Cyprus delivered a tough critique of the euro zone’s decision to restructure Greece’s private-sector debt on Friday, saying it had effectively thrown the Cypriot economy into turmoil and forced it into bailout of its own.
Euro zone leaders agreed in late 2011 to write down the value of private sector holdings of Greek government bonds to try to cut Greece’s debt by around 100 billion euros – a process known as PSI, or private sector involvement.
It was a controversial decision and one that the former president of the European Central Bank, Jean-Claude Trichet, had warned EU leaders could cause repercussions.
For Cyprus, the euro zone’s third smallest economy, with a GDP of just 17 billion euros and a large banking exposure to Greece, it meant that Cypriot banks had to write off around 80 percent of the value of their holdings of Greek bonds.
That in turn made it harder to access inter-bank borrowing or to post collateral with the ECB to access liquidity.
Finance Minister Vassos Shiarly said Cyprus’s economy, fuelled by a buoyant property sector and services industry, would not have run into the severe problems it currently faces were it not for the PSI decisions.
“Effectively, because of our close proximity, financial proximity to (Greece), we were called upon to pay a very heavy price,» he told Brussels-based journalists during briefings in Nicosia as Cyprus takes over the presidency of the European Union for the next six months.
“Cypriot banks that owned Greek sovereign bonds lost about 80 or 81 percent of their total investment, which in actual terms amounts to 4.2 billion euros,» he said, underlining that that amount to 24 percent of economic output.
“The real problem stems from that particular investment. If you ask me whether this was a fair way to deal with it, I would say no, this was not a fair way of dealing with it.”
Instead the minister argued that 100-billion-euro writedown of Greece’s government debt – a process that has still not restored the country to debt-sustainability – should have been portioned out the basis of the size of euro zone economies.
That would have meant Germany paying the most – around 27 percent of the total – and Cyprus just 0.2 percent.
“What we should have done is share that loss fairly, on a level playing field, as the Europeans do, in a manner of solidarity,» the finance minister said.
“If our share had been fairly evaluated … our total loss might have been in the order of 200 million euros – one would say petty cash these days. But as I’ve said, our write off was 4.2 billion.”