Skip to main content

Cypriots demand the resignation of President Demetris Christofias over the deadly July 11 munitions blast at a naval base. MONA BOSHNAQ/AFP/Getty ImagesMONA BOSHNAQ/AFP / Getty Images



In the lobby of the Hilton hotel in Nicosia, fashionable European and Middle Eastern bankers huddle over tables, iPads in hand, waited on by blonde Russian waitresses. Among them sit a pair of Greek Orthodox priests.

Through the window, sun-seeking tourists are splashing in the pool. A Ferrari is parked at the door.

Beyond this air-conditioned oasis, a thunderstorm is gathering over Cyprus.

Pensioner Leas Kontos, 65, is among a crowd of protesters outside the presidential palace. "The economy is in an abyss, we suffer daily hardships because of the power cuts," he rages. "It is a tragic situation, a disaster."

Soulla Athanassiou, 63, a housewife, agrees: "The president has ruined the country. He is an unrepented communist. God help us get rid of him."

After decades of prosperity, courtesy of an offshore banking industry that soaked up billions of dollars from Russian oligarchs and Arab dictators without asking too many questions, this fantasy island is now at risk of being dragged down by its gargantuan banking sector.

Concern is mounting that Cyprus may join Greece, Ireland and Portugal as the next ward of the European Union's new bailout fund.

The communist-led government helped spark the crisis by closing its eyes to a vast cache of Iranian munitions, seized en route to Syria, leaving them to bake in the sun for months - right beside the power plant that supplies more than half the island's electricity. When the weapons exploded earlier this month, killing 13 and destroying the power station, they also hit a nascent economic recovery and plunged the government into a full-blown political crisis.

"If it wasn't for the explosion, Cyprus would probably get by," says Stelios Platis, an economist and chairman of the Association of Cyprus International Investment Firms.

Now, he is not so sure. His countrymen are in a daze all around him, he says: "Cyprus has never found itself in a similar situation before - not since 1974."

That was the year of Cyprus' great, convulsive tragedy: the Turkish invasion that cleaved the island in two and still remains its animating political drama. Cypriots still recount how under fire from Turkish tanks, they scrambled out of their homes - some in their underwear - never to return.

But that event also planted the seeds of Cyprus's later prosperity. With its economy in tatters, the island decided to transform itself into an offshore centre - first for shipping, and then banking.

Thanks to its colonial history, Cyprus had a ready supply of British-trained lawyers and accountants. It paired them with a low corporate tax rate and a lax approach to money laundering. A golden decade followed the fall of the Soviet Union, with which the nonaligned and Christian Orthodox Cyprus had long enjoyed warm relations.

"When the Soviet Union started collapsing and the money needed to come out, it came through Cyprus," Mr. Platis explains. "That meant billions flowing through the system, and the banks grew very quickly."

With the cash came seamier people and habits, including a robust trade in eastern European women. In 2002, the International Criminal Court revealed that Cypriot banks had provided former Yugoslav president Slobodan Milosevic's main financial link to the outside world. Adding to this frothy mix were tens of thousands of British and other European ex-pats and a legion of hedonistic tourists.

One irony of so much banking prosperity is that it allowed the hyper-capitalist island to afford one of the best-paid and least-efficient public sectors in the world. More than 70 per cent of the population belongs to a labour union - even the bankers.

In spite of the easy money flowing in, Cypriot banks remained cautious. They steered clear of the toxic mortgage-backed securities that gutted U.S. and European banks in 2008. But, with their tiny home market saturated, they could not avoid the temptation of expanding into neighbouring Greece, where over the past decade they grew quickly again.

"Greece was a very natural option," says Andreas Charalambous, a senior economist at the finance ministry.

The banks picked up billions of euros in Greek government debt, loading their portfolios with loans. Marfin Popular Bank, the country's second-largest, holds some €12.5-billion ($18-billion U.S.) in Greek loans, or more than 40 per cent of its total book. Those loans are now under pressure as the cash-strapped Greek government staggers toward default.

The focus is now on President Demetris Christofias, a life-long communist party member with a shock of bone-white hair. There is a growing sense that the president, who speaks fluent Russian as a result of his studies in the Soviet Union, is ill-suited to manage a banking and financial crisis and unwilling to confront the powerful unions for even modest benefit cuts.

If Cyprus is forced to turn to the EU for help, its bankers may discover another nightmare - in return for support, Brussels would likely pressure Cyprus to adjust its low taxes and bank secrecy provisions.

Then the island may no longer be such an appealing haven for the world's cash.

Copyright The Financial Times Ltd. All rights reserved.

Interact with The Globe