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The worldwide financial turmoil which started back in 2008 along with the real estate boom in Cyprus did not leave the economy of the island unaffected. At the heart of the crisis (2009-2010), major investments by a number of Cyprus banks were undertaken in Greek government bonds which were the final piece that brought an unprecedented economic crisis to the country. The two largest banks – Bank of Cyprus and Laiki Bank eventually suffered losses of more than €4 billion due to their high exposure to Greek government bonds. As a result, in 2012, the government became the major shareholder of Laiki bank as it was left with no alternative but to provide financial support amounting to €1.8 billion in an effort to secure the banks’ survival.  However, nobody ever anticipated it would come down to the point that the request of Cyprus for a bailout from the EU would entail cutting into bank deposits.

On 16 March 2013, President Nicos Anastasiades initially agreed to a €10 billion bailout deal with the Eurogroup, subject to the approval of the Cyprus parliament. The deal included prerequisites such as an increase of corporate income tax from 10% to 12.5%, an increase of the withholding tax on interest income from 15% to 30% (for CY residents), general reductions in public sector salaries and other allowances and a once-off bank deposit levy of 6.7% for deposits up to €100,000 and 9.9% for deposits more than €100,000 on all domestic bank accounts with the condition that the depositors be compensated with shares in their banks.  The aforementioned deal was rejected by the Cypriot parliament on 19 March 2013 with 36 votes against, 19 abstentions and 1 absent for the voting.

The Cyprus legislature went on to approve a plan to restructure Laiki Bank into a “good” and a “bad” bank where all accounts with credit balances up to €100.0000 would be transferred to the good bank along with all performing loans, and ultimately absorbed by the Bank of Cyprus. The bad bank will receive all credit balances in excess of €100.000 and non-performing loans. The deposits allocated to the bad bank will remain frozen until such time collection of loans is achieved and realization of assets to the extent possible so as to partially pay back the depositors.

After the rejection of the initial bailout deal by the Cypriot parliament, a new “revised” bailout deal with the Eurogroup for €10 billion was agreed on 25 March 2013, with President Anastasiades, which included the closure of the islands second largest bank, Laiki Bank, and aiming at safeguarding small savers by excluding insured deposits up to €100,000 from the equation but inflicting heavy losses on uninsured deposits.

According to the new plan, the Bank of Cyprus is to be recapitalized by its own funds through its depositors holding more than €100,000.   They are to contribute 37.5% of their deposits (‘haircut’) and another 22.5% will be frozen for the next few months for any future recapitalization, if needed. All insured deposits of €100,000 or less will not be affected. Savers affected are to be compensated with the issue of Class A shares of the bank. The Bank of Cyprus will also take over the Emergency Liquidity Assistance balance already provided to Laiki Bank by the European Central Bank which is estimated at € 9.4 billion. Deposits in other financial institutions except for Laiki Bank and Bank of Cyprus will remain unaffected.

Furthermore, temporary capital movement restrictions have been put in force by the Central Bank of Cyprus and are updated on a regular basis in order to control a possible capital outflow. These controls are being gradually relaxed on almost as daily basis and some examples of the current restrictions include; the transfer of deposits/funds to accounts held in other credit institutions is limited up to a specific amount per month, per natural and legal person in each credit institution within the Republic, limiting the amount of cash withdrawals per natural person, restricting the amount of cash permitted per natural person when travelling outside Cyprus and imposing strict controls on the termination of fixed deposits prior to their maturity.

The decisions of the Eurogroup have clearly shaken the confidence of the banking system and investors worldwide, criticized by many EU and third countries, depositors of all sizes and the international financial and banking sectors. Such a decision does not only appear to be potentially unconstitutional, depriving property from the citizens of Cyprus but moreover confirms that even lifetime savings are not necessarily safe in European banks, opening Pandora’s box of what may also lie ahead in the future for other fellow EU countries seeking financial assistance such as Spain, Italy, Portugal and so on. For Cyprus this has brought about significant concern over the consequences and effects such a decision will bring to the professional services industry as a whole, which is the strongest pillar of the Cypriot economy. It is worthwhile mentioning that some €30 billion Euros are held by Russian nationals in Cyprus banks alone and even though it is a well known fact that Cyprus is in a difficult financial situation, proposing to impose such a measure to say the least is a tremendous blunder as it has had a significant negative impact on the most prominent sector of the islands economy.

Just like all firms in Cyprus we too have been affected by the economic aftermath, both directly and indirectly. It was inevitable that we take difficult decisions and go through a daunting exercise of implementing measures to significantly reduce our overall costs so as to compensate and manage the now stringent cashflows.  Affecting also each and every “pocket” in one way or another, dealing with the psychological impact alone of both our clients and staff has certainly been a new challenge for us. On the other hand, retaining our existing business and even generating new business seems like climbing Mount Everest! Local businesses are ultimately a large part of our potential or existing client base, being extensively affected themselves they are in a constant battle to secure funding to preserve their working capital and exploit new investment opportunities as well as ensure their operational survival in the resulting “new” conservative market which has limited demand for products and services.

Despite all, the fiscal and monetary measures to be implemented are expected to reinforce both the Cyprus banking system and local business community, making them healthier and fundamentally stronger.  It is important to highlight that the ambiguity created by the recent developments in the banking sector should not be placed in the same basket with the country’s corporate sector. It still stands strong, with only minor changes being made to the tax and legal regime and thus retaining the ability to continue its role as one of the leading international business centers on the globe. Currently, more than 80% of the working population has a tertiary education, which demonstrates the potential and quality human capital has to offer to the economy as whole, including professional services.  Furthermore, the recent discovery of hydrocarbons (natural gas) in the exclusive economic zone of Cyprus has attracted the attention of the international community for its developing energy industry. No doubt an industry and a first for the country to capitalize on, which will significantly contribute to balancing the government budget in the medium to long-term, bring down operational costs for local businesses and households, as well as benefit generations to come.  Last but not least, 360 days of sunshine is a scarce resource! Being one of the most internationally renowned leisure locations, tourism is an industry which continues to grow and with plans in the pipeline for the development of luxury marinas, modern golf premises, sports training facilities and casinos, this will invariably offer new investment opportunities.