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Tax plan degrades Cyprus’s banking status

Protesters shout slogans during an anti-bailout rally outside the parliament in Nicosia on Monday.


When Cyprus joined the European Union in 2004 there was a sense of euphoria among Greek Cypriots and a feeling that Europe would offer the divided island nation real prosperity. It hasn't turned out that way.

Once a thriving country with virtually no unemployment and steady economic growth, Cyprus is now among the most distressed places in Europe with unemployment pushing 16 per cent, a stagnant real-estate market and an economy expected to shrink this year for the second year in a row. Now a move by creditors to tax bank deposits as part of a $13-billion bailout has thrown the country of roughly one million people into more turmoil, with far-reaching ramifications for the economy and for any hope of reunification.

"It's an unfortunate decision that basically just destroys the country for a few years," Antonis Ellinas, an assistant professor of political science at the University of Cyprus, said in an interview from Nicosia.

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Cyrpus has always been an unusual EU member – a divided country where Greek Cypriots, numbering about 800,000, are part of the union and Turkish Cypriots, roughly 200,000, are not. Only Greek Cypriots use the euro, and trade and political relations between the two sides remain complicated. That all stemmed from 1974 when Turkey invaded the island and occupied the northern part after a Greece-inspired coup in the south. Most of the world recognized the south as Cyprus, leaving the north largely a Turkish outpost.

In the decades since, Cyprus became a banking, tax and real-estate haven for the rest of Europe. Wealthy Britons, Russians and others retired to the island, snapping up sun-soaked property and sinking their money in the country's sophisticated banking system. From the mid-1970s until 2008, Cyprus's economy grew at roughly 4 per cent annually and unemployment was almost non-existent. Even after the financial crisis started battering the country, many Europeans still put their money in Cypriot banks, believing in their security.

Even if the tax on bank deposits is amended or dropped, Prof. Ellinas and others believe the country's status as a global banking centre has been weakened. "So whether they go through with the haircut on the deposits or not, people will try to move their money elsewhere," Prof. Ellinas said. "It's a lose-lose situation."

As for any chance of reunifying the divided nation, that, too, has been put into doubt by the bailout plan. The Turkish north, while not part of the EU or the euro zone, has also stagnated economically although it has benefited somewhat from a resurgent economy in Turkey. Cyprus joined the EU just after Greek Cypriots rejected a reunification proposal, and while the EU has been keen to try again, many doubt it will have any credibility as a broker.

"The big advantage of the EU until now was that they could have created this additional layer of trust within the two communities," said Neophytos Loizides, a professor of international relations at the University of Kent in Britain, who specializes in Cyprus. "With this [bailout] decision, the Greek Cypriot public will never trust European leaders again."

There is some hope that the discovery of oil and natural gas might offer some long-term economic benefits. But for now, Cypriots on both sides of the divide are struggling to cope and showing little interest in joining together. "People are very negative at this point," Prof. Ellinas said. "Probably as negative, or even more negative, than they were [during the failed referendum] in 2004."

The country's political system has also taken a blow. President Nicos Anastasiades was elected just a couple of weeks ago, partly on a promise not to accept a tax on deposits. Whatever political capital he had has vanished and his party doesn't have a majority in parliament, making it uncertain the bailout plan will received the necessary approval. The result could be a stalemate that lasts for the remainder of Mr. Anastasiades's five-year term, or at least until parliamentary elections in 2016.

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