A New Business Model for Cyprus

Today, the small, divided island of Cyprus is facing yet another economic storm. But there is light on the horizon: economic hope in the form of huge offshore gas reserves, which promise not only to transform the island’s economy, but also to improve regional cooperation and revive reunification efforts.

MADRID – Once again, Europe has peered into the abyss. But the tentative agreement between Cyprus and the troika (the European Commission, the International Monetary Fund, and the European Central Bank) probably means that the worst has been avoided. Big losses for large depositors in Cypriot banks will now be imposed, and the country’s second-largest bank will be shuttered. Looking ahead, however, Cyprus has the means not only to recover, but even to heal its longstanding division with the Turkish-backed statelet in the north of the island.

Cyprus, of course, is just the latest country to be hit by the economic crisis surging through the Mediterranean. For years, Cyprus had an immense banking bubble, with the sector’s assets estimated at roughly seven times the country’s GDP, as foreign money poured into a tax haven within the eurozone’s secure environment.

The design of the bailout has been shaped both by domestic pressures faced by eurozone leaders and by the exceptional nature of the Cypriot banking bubble: many European leaders suspect that the island had become a money-laundering center for Russian individuals and entities, which pumped an estimated one-third of the €68 billion into the country’s banks. Regardless of the details of the ultimate deal, the risk is that the ghost of Russia’s bailout of Cyprus in 2011 could provoke severe side effects across Southern Europe, both for governments’ borrowing costs and for small savers.

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