The Cyprus bailout is different, not only due to the bail-in

Agora Contributors: Alexander Apostolides, Charis Michalis
Photo by Myrto Papadopoulos []
Photo by Myrto Papadopoulos []

The Cyprus programme as agreed in March 2013 was different from the Greek and other eurozone bailouts in more ways than just the bail-in of uninsured depositors at the country’s two major banks.

There are distinguishable divergences from the Greek memorandum that allow us to identify the change in the perception of what share of the blame is apportioned to the member country and what to the creditor. It explicitly separates responsibility in an unprecedented way.

It is foolish to argue if Official Sector Involvement (OSI) will take place in the eurozone bailout countries as it has already happened in Cyprus through a rollover of loans and a reduction of interest rates.  The Cyprus bailout was the first to demand from Russia to restructure a loan of 2.5 billion euros that was due within the bailout window period.

Although the principal remains the same, the loan has been pushed forward to 2018-2021 and the interest is now at 2.5 percent. It is still not general public knowledge that a much smaller amount of 0.6 million (an amount outstanding in December 2012) that is owed to the French Treasury was spared of such restructuring. Of course other nations such as Ireland, Portugal and Greece have received similar rollover of loans granted to the troubled governments by other eurozone countries. Yet in Cyprus it is the first time a non-European Union State was explicitly asked to take part in the pain of restructuring.

In terms of fiscal consolidation the ESM/IMF has found a political class that is mostly in favour of more austerity measures, perhaps as a political overreaction to the perceived lack of sufficient austerity measures under the previous government, led by Demetris Christofias between 2008 and 2013. In general terms it seems similar to the Greek second bailout programme: Fiscal consolidation comprises of privatisation of state enterprises and breakdown of state guaranteed monopolies and an absolute reduction in the number of public workers.

Yet the devil is in the detail: privatisation is put in a very different framework than in Greece, avoiding the establishment of a privatisation authority and earmarking three organisations for sale prior to the expiration of the memorandum (Expected to raise 1.4 billion, 1 billion of which is needed for state funding during the duration of the programme).

The large amount of public workers retiring in order to claim the very high (and still tax-free) one-off retirement allowance (εφαπάξ) perhaps makes the mandatory layoffs expected of Greece unnecessary in the case of Cyprus despite the commitment to reduce the size of the civil service by 4/5,000 persons. This is not without a cost, however. The large payouts to retiring civil servants are a real drain on the limited resources in the government’s very truncated budgets of 2013 and 2014.

Shockingly, the memorandum attacks the most competitive sector of the economy: business services. The increase in the corporate tax rate to 12.5 percent makes Cyprus more expensive for Cypriot companies and individuals than other destinations since they also have to pay the Cyprus Defence Tax of 15 percent on dividend and rent and 30 percent on received interest (the last raised to that amount on January 2013).

Business Insiders claim that as of 2014, new regulations on the registration of companies and of regulation of their business is expected to both increase the cost of doing business in Cyprus and increase the “annoyance” factor of doing business in Cyprus. Large companies domiciled in Cyprus are already fretting about being subject to capital controls, which leads to the divulging of substantial information to the Cypriot central bank.

*Alexander Apostolides is an economic historian at the European University Cyprus. For his analysis of economics and politics in Cyprus and Malta visit:

*Charis Michalis is a research assosiate at the European University Cyprus

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