[LINK] "Cyprus: a sunny place for shady people"

[rfmcdonald]

Alex Spillius' article in The Telegraph, syndicated in--among other papers--the National Post--outlines the ties of sentiment and ethnicity that contributed to the ongoing Cypriot financial meltdown. It's open to question whether or not the Russo-Cypriot relationship will survive the depositors' enforced haircut.

[W]hat went wrong? Not so long ago, Cyprus was being hailed as the home of a minor economic miracle. The International Monetary Fund described the country’s performance before 2008 as a “long period of high growth, low unemployment, and sound public finances”. It suffered a recession in 2009, but it was the mildest in the eurozone.

Tourism was booming, with British visitors still flocking to the former colony’s beaches and snapping up seaview properties, while the banking sector flourished. But as with the other troubled states of southern Europe, the success story hid grave ills and vulnerabilities.

Throughout the past decade, Cyprus gained a reputation as a centre for money-laundering. Among those booming numbers of foreign visitors were thousands of Russians, attracted by political connections with Moscow that went back decades, a shared Orthodox faith, and a banking sector that not only didn’t ask too many questions, but commonly pays interest rates of six per cent and upwards.

Over the past decade, many such Russians settled in Cyprus or bought second homes. The city of Limassol, the financial centre, became known as “Lima-grad”: it now boasts expensive boutiques for Muscovites, rental firms offering Porsches rather than Fiat Pandas, and three Russian-language newspapers.

Like Monaco, then, Cyprus has become something of a sunny place for shady people. “There are girls with legs that go on forever and men who insist on wearing sunglasses throughout the gloomy Cypriot winter,” says Smith. “They have vulgar villas, which cause a lot of consternation – blocking other people’s views and so on – but they tend to throw their money around and get their way.”

It is estimated that some 20 billion of the 70 billion euros on deposit in Cyprus – a country of only 800,000 people – belongs to Russians. Those deposits helped the banking sector grow beyond all reason, just like in Iceland. By 2011, the IMF reported that the assets of Cypriot banks were equivalent to 835 per cent of annual national income. Some of that was down to investment by foreign-owned banks, but most was Cypriot.

This imbalance might have been sustainable had the country’s two largest banks not made loans to the Greek government worth 160 per cent of Cypriot GDP. It has never been clear whether that risk was taken out of ethnic solidarity, or from a presumption that the Greeks knew what they were doing. But in any event, it was disastrous.