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Friday, March 29, 2013

Cyprus looks to its past for economic reboot





LONDON (AP) — As it grapples with the prospect of years of economic pain, Cyprus will try to draw strength from its not-so-distant experience of invasion — and the fact a whole generation knows what it means to rebuild from scratch.

In many ways, the challenge facing Cyprus now following an international bailout that effectively wipes out a hefty chunk of the banking sector is more daunting than the events of 1974 when the island was split into an internationally recognized, Greek-speaking south and a breakaway Turkish north, following Turkey's invasion in the wake of an attempted coup by supporters of union with Greece.

The country's room for maneuver is limited, given that it has already largely exhausted the potential for development from a primarily agricultural state.

[...] any reboot of the economy of the Greek-Cypriot side — the part of the island that has joined the European Union and is afflicted by the recent bailout woes — will have to be done within the limitations of a colossal debt mountain, a collapsed property bubble, a sclerotic European economy and a seeming dearth of international sympathy.

"A lesson that came out of 1974 was that people learnt that you could lose your property, your money, but if you've got an education, you can start again and rebuild," said James Ker-Lindsay, a senior research fellow at the London School of Economics, who has written extensively on modern Cyprus.

The booming financial sector got a further turbo charge from the collapse of the Soviet Union in the early 1990s, and Russian money — some thought to be of dubious origin — started flowing into the country's banks, an influx of capital that further unbalanced the economy.

[...] Europe's debt crisis and in particular the problems of Greece tore up the Cypriot economic model and the country eventually had to accept an onerous package of measures to stave off bankruptcy, including the closure of its second-largest bank, Laiki, and a whack on big depositors.

"Should the current banking sector instability result in a prolonged breakdown in the domestic payments system, this would lead to a surge in corporate bankruptcy and drive a deeper GDP contraction," the ratings agency Fitch warned.


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