Will Cyprus survive as an international financial centre?

Yes

Evgenios C. Evgeniou, CEO of PricewaterhouseCoopers Cyprus

The eurozone crisis interrupted more than three decades of growth for Cyprus as an international business hub. The consequences have been harsh for the country, with the banking sector bearing the brunt of a financial assistance package which will see one bank wound down and another recapitalised through a depositors’ bail-in.

The signed MoU (memorandum of understanding) sets out measures for restoring the soundness of the banking sector, controlling public finances and ensuring sustainable growth. Cyprus has secured the funds needed and has agreed to implement reforms that, despite the pain, will ultimately strengthen the economy. Following its restructuring, the key Cypriot bank will find itself on a stronger capital footing, enabling it to focus on serving the needs of businesses and individuals in Cyprus, while unaffected local and international banks may identify new opportunities. Lifting of capital controls and diligent implementation of the MoU will be necessary to restore the country’s credibility and to regain the trust of the markets.

The main pillars of the development of Cyprus as a business centre, which have been the tax, legal and regulatory frameworks and the quality of professional services, have remained fundamentally unchanged. Furthermore, the strategic geographic location as a European gateway to the East and the excellent living conditions were beyond reach in the context of the MoU agreement.

The country retains one of the most competitive tax environments in the EU, fully compliant with the EU Code of Conduct and OECD Harmful Tax Practices, working under double taxation treaties with 47 countries. It has a robust common law linked legal system (based on English law), easily understood by international businesses.

Cyprus continues to have an excellent EU-compliant regulatory environment and recognised central administration companies, providing operational support and reporting solutions to a wide variety of holding and financing companies, funds and investment management firms.

According to the final round evaluation report by Moneyval, Cyprus ranks higher in FATF-compliance than most other EU countries and is on the OECD ‘white list’. Per the MoU Cyprus has agreed to further improve AML implementation, on the basis of an audit by Moneyval and an independent auditor, to make Cyprus best of class in the EU.

In shipping, the island is the only EU approved ‘Open Register’ with one of the most competitive and wide ranging taxation systems covering ship owning, ship management and chartering, offering a secure, legally transparent and attractive basis of operation.

The World Economic Forum identified Cyprus as one of 35 innovation-driven economies in 2011-12. The country enjoys a highly-qualified and multilingual workforce and the professional services sector is dominated by UK qualified accountants and lawyers with deep expertise and collective experience.

Cyprus will not relinquish its unique advantages as an international business hub. The underlying strength in professional services and non-financial sectors of the economy will be important to Cyprus’ long-term economic recovery. The active maritime, technology, education and tourism industries continue to require a stable financial services sector to support their activities. On the horizon, the commercialisation of natural gas reserves will augment this requirement and necessitate the provision of new and specialist services.

An EU member for nine years, Cyprus is committed to both the Union and the common currency. Operating within its legal and regulatory frameworks, the country will focus on developing key, vibrant industries with an emphasis on innovation to further evolve as a competitive and reliable international business hub. Cyprus has faced crises before, emerged stronger from them, and will do so again. 

No

 Ray Soudah, Founder of MilleniumAssociates AG

Ray Soudah

The killing of the Cypriot financial centre, and with it the oversized banking sector, was a precondition of the only viable option available to Cyprus within the troika bailout plan; otherwise a formal default and exit from the eurozone accompanied by a massive immediate devaluation would have certainly been the only remaining avenue. Pain over years versus pain now was the choice; in both cases the past cannot continue and anyone who argues the financial sector can recover and that Cyprus can be a viable financial centre in the foreseeable future is dreaming.

Free enterprise in combination with brave political parties of all colours should examine the strengths and situ of the Cypriot people and environment and organise a recovery plan made up of certain major initiatives as well as thousands of minor ones, all working towards turning around a tragic situation into a flourishing country once more.

While there is no point in making excuses for the Cypriot banking crisis which caused, and still causes global shockwaves and even brought into question the mere existence of the Euro and its zone, it must be said that many EU countries have had banking crises of significant size which required massive bail outs and such financial issues are still not nearly resolved in many countries.

If there were basic failures other than the oversized and undercapitalised banking system, two such can be remarked upon which have been basically overlooked, for which Banking supervisors and boards must share the responsibility. Firstly the lack of adequate portfolio management, which allowed such a large investment into Greek Sovereign debt and the Greek economy, causing a secondary crisis everyone, including the troika, forgot about when they were trying to rescue Greece - they should have rescued Cyprus at the same time given its near dependence on the survival of the Greek bond market and economy. Secondly the Cypriot banks’ poor handling of “asset and liability management” in confusion  with “assets under management”, the latter being safer and the domain of many Swiss banks who handle large client funds off-balance-sheet and on the whole have survived the crises in somewhat better shape (excluding UBS and Credit Suisse who are really global on and off balance sheet banks, not typical Swiss private banks handling client funds off balance sheet).

In its young history as an independent republic, which wrenched its liberation in 1960 from centuries of successive colonisation and invasion, Cyprus has frequently been in turmoil and has always recovered.  Following the 1974 Turkish invasion, instigated by the then Greek military Junta’s interference with Cyprus’ domestic politics, Cyprus recovered rapidly albeit with a bloated banking system. In that crisis it was primarily a let down by Greece which failed to come to its military rescue from the superior Turkish Army. As a result Greece became a democracy with the fall of the Junta at Cyprus’s expense. The real reason Cyprus thrived after the Turkish invasion was the entrepreneurial spirit and energy of its people. The 2013 crisis was also in a sense a second major let down by Greece, in that Greece effectively defaulted on its own debt (following a massive mishandling of its governments finances) which had been heavily invested in by Cypriot banks, lured by high yields from a friendly, brotherly state, thus causing their downfall and a need for the recent and as yet unquantified, ever growing bail out.

This time Cyprus should depend on no one but itself, certainly not Greece or the EU, which has its own troubles. The entrepreneurial spirit and determination of the people will prevail even without a five-point macro-economic recovery plan as exemplified below.

Limit the financial sector to serving the national economy with limited exposure to external risks and do NOT sell the gold. Some partial sale of selective state assets allowing meaningful residual state holdings permitting upside in due time. Perhaps develop links to its long-time friend the UK and invite certain UK banks into the country in joint ventures.

Reorganise the tourism industry with greater cooperation with the north helping both sides with a net increase, including reopening Nicosia International airport to serve both Turkish and Greek Cypriot communities. Focus on the cultural heritage and beauty rather than cheap packages for the drinking populations of Europe.

Jointly develop the natural resources with incentives, but not give-aways, to global firms sincerely willing to invest for future rewards, putting the future revenues towards a development fund to create further light industries and services for the MENA region rather than just to pay expensive debt.

Reinvigorate the agricultural sector, in zonal cooperation with the fertile north and valleys as a source for supplying the domestic and regional needs of the population, whilst conducting a major offshore desalination plant programme to supply the necessary volumes of water. Cyprus needs at least five new offshore desalination plants to once and for all stop the annual water shortages.

Provide small and medium enterprises with start-up incentives to develop alongside the macro plans and redirect the oversized banking industry human capital into a variety of industries for domestic and regional enterprises.

With a renewed energy and strong bi-partisan leadership, Cyprus can and will be third time lucky.