23rd Mar 2018


Cyprus 'business model' was no mystery to EU

  • Cyprus joined the euro only five years ago (Photo:

Be it the German finance minister, European Central Bank (ECB) officials or the head of the Eurogroup - they all agree on one thing: Cyprus must scrap its "unsustainable business model" based on low taxes and attracting large amounts of bank deposits from abroad, mainly Russia.

The Cypriot banking sector, relying largely on deposits, is more than seven times the size of the island's economy - which means that if the banks go bust, the state cannot cover their losses.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

And if Cyprus wants help from its fellow eurozone countries, Russian and local depositors will have to take a hit.

"The banking sector in Cyprus simply has no future in its current form. Everyone in the Eurogroup agreed on this," German finance minister Wolfgang Schaeuble told public broadcaster ARD earlier this week.

"The Cypriots' hope they could continue like this, attracting capital with low taxes and lax regulation, and then others should pay for it when the model doesn't work any more - this is unfortunately an illusion and the ones in charge should explain this to their population," he added.

Speaking in the European Parliament on Thursday, Eurogroup chief Jeroen Dijsselbloem also said that Cypriot banks "have to be downsized and rebuilt on a healthy and sustainable business model."

But the Cypriot business model is not something that they all discovered just now.

In a so-called convergence report dated 2007, one year before Cyprus joined the eurozone, the ECB mentioned the large influx of capital.

"Much of the financing of the deficits in the combined current and capital account over the past two years has also come from capital inflows in the form of 'other investment,' comprising non-resident deposits and loans," the report says.

"Other investment inflows amounted to a sizeable 11.3 percent of GDP in 2006. Since capital inflows exceeded the current and capital account deficit between 2004 and 2006, Cyprus experienced an accumulation of official reserve assets in this period," it adds.

One data chart on foreign deposits published on the ECB website shows that the inflows of foreign deposits increased to a peak of over €19.2 billion in 2011, €1 billion more than the size of the overall economy.

"The ECB did know about the Russian money flowing into the island. Technically it's impossible not to know it," says Yasen Iliev, an investment banker with New Europe Corporate Advisory, a Sofia-based consultancy.

"Large imbalances in the GDP components, such as the oversized Cypriot banking sector, were an obvious time bomb easily noticeable to students in macroeconomics, let alone central bankers," he told this website.

He said the main reason why nobody said anything at the time was political.

"I believe the Cypriots somehow thought the party will go on indefinitely. The rule of thumb in Brussels and Frankfurt was to 'let go,' probably because of [Cyprus'] dispute with Turkey or maybe because the island's economy was too small to care about. As a consequence, the Cypriots grew up like kids who know their parents will get angry at them from time to time, but they will never kick them out of the house," he added.

For his part, Peter De Keyzer, chief economist with BNP Paribas bank in Brussels, agrees that letting Cyprus into the eurozone had less to do with economics than politics.

"Ten years ago, Cyprus was not even an EU member. Then it joined the EU, the eurozone, it even held the rotating EU presidency last year. This was clearly a political process," he told this website.

"And it strikes me that with Latvia potentially joining the euro next year - with all due respect to what they've been through and accomplished - it is again a political decision that has nothing to do with economics," he added.

Pressed on how much the German government knew about the business model in Cyprus over the past few years, government spokespeople in Berlin say that the flaws became evident only after the financial crisis.

"The crisis has uncovered weak spots in the business models that were built on very thin ice," said Martin Kotthaus, the spokesman of the German finance ministry.

"We now have to deal with the situation as such. It is not a reproach, each country is free to set their own taxes as they please. But then nobody can claim that a state that has chosen low taxes on purpose, should be completely financed with the tax revenues of other states," he added.

Cyprus struggling on bailout Plan B

With no firm offer from Russia, Cypriot officials are scrambling to find alternative money to secure a €10 billion EU bailout.

Cyprus rejects bailout deal

The eurozone plunged into uncertainty on Tuesday after the Cypriot parliament rejected its EU bailout plan by an overwhelming majority.

