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Thank Fathom It’s Friday – Cyprus’ remarkable recovery

Wind the clock back to 2012. The single currency bloc was hit by what economists like to call an ‘asymmetric shock’, in the form of a good old-fashioned banking crisis. Countries with astronomically large banking systems compared to the size of their economies, including Ireland, Iceland and Cyprus, were hit particularly hard, along with those such as Greece, whose public finances were already in a state of disarray. In Cyprus, the situation was particularly acute. Cypriot banks failed en masseand the mere integrity of the single currency area hung in the balance. The following year, Cyprus became the fifth country in the European Union to request a financial rescue package from the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF), collectively known as the Troika.

The bailout received by Cyprus in 2013 became famous for all the wrong reasons. It was the first of its type ever dished out which imposed a bail-in of bank deposits. This meant depositors were forced, in part, to pay for the rescue package. The decision sparked a bank run, forcing the government to shut all banks for two weeks to halt the haemorrhage of cash from the island. When the banks re-opened, the government imposed capital controls that allowed savers to withdraw a maximum of just €300 a day, a first among EU member states.To make matters worse, the sheer degree of overextension in the Cypriot banking system had spiralled so far out of control that it could only be matched by the likes of Iceland, whose banking sector also grew to multiples of the size of its economy. Cypriot banking sector assets ballooned to €143 billion by early 2012, almost eight times the size of the Cypriot economy. Cyprus also had the added handicap of precarious ties to the much maligned Greek banking system whose banks also had direct exposure to the tune of 150% of Cypriot GDP. Confidence was hit hard and Cyprus’ economy nosedived with annual GDP falling 6% in 2013.

However, unlike Greece, Cyprus was not subject to such severe austerity in the form of taxation and public spending cuts post 2012 which has meant its escape from recession has been a breeze compared to Greece’s experience. While Greece has flirted with positive GDP growth following the crisis, Cyprus seems to have shifted decisively towards economic expansion since 2015. We expect, in the short term at least, for that to continue as the cyclical upturn across the euro area takes effect. However, over a longer horizon, the outlook remains dire. Greece and Cyprus’ fortunes have always been, and will continue to be, inextricably tied meaning that if the Greek economy tanks, Cyprus will be dragged down with it. Nevertheless, we forecast annual Cypriot GDP growth to be 2.2% this year, above the 1.3% we have pencilled in for Greek growth.

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