The offshore history of Cyprus has come to its end

On Monday night the Cypriots found out how to prevent Cyprus from default. The island country will receive 10bn euro of financing from the European Commission, European Central Bank, and IMF. Though no disputable tax on bank deposits was imposed, two largest banks which suffered from Greece debts remission - Bank of Cyprus and Cyprus Popular Bank (Laiki) -- will have to fall victims.


In doing so, the troubled banks will be qualified as ‘good’ – Bank of Cyprus, and ‘bad’ – Laiki. Bank of Cyprus will be restructured and resized, 30% will be deducted from its deposits and customer accounts of more than 100,000 euro to recapitalize the bank. Laiki will go bust, its ‘good’ assets will be transferred to Bank of Cyprus, deposits and accounts of less than 100,000 euro will be kept intact and transferred to Bank of Cyprus.

This is an absolutely standard scheme of banking system reanimation, when assets are qualified as ‘bad’ and ‘good’. The ‘bad’ bank will undergo the following procedures: securities will be issued against ‘bad’ assets, whereas some assets will be written off. The ‘good’ bank will continue to operate. In general, the banking system has been saved but reputation lost. The money generated from the rehabilitation of the ‘bad’ bank will be sufficient to save the banking system, as there is nothing left to save. 

However, no money can restore the previous Cyprian banking system, nor anyone intends to. The Cyprian banking sector is going to see radical changes in the future. I think that the offshore history of Cyprus has come to its end. The Cyprian banking system will be designed to do nothing but provide financial services to Cypriots and tourists. 

It is hard to say whether Cyprus is going to face a new wave of recession or the fire has been put out. In any case, Cypriots will have to put themselves to work, which is what they have failed to do good to date. Hopefully, offshore energy resources would help resolve the problem. However, Turkey has already claimed these oil fields, thereby complicating the process of enticing foreign investors to develop the shelf. As a matter of fact, this is why Russia paid no serious interest in energy resources of Cyprus. 

Vedev А.L. – Director of the Center for Structural Studies