Eurozone agrees Cyprus bailout 2.0

Cyprus' Laiki bank is to be wiped out. Depositors in Bank of Cyprus will also take a hit under a new bailout deal. But details remain sketchy.

Cyprus MPs pass bank laws, start bailout talks

Cyprus edged back from the brink of bankruptcy on Friday after MPs agreed to a series of emergency reforms - including capital controls - in a bid to avoid financial meltdown.

News in Brief

  1. EU will be exempted from tariffs, says US minister
  2. Malmstroem: EU 'hopes' for US tariffs exemption
  3. Parliament must publish 'trilogue' documents, court says
  4. Italy's centre-right set to share top posts with 5-star movement
  5. Brussels condemns tear gas in Kosovo parliament
  6. Finland pays billionaire €400,000 in EU farm subsidies
  7. 44 leaders sign up for Africa free trade area deal
  8. British 'blue' passports to be made in EU

Stakeholders' Highlights

  1. EUobserverStart a Career in EU Media. Apply Now to Become Our Next Sales Associate
  2. EUobserverHiring - Finance Officer With Accounting Degree or Experience - Apply Now!
  3. ECR GroupAn Opportunity to Help Shape a Better Future for Europe
  4. Counter BalanceControversial Turkish Azerbaijani Gas Pipeline Gets Major EU Loan
  5. World VisionSyria’s Children ‘At Risk of Never Fully Recovering', New Study Finds
  6. Macedonian Human Rights MovementMeets with US Congress Member to Denounce Anti-Macedonian Name Negotiations
  7. Martens CentreEuropean Defence Union: Time to Aim High?
  8. UNESDAWatch UNESDA’s President Toast Its 60th Anniversary Year
  9. AJC Transatlantic InstituteAJC Condemns MEP Ana Gomes’s Anti-Semitic Remark, Calls for Disciplinary Action
  10. EPSUEU Commissioners Deny 9.8 Million Workers Legal Minimum Standards on Information Rights
  11. ACCAAppropriate Risk Management is Crucial for Effective Strategic Leadership
  12. EPSUWill the Circular Economy be an Economy With no Workers?

Latest News

  1. EU summit takes hard look at Russia
  2. Germany casts doubt on Austrian intelligence sharing
  3. EU leaders set for 'stormy debate' on digital tax at summit
  4. EU praises Turkey on migrant deal despite Greek misery
  5. Judicial reforms 'restore balance', Poland tells EU
  6. Whistleblower fears for life as US arrests Malta bank chair
  7. Behind the scenes at Monday's EU talks on Russia
  8. US yet to push on Nord Stream 2 sanctions

Stakeholders' Highlights

  1. European Jewish CongressThe 2018 European Medal of Tolerance Goes to Prince Albert II of Monaco
  2. FiscalNoteGlobal Policy Trends: What to Watch in 2018
  3. Human Rights and Democracy NetworkPromoting Human Rights and Democracy in the Next Eu Multiannual Financial Framework
  4. Mission of China to the EUDigital Cooperation a Priority for China-EU Relations
  5. ECTACompetition must prevail in the quest for telecoms investment
  6. European Friends of ArmeniaTaking Stock of 30 Years of EU Policy on the Nagorno-Karabakh Conflict: How Can the EU Contribute to Peace?
  7. ILGA EuropeCongratulations Finland!
  8. UNICEFCyclone Season Looms Over 720,000 Rohingya Children in Myanmar & Bangladesh
  9. European Gaming & Betting AssociationEU Court: EU Commission Correct to Issue Guidelines for Online Gambling Services
  10. Mission of China to the EUChina Hopes for More Exchanges With Nordic, Baltic Countries
  11. Macedonian Human Rights MovementCondemns Facebook for Actively Promoting Anti-Macedonian Racism
  12. Nordic Council of MinistersGlobal Seed Vault: Gene Banks Gather to Celebrate 1 Million Seed Collections