CYPRUS: POOR ECONOMIC MANAGEMENT HURTS GREEK

C O N F I D E N T I A L NICOSIA 000077 SIPDIS E.O. 12958: DECL: 02/09/2020 TAGS: ECON EFIN PREL CY SUBJECT: CYPRUS: POOR ECONOMIC MANAGEMENT HURTS GREEK CYPRIOT SUPPORT FOR REUNIFICATION Classified By: Ambassador F Urbancic for reasons 1.5 B and D ¶1. (C) Concern about the Cypriot economy is growing among Greek Cypriot businessmen and economic technocrats. They are alarmed at the rapid growth of the fiscal deficit, from a 1 percent surplus to a 6 percent deficit in less than three years. Worse, they believe the GoC is exacerbating the problem by denying for too long that there was a problem, by increasing the size of the public sector, and by being unwilling to reduce the benefits paid to public sector workers towards parity with what the private sector provides. ¶2. (C) Manthos Mavromatis, president of the Cypriot Chamber of Commerce and Industry, noted to the Ambassador that Cyprus' labor force productivity is not keeping up with its EU peers and, with adoption of the Euro, the country can no longer use its currency as a means to achieve cost advantages for its exports. "Even if the UK economy comes back, they are not going to be a source for new construction and additional tourists as they have been. And we can't compete on price with Turkey or Egypt. All we have is our services, especially financial services, and we must protect that." Mavromatis sees a potential risk to this sector from a reunified Cyprus. He described Turkish Cypriot banks as a "black hole" whose unprofessional standards and/ or financial collapse "of even one bank" could harm the reputation of the financial system on the entire island. Central Bank Governor Athanasios Orphanides agreed with this analysis and pledged that, until his bank examiners did a thorough audit of Turkish Cypriot banks, they would not be allowed to integrate into a single bank sector for Cyprus. ¶3. (C) The Greek Cypriot business community has traditionally been among the most pro-solution sectors in the society. As Mavromatis pointed out to us, however, people are less willing to take the risk of reunification when they are feeling uncomfortable about their economic security. He contrasted the sour economic outlook now to the high economic confidence prevailing in 2004 (when Greek Cypriots voted against a reunification plan.) While most economists here believe that reunification would be an economic boon, some argue the opposite-that Greek Cypriots would be expected to transfer funds to Turkish Cypriots to make up the funds currently provided by Turkey. A book written by a former Bank of Cyprus Governor (and published with help from the Archbishop of the Church of Cyprus) paints a stark economic future if the island is reunified under any scenario currently considered politically realistic. Orphanides has made clear in the press that he disagrees with this negative analysis, but has told us privately that true economic integration of the island (as opposed to reunification with the economic derogations to the EU acquis reportedly being demanded by the Turkish Cypriots) is a prerequisite for his positive analysis. Orphanides implied that, if a settlement depended on what he views as institutionalizing uncompetitive economic structures and practices, he would be unlikely to support the reunification agreement. ¶4. (C) The fallout from Greece's current troubles were of less concern to our interlocutors. The Central Bank Governor acknowledged that Cypriot banks, due to their significant operations in Greece, will likely have an increase in bad loans and pressure on their profits. However, he did not believe it was more than they could manage given that "Cypriot banks have high liquidity and conservative practices." To our comment that with Greece as Cyprus' largest trade and investment partner the real sector would be impacted by the Greek turmoil, the Chamber president argued that Greece was primarily a trans-shipment point and that Cyprus was not very reliant on capital or customers from Greece. ¶5. (C) Comment: The dissatisfaction with the Christofias government among the Greek Cypriot economic elite is growing. They believe he and Finance Minister Stavrakis have severely mishandled the economy. They also have no confidence that Christofias is making progress in his talks with Talat. Former Finance Minister (and World Bank official) Michael Sarris confirmed to us that there is discussion about his reassuming the Finance Minister portfolio - although he said he would do so only if the President agreed to allow him almost total control of fiscal policy. URBANCIC