Cyprus economy on right track, but still shackled by lack of liquidity

Eight months after Cyprus received bailout support, its economy has been declared to be on the right track but still facing dangers because of the lack of liquidity.

The Cypriot government, which took office just as the economic crisis reached its climax in March, has managed to pull the country back from the brink of default with a 10-billion-euro (13.7 billion U.S. dollars) assistance from the European Stability Mechanism and the International Monetary Fund (IMF).

However, the bailout came with harsh conditions on the eastern Mediterranean island's banking system.

After suffering huge losses on account of their extensive exposure to the write-down Greek bonds and drawing large amounts of emergency liquidity assistance (ELA) from the European Central Bank, the Cypriot banking system was forced to undergo a catastrophic shakedown.

It involved the closure of the island's second largest bank and the recapitalization of its main lender, Bank of Cyprus, with depositors' money.

The bank seized 47.5 percent of deposits over 100,000 euros to raise its core Tier 1 capital to the required 9 percent level, actually achieving level of 11 percent.

In the process it changed ownership overnight as its former depositors became its new shareholders.

The haircut on deposits undermined confidence in the once thriving Cypriot banks and led Cypriots to stash money instead of depositing them.

Marios Clerides, president of the island's Banking Association, estimated that Cypriots keep close to 1 billion euros either in their homes or in bank boxes out of fear of a possible new haircut on deposits.

Bank of Cyprus CEO John Hourican said in an interview "The (Eurogroup) experiment on the Cypriot banking system destroyed what the banks need most -- trust in them."

The Cypriot economy came out with flying colors from two evaluations by the troika, namely the European Commission, the European Central Bank and the IMF.

IMF chief Christine Lagarde said she was impressed at Cyprus' macroeconomic results after the IMF Board approved the release of a 87.5 million euro loan installment.

Recession this year was markedly lower than the 8.2 percent projection at the start of the year and is expected to close at about 7.5 percent.

Recession is projected to continue into 2014 at an estimated rate of 3.9 percent.

Citing macroeconomic results and projections, Finance Minister Haris Georgiades was able to pronounce the Cypriot economy safe despite challenges ahead.

"We have managed to avert the elevated risk of total economic collapse, our exit from the eurozone what we had achieved up to now being lost," said Georgiades in presenting the 2014 budget to parliament earlier in the week.

"The economy has proved more resilient than expected," he added.

But it is still lacking funds needed for its restart as businesses are struggling to stay alive in the coming year until growth returns in 2015.

Marios Mavrides, an economist and lawmaker, told Xinhua "We have managed to stay on our feet and the public finances and the economy are on the right track but the banking system is still faced with serious problems."

He said the most serious problem for the banks is the growing number of non-performing loans which is the main reason for the lack of liquidity.

It is estimated that bad loans at Bank of Cyprus alone have reached 48.5 percent as growing unemployment adds to bank debtors who cannot repay their loans.

"The banks have to do something about this problem ... and this means they have to start selling off mortgaged properties," Mayrides said.

However, selling properties on a large scale is a doubled edged knife which may hurt the banks. A large offer of properties will lead to lower prices and this is something the banks have to reckon with.

In a bid to help debtors who have lost their jobs, Bank of Cyprus announced that they can pay a nominal 10-euro fee or even less each month for a year, before they start paying only the interest after finding a job.

Unemployment has gone up to about 71,000, or nearly 17 percent of the economically active population. About one in four young people is out of work.

This is the most tragic aspect of the situation as about 6 percent of the previously well-off Cypriot population relies on charity handouts for their everyday living.

Job opportunities are expected to return when Cyprus embarks on big projects related to oil and natural gas development.

U.S. based Noble Energy has discovered considerable natural gas reserves in an offshore field and is discussing with the Cypriot government a partnership in building a gas liquefaction plant and other infrastructure at a cost of 10 billion euros, more than two thirds of the Cypriot annual economy.

Gas sales are expected to bring considerable revenue but gas is not expected to start flowing before 2020.

A more promising avenue has been opened up by an announcement by Noble Energy about the possibility if oil deposits amounting to 1.5 billion barrels lying under the gas bed.

Provided that seismic data prove true, oil could start flowing much earlier as its exploration does not require time consuming and expensive infrastructure.

The Cypriot government has cautioned against premature expectations but still counts on the exploitation of its natural resources for an early exit from its economic straits.

In the meantime, Cypriot President Nicos Anastasiades is taking off time from pressing government work to travel to several countries soliciting foreign investment.

He has already visited countries of the immediate region and is planning more trips to Russia and China early next year.