By Angelos Anastasiou
In the increasingly likely event that Greece defaults and is forced to exit the eurozone, the economic impact on the state’s finances will be minimal and manageable, though probably not negligible for the private sector, experts have told the Sunday Mail.
For the past few months, the issue of Greece has dominated the agenda across Europe – and beyond – but no light has appeared at the end of the tunnel. At every major milestone, the question on the impact of a possible ‘Grexit’ returns, as a convincing answer continues to elude everyone involved.
Throughout the saga, Cyprus has been a case of special concern despite its small size, not just because of its traditionally close commercial and cultural ties to Greece, but also due to its own particularly fragile economic circumstance. In the wake of a substantial ‘haircut’ of privately-held Greek sovereign debt in 2012, which left the two largest banks desperately undercapitalised and plunged the country into an economic spiral to the bottom from which it is still trying to recover, Cyprus, too, has asked itself the Grexit question, and those in the know have been positively reassuring.
“Cyprus’economy has been stabilised and sufficiently ring-fenced,” Finance Minister Harris Georgiades said in February, following a Eurogroup meeting that produced no hope for a deal on Greece.
“My concern [over the deadlock in talks] relates to Greece – not Cyprus.”
Days later, President Nicos Anastasiades was even more confident.
“Firstly, there is no significant risk of a ripple effect on the Cypriot economy,” he said of a possible Grexit.
“But even in the unlikely event that we are impacted, a series of measures have been planned to minimise it further.”
It is a message officials have reiterated repeatedly ever since.
And on Friday the Central Bank was quick to reassure the public that Greek bank subsidiaries on the island were ring-fenced and faced no risks from the instability in Greece.
“There is no cause for concern,” said Yiangos Demetriou, the head of the CBC’s supervision department.
He said the four subsidiaries of Alpha, National Bank of Greece, Eurobank, and Piraeus were Cypriot entities, having the Greek banks as shareholders. They are licensed and supervised by the CBC, are adequately capitalised and have enough liquidity.
“We do not see any risk from any development there might be in Greece,” he said.
Asked whether the shareholder could influence the lender’s capital and liquidity, Demetriou said the CBC has measures in place and has, along with the European Single Supervisory Mechanism, ensured that any exposures have been eliminated and there is no Greek risk in the subsidiaries’ books.
Such confidence-boosting assurances notwithstanding, the Fiscal Council’s Spring Report, published on Wednesday, warned of risks to the Cypriot economy relating to “instability in Greece” – code for a Greek default.
According to Bloomberg stats, Cyprus is exposed to Greek government debt to the tune of over €1.5 billion, or 1 per cent of GDP. In case Greece reneges on its obligations, part or all of these holdings will be wiped out, leaving the country to cope with yet another gaping hole in its balance sheet.
“In such a case, the real question boils down to whether the European Central Bank and the EU have an emergency-response plan for Cyprus – and it’s a safe bet that they do,” a government official who spoke on condition of anonymity told the Sunday Mail.
According to the official, the recent favourable remarks made by EU officials, including Economy Commissioner Pierre Moscovici who deemed Cyprus a “bailout success model”, are no coincidence.
“By now, it has been established that the EU had been excessively harsh on Cyprus in March 2013,” he claimed.
“They know, now, that we weren’t trying to trick them into bailing us out so we could keep spending their money recklessly, and that we were genuinely willing to change so that we wouldn’t have to ask for more down the line.
“Also, they have reasons to support Cyprus in order to demonstrate that they have nothing against ‘the South’, or Mediterranean EU states, as they are often accused. But most importantly, they need to strengthen the argument that conditional bailouts work.”
Of course, even if that is the case, the fallout from a Greek default would not be limited to losses on sovereign debt held.
“There are many large Greek companies operating in Cyprus,” the official said.
“They will likely face major trade disruptions and dramatic cost spikes overnight, were Greece to leave the Euro and adopt its own currency.”
Director of the Cyprus Technical and Commercial Chamber (KEVE) Marios Tsiakkis shared this view, saying that while the precise nature of Grexit’s impact on Cyprus is unpredictable, the outcome would certainly be undesirable.
“To be honest, I still believe all this may be nothing more than face-saving brinksmanship,” he said of the increasingly acrimonious negotiations between Greece and its international lenders that seem to be dragging on after the eleventh hour.
“As KEVE, we hope and wish that logic and mutual understanding will prevail, because Greece’s ousting from the eurozone will serve no one’s interests – not Greece’s, not the EU’s, and not the euro’s.”
Hoping is one thing, but what of the possible consequences to Cyprus in practical terms? As with everyone else, Tsiakkis could only speculate.
“The possible impact on Cyprus is unpredictable, really,” he said.
“We have strong commercial ties with Greece, and we produce many similar products. Grexit, of course, would herald a substantially depreciated drachma. In real terms, this means that anything produced in Greece would be much cheaper than it is now – so that would hurt the competitiveness of our exports to Greece.
“Additionally, tourism might also be dealt a blow, because the Greek islands will instantly become a cheaper destination. Thus, many tourists who may have planned to visit Cyprus could opt for Greece. And even Cypriot tourists may look at Greece more favourably, relative to local tourist products.”
On the other hand, Tsiakkis added, Greece under the drachma would see import prices rise substantially, translating to an added threat to Cypriot exports.
“We really hope this scenario doesn’t materialise, and that cooler heads prevail,” he said.
The three-year old question of Grexit looks like it’s about to be finally answered in the coming days. Greece is either going to clinch a deal with its counterparts, or it is going to be forced out. What the outcome of each scenario will be, for Cyprus and the world, can only become known in practice, down the line. But what is already a given on the island is the hope of both the government and the business world in Cyprus that the answer to “what happens if Greece is ejected” remains theoretical.