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UPDATE ON THE CYPRUS ECONOMY
Cyprus reached a €10bn bailout deal with international lenders on Monday (25/03/2013) morning. The deal avoids a levy on bank accounts but will force large losses on big deposits in the island’s two largest lenders Bank of Cyprus and Laiki Bank. What is important is that the European Central Bank will keep its emergency lifeline open to Cypriot banks thus the Cyprus banking system will remain operational.
Everybody agrees that the Cypriot economy has suffered a serious shock and it will take some time before recovery. The deal is painful but necessary.
Key things to note for the new program are:
- It spares all bank deposits below €100,000.
- It affects only bank accounts held at Laiki Bank (Marfin Popular Bank) and Bank of Cyprus. Bank accounts or deposits in other banking institutions are not affected.
The day after tomorrow.
Despite the blow on the economy, Cyprus continuous to have considerable advantages as an international business center.
The main are:
- Lowest tax in Europe. The corporate tax will go to 12.5% from 10%, but it will still be the lowest in Europe.
- A favorable and business oriented tax system
- An impressive network of Double tax treaties.
- Member of the European Union and not a tax heaven.
- Business educated personnel.
- Stable and trustable legal framework.
The failure of the system in Cyprus was triggered by the wrong business decisions of the Boards of Directors of the two main banks Laiki Bank and Bank of Cyprus who decided to invest in the Greek bonds at a time that international markets were selling. The haircut in Greece created from one day to the other a €5bn deficit in the Cyprus banking sector which in turn initiated a tsunami effect on the rest of the economy.
As a result, the source of the crisis was not with the system as such or the Cyprus business model.
It is true that the depositors of the banks that created the problem (Laiki Bank and Bank of Cyprus) are penalized. The freezing of a percentage in deposits over €100,000 for some time is profoundly illegal and it is certain that legal action will be taken by the bank’s clients. Nevertheless, the loss will be compensated by the Bank of Cyprus’s shares the value of which will increase in the future.
However, we all need to see the next day.
The advantages that Cyprus has to offer as a business center are still there and cannot be ignored by the international business community. On the contrary, the current crisis creates unique opportunities.
Cyprus has rich natural gas resources and in a matter of 2 to 3 years, income will flow in from investment and in 5 to 10 years from the proceeds from the exploration of gas. Therefore the potential is still there.
From our side we will work hard to keep or regain the confidence of our clients and provide the best possible service and advice.