Wolf Richter: Manna for Bankrupt Cyprus

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

In Greece’s chaotic wake bobs the listing Republic of Cyprus, soon to be the fifth Eurozone country, out of seventeen, to get a bailout. By June 30. And on July 1, in the ironic European manner, the tiny country on a Mediterranean island that is geographically closer to Turkey, Syria, and Israel than any European country, will automatically rotate into the Presidency of the Council of the European Union for a six-month term—mechanized democracy at the EU level.

Only last year’s €2.5 billion loan from Russia has kept it afloat. Its economy is shrinking, unemployment is at a record, and real estate is collapsing after a phenomenal bubble and after an even more phenomenal nationwide title-deed scandal that bankers, lawyers, and developers were colluding in to their immense benefit. And it has taken down the banks. [For more on that fiasco, read my post from last October…. Another Eurozone Country Bites the Dust].

So the banks need to be “recapitalized.” As is the case in Eurozone bailouts, the losses will be socialized to taxpayers in distant countries. €1.8 billion, or 10% of GDP, is needed just to recapitalize its second-largest bank, Cyprus Popular Bank. Many more billions will be needed for the other banks. And as the first bailout is never enough, more money will be needed for the second wave. The government itself needs to be bailed out too; it has been cut off from the markets and can’t get its deficits under control—amazing how a country with 803,000 people can concoct problems of such magnitude.

“The issue is urgent,” said Finance Minister Vassos Shiarly on Monday because “recapitalization of the banks must be completed by June 30.” And on Tuesday, a government spokesman confirmed that a bailout would be “one of the options.” It would be large—”a comprehensive request covering not only present circumstances and the recapitalization of the banks but also future needs,” Shiarly said. But there is one thing Cyprus has that the other four bailed-out debt sinners don’t have. And it changes everything.

Vast deposits of natural gas. Noble Drilling announced the discovery last December. Based on its Cyprus A-1 well, it estimated that the field off the southern coast held up to 8 trillion cubic feet of gas. There is a good probability of other gas fields around Cyprus. And a mad scramble has ensued.

15 major oil and gas companies and consortiums, among them Russia’s Novatec, Italy’s ENI, France’s Total, and Malaysia’s Petronas, are bidding to start exploratory drilling activities. Novatek may also invest in transport, processing, and liquefaction facilities (to produce LNG for export). Chinese firms have submitted proposals. Israel is working with Cyprus on a “unitization agreement” for reserves that overlap the border between their “exclusive economic zones.” And they’re bent over plans for a pipeline between their gas fields.

Alas, Cyprus has been a divided island since 1974: in the south, Greek-speaking Cypriots; in the north, Turkish-speaking Cypriots—who proclaimed the Turkish Republic of Northern Cyprus, recognized only by Turkey. So the gas find is a bit delicate … to the point where NATO member Turkey sent warships to the area to pressure Cyprus to halt exploration until their dispute is resolved. To defuse the situation, Commerce Minister Praxoula Antoniadou claimed that the project would take years of planning, exploration, and construction. By the time revenue starts flowing, he said, Cyprus would be reunified, and all Cypriots would benefit from the manna.

The gas could be exported to continental Europe which currently relies on expensive Russian gas. But a pipeline would have to cross Turkey, and current tensions make that a non-option. Hence the necessity for a liquefaction facility, from which the gas could be exported as LNG by tanker to anywhere in the world. It would cost perhaps €7 billion, more than a third of the country’s GDP. Yet companies are eager to build and fund it.

The promise of money! Despite its fiscal nightmare, corruption, teetering economy, and ruined banking sector, Cyprus won’t have a problem attracting a bailout, either from the Troika, or if they bandy about the noxious terms of structural reforms and austerity, from Russia, China, or some other side. For them it would mean an investment in a scarce resource, a bridgehead to the EU, and possibly a controlling stake in the country.

“I believe, no,” is how Italian Prime Minister Mario Monti answered the question if Italy would seek a bailout—lacking the bravado and vehemence with which Spanish Prime Minister Mariano Rajoy had claimed for the longest time that Spain wouldn’t need one. Until it needed one. The question was hot. It followed the kerfuffle that ensued when Austrian Finance Minister had let it slip that Italy might also need “support.” But Italy is too big to get bailed out. Read…. Italy Trembling on the Brink.

And here is the hilarious but brutally truthful video from down-under comedians Clarke & Dawe that in 2.5 minutes summarizes better than anything else the entire Eurozone debt crisis. 

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  1. Glen

    So the banks need to be “recapitalized.”

    Just once, it would be nice to see the GD banks being broken up, and the people being bailed out.

    1. Dan Allen

      They run a deficit now, but not prior. There exposure to Greece kills them. Cyprus was not only a surplus country, but a NET contributor to EU subsidies (in other words, Cyprus made more than the average eurozone country).

        1. Steve

          They run a trade deficit not a net deficit. Their economy is heavily service based (mostly tourism, financial and shipping). Income from services would not appear on the trade deficit figures.

          1. greg

            They still run a large $2.858 Billion (2011) current accounts deficit. Less than the trade deficit, but still almost 11% GDP. The total external debt as percent of GDP is now probably greater than 150%.

  2. Paul Tioxon

    The Manna from heaven will more bread for multi-national energy giants if Pennsylvania is any indication:


    While over 5000 wells have been sunk, and are producing a bounty of gas, the REPUBLICAN Gov gives away nearly $2BILLION in tax incentives to SHell Oil. This is in addition to being the only state in the USA that does not tax the extraction at the well, even on state land!! All of the costs of production come from leasing costs to land owners. THERE IS NO PUBLIC BENEFIT. Unlike Alaska with annual checks going to the people from big oil and even N Dakota’s misguided attempt to wipe out taxes before replacement revenue can be fully funded, there seems to be no connection made in the minds of the politicians between minerals laying in the ground of your state and making some money from this Manna on behalf of the taxpaying public. Little hope can be had for Cyprus in deriving any public benefit in this day and age of DE-NATIONALIZATION FROM PRIVATIZATION.

  3. Historicaecon

    Running a trade deficit when you don’t have control over your own currency is a very serious problem, but more importantly it should be a spur to action. The American Revolution is an example of what can happen when it goes on too long.

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