I will be ready for my retirement in 5 years. How fantastic would it be to have a fair for all settlement by then
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February 18, 2013 7:28 pm
Cyprus crisis offers reunification hopes
By Tony Barber
Financial aid should be conditional on progress towards diplomatic settlement, says Tony Barber
Can a pig’s tail be straightened, asks a Cypriot proverb. It is rather like asking if the Cyprus problem can ever be solved.
As it happens, an opportunity for a solution is at hand – if Europe’s leaders are brave enough to seize it. In Cyprus’s presidential election last weekend, Nicos Anastasiades, the conservative candidate, emerged as the frontrunner to win next Sunday’s run-off ballot. He is one of Cyprus’s few politicians with the credentials to do what needs to be done on the diplomatic and economic fronts.
For the Cyprus problem is, these days, two problems. First, it is a security and diplomatic problem in that the east Mediterranean island is split into a southern zone, controlled by the internationally recognised Greek Cypriot government, and a Turkish Cypriot-ruled north propped up by Turkey. In spite of repeated UN-sponsored efforts to reunite the island, this division has lasted since 1974. As was once wearily observed by David Hannay, a retired UK diplomat who came to specialise in the issue, no one ever lost money betting against successful negotiations in Cyprus.
Over the past three years, the island has turned into a banking, sovereign debt and economic problem, too. Cyprus is the third smallest of the eurozone’s 17 states, accounting for less than 0.2 per cent of its economic output. But its size is in inverse proportion to its capacity to tip the eurozone back into the peril that gripped the area until last summer. This is because the island’s rescue needs – up to €10bn for banks and €7.5bn for government operations and debt servicing – will raise its public debt to an unsustainable 140 to 150 per cent of gross domestic product. One remedy is a debt restructuring, similar to that applied to private-sector holders of Greek government bonds. Another is to reorganise the banks, as in Spain, and impose losses on deposit holders. Cyprus’s eurozone partners seethe with indignation at bailing out a country whose banks are flush with billions of euros owned by wealthy non-resident Russians.
However, each proposal has drawbacks. Europe’s leaders assured financial markets last year that the Greek debt restructuring was a one-off event. To renege on this promise would sow fresh doubt about the quality of Greek, Italian, Portuguese and Spanish debt. In any case, most of Cyprus’s sovereign debt is held by Cypriot banks. A restructuring would simply deepen the hole they are already in. As for raiding Russian depositors, it sounds tempting but it is neither practical politics nor wise economics. The Kremlin helped the island in 2011 with a €2.5bn loan. It would make sense to encourage Russian participation in a broader EU-led rescue. Besides, to clip depositors – even dodgy oligarchs – might spark panic among bank account holders elsewhere in Europe.
Whatever the answer, Cyprus’s emergency presents European governments with the best chance in almost 40 years to overcome the island’s division. The outlines for a settlement are clear: a two-zone federal state with a common citizenship, and compromises on territorial and property disputes. Such a deal, brokered by the UN, appeared within reach in 2004 when Turkish Cypriots approved it in a referendum. But Greek Cypriots, certain of being admitted into the EU no matter how they voted, rejected the plan. Europe’s leaders now have a chance to tell the Greek Cypriots, in a friendly but firm way, that financial aid requires progress on a diplomatic settlement. They may find they are preaching to the converted. For Mr Anastasiades – unlike Demetris Christofias, the outgoing communist president – was a supporter of the UN plan that fell at the final hurdle in 2004.
But the Cyprus morass is deeply political. Mr Christofias asked for a financial rescue last June, but his main objective thereafter was not to be the president who submitted to the inevitably onerous bailout terms. Meanwhile, Cyprus’s communist party is looking ahead to the 2016 parliamentary elections and 2018 presidential election, calculating that voters will be so fed up with foreign-imposed austerity by then that they will return the communists to power.
Conveniently, the 2018 election will come just before gasfields recently discovered off Cyprus’s coast start to pump out their riches. This bonanza for the Greek Cypriots will probably close the window for a Cyprus settlement. Mr Anastasiades, and his European counterparts, have five years to deliver a deal.
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