What’s Needed to Resolve the Cyprus Issue?
According to experts, international financial assistance will not solve all the country’s problems
A € 10 billion deal to provide Cyprus with an end to financial market panic and talk that the island nation will have to leave the eurozone.
Speaking to reporters following talks in Brussels, Cyprus Finance Minister Michalis Sarris welcomed the agreement.
“The long period of uncertainty and instability in the Cypriot economy is finally over. I believe that by doing so we have eliminated the likelihood of bankruptcy and provided guarantees for future generations, ”said Sarris..
The long period of uncertainty and instability in the Cypriot economy is finally over. I believe that by doing so we have eliminated the possibility of bankruptcy and provided guarantees for future generations.
Michalis Sarris, Minister of Finance of Cyprus
In turn, the head of the IMF Christine Lagarde, noted that the negotiations brought “good results.” According to her, she recommended the IMF to take part in providing assistance to Cyprus. “We believe that this will be a long-term and full-fledged solution to the crisis,” – said the head of the IMF.
The agreement provides for a significant reduction in the Cypriot banking sector and the introduction of a tax on deposits in the amount of more than 100 thousand euros. In addition, international investors demand from the government of Cyprus to cut costs and carry out a number of economic reforms, including the privatization of state assets..
According to Tomasz Michalski, an economist at the Parisian business school HEC, in the short term, this will lead to the fact that Cyprus, in an attempt to fulfill the terms of the agreement and restore the economy, plunges deeper into recession..
“A lot of people will lose their jobs. The authorities will probably have to raise taxes, because the tax regime in the country is too soft at the moment. They will also have to significantly cut government spending, including pensions, ”Michalski said..
According to him, a serious blow also awaits large foreign depositors who keep money in Cypriot banks, including Russians and Britons..
This whole offshore tax haven will be hit by a shockwave. By investing in banks of such countries, you always take risks. From the point of view of the governments of the high tax countries in the eurozone – such as France, Belgium, Germany – where, as we know, people often try to evade taxes, this is very good news.
Tomasz Michalski, economist at HEC Paris Business School
“This whole offshore tax haven will be hit by a shockwave. By investing in banks of such countries, you always take risks. From the point of view of the governments of the countries with high taxes in the eurozone – such as France, Belgium, Germany – where, as we know, people often try to evade taxes, this is very good news. “.
The agreement ensures that the European Central Bank will continue to provide financing to Cypriot banks. However, as noted by Janis Emmanuilidis, an analyst at the European Policy Center in Brussels, this also means that Cyprus needs to look for another growth strategy:
“The Cypriots hope that they will be able to compensate for losses in one sector – banking – at the expense of the energy sector. Now oil reserves are found off the coast of Cyprus. But it will take time to develop them. It will take a couple of years before these resources can be put into full operation, ”says Emmanuilidis..
Following the lead of Greece, Ireland and Portugal, Cyprus has become the fourth eurozone member to receive international financial assistance since the crisis began in 2009..