Cyprus economy one year after the deposits raid
A look at various economic indicators
In March 2013 Cyprus made international headlines. The EU decided on a radical solution to resolve the perfect crisis that was brewing in Cyprus. Bank deposits were raided to restore banks’ capital buffers, draconian capital controls were put in place and the government was to undergo strict fiscal consolidation.
In the ensuing months, the Cypriot economy showed signs of unexpected (and indeed welcomed) resilience, adapting faster than anticipated, beating even the most optimistic forecasts.
This will be a graph heavy post as I attempt to quantify the deposits raid impact on various sectors of the economy. Data obtained from the Cypriot statistical Service Cystat and from the Central Bank of Cyprus.
Construction
Cystat has set 2010 as the reference year (100 points)for measuring the Construction production index. Therefore the data do not accurately reflect the drop in construction (construction peaked in 2008).
* Note to the graph: 2013 provisional data
Consumer Price Index
CPI was increasing till 2013 despite the overall decline in the economy and the increase in unemployment. The trend reversed in 2013.
Retail total Volume Value
Retail Value decline began in 2011 and continued to fall throughout 2012 and 2013.
Tourism
Admittedly the bad press Cyprus received in 2013 had an impact on tourist arrivals especially from Western Europe. However Tourism Revenue continues to grow as the drop in revenue from Western Europe tourists is offsetted by heavy spenders from Eastern Europe and Russia.
Average Monthly earnings
This indicator is a bit misleading as CyStat does not make the distinction between public sector and private sector workers. The 2nd group saw their earnings decline earlier than their public sector counterparts. Upon signing the MoU the republic of Cyprus decreased public sector wages on a progressive scale.
Unemployment
Unemployment continues to increase at a steady pace and has reached alarming unprecedented levels by end 2013. Construction and Retail related professions are the hardest hit categories making up close to 1/3 of all unemployed. Additionally the financial services sector (excluding banks) seems robust and is the only sector that continues to add new jobs.
Total Trade (EU and the rest of the world)
Cyprus does not export much and its trade deficit is the largest of the EU’s 28 member countries. Due to the ongoing crisis total imports have dropped dramatically while Cypriot exports held steady or marginally increased.
Government finances
In 2013 there is a noticeable drop in government revenue which was off-setted by the government’s fiscal consolidation drive. Overall the primary deficit was narrowed to 332mn in 2013 from the lowest in 5 years.
Final Data from CySTAT
Monetary and Financial Statistics
Cyprus has yet to lift the draconian restrictions on capital imposed in 2013, although these measures have gradually eased since. According to a road map drafted by the Cypriot Ministry of Finance,the Central Bank and the Troika certain banking milestones have to be achieved before lifting restrictions altogether. In recent interviews the Minister of Finance Harris Georgiades has said that by end of 2014 restrictions on movement of capital within Cyprus will be lifted.
Total Deposits
As per the bailin-out agreement between Cyprus and the Troika, Cypriot banks’ Greek operations were carved out, insulating Greece from the Cypriot crisis. As a result deposits from Greece were completely wiped out from the system.
Despite capital controls there was a steady deposit outflow as people feared more bailins. The situation has somewhat stabilised in the last few months of 2013 but remains critical.
Total loans
Banks have embarked on a consolidation drive. Households and businesses are slowly delevaraging as credit availability remains scarce.
According to Hellenic Bank and Bank of Cyprus preliminary financial results for 2013, a massive 46-49% of all loans (46% for Hellenic, 49% for Bank of Cyprus) are classified as non performing, up 22-27 percentage points from 2012.
Emergency Liquidity Assistance Funding
Since March 2012 the now defunct Laiki bank (also known Cyprus Popular Bank ) was constantly drawing liquidity from the Cypriot Central Bank. ELA funding peaked at 11.4bn euro in March 2013. Under the bailout agreement Laiki was split into a bad and a good bank. The bad bank is now under liquidation while the good bank was absorbed by its competitor Bank of Cyprus which is now liable to repay Laiki’s ELA.
In June 2012 Republic of Cyprus debt was downgraded to junk status by all three major credit rating agencies. Thus Cypriot debt was no longer acceptable as collateral by the ECB, consequentially Cypriot banks had to rely exclusively on ELA.
In late summer of 2013 the ECB announced it was reinstating the freshly recapitalised Bank of Cyprus as an eligible counterpart for monetary operations. Additionally the ECB announced that it was accepting Cypriot debt as collateral (subject to a haircut) for bank funding.
As a result, ELA decreased to 9.55bn euro while ECB funding increased to 1.6bn by the end of 2013.
Summary
Upon receiving the news of the terms of the Cypriot bailout many people thought (including myself) that Cyprus was going to sink faster than the Titanic. The data show that the deposits raid did little to exacerbate an already bad situation.
Some sectors of the economy exhibit profound resilience (financial services, tourism) while others continued their decline that began long before the events in March 2013 (construction, retail).
In addition, the government’s strict adherence to budget targets have helped to off set the steep decline in revenue and thus stave off the danger of new fiscal measures (either taxes or expenditure cuts) for the foreseeable future.
Banks continue to be an on going concern as the increase in unemployment and the decline in economic activity, means that more loans will turn sour eroding the banks’ capital base.
Updates
- 25 April 2014: Final Data on Government Expenditure.
