GDP, will keep Cyprus within the EU % and no need for bailout, however it should used with the cuts needed to ensure that this win fall is not wasted.

Steve


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## RonJeremy (Sep 17, 2009)

Thanks for that detailed answer WhiteMagick, I too can't help but to think that a country which main business is property could possibly survive the financial crisis unharmed.

I remember in the US depression when things were at the absolute worse they had incredibly bad luck that just that year (and for years onwards) they were hit by US-history's worst drought, that's another problem that could potentially face Cyprus that if Cyprus goes really bad and is combined with a serious drought that could be disasterous.

I've read that Cyprus tax-position is a bit different from most countries, in many countries you can simply raise taxes and the companies will have no choice but to pay them, but in Cyprus there are many international companies which are there simply because of the low taxes, so if Cyprus raises taxes these companies might simply pack up and leave, 
that was the argument for why someone believed that cyprus taxes weren't going to change, but this info was pre-crisis so they might very well just raise it anyway (or in case of EU bailout be forced to raise it no matter the consiquences).


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