By Timothy Ash of Standard Bank
Greek Cypriots must be thinking that with friends like these (the EU and Russia, both seeking to extract their pound of flesh for any bail-out), who needs enemies?
Well, what if Cyprus begins to think outside the box, and what if it goes to its erstwhile enemy, Turkey, for assistance?
How about this: Turkey provides €7bn in assistance, saving Cypriot savers from the chop in exchange for Cyprus agreeing to the terms of the 2004 Annan peace plan for the unification of the island.
In return for its cash, Turkey would get agreement on the peace plan it backed back in 2004 and which was supported then by two thirds of Turkish Cypriots in an island-wide referendum. Admittedly, it was rejected by three quarters of Greek Cypriots but this was in no small part due to the intransigence of the then Papadopoulos administration.
By so doing, Turkey would save a very big chunk of the substantial aid (and significant military spending) it pumps into northern Cyprus every year, and the north would gain access to EU structural funds. Turkey would also remove a big Achilles heel in terms of its own EU accession bid, stalled by disagreement over the divided island.
Turkey would win huge international kudos for doing the right thing by helping a neighbour in need. And it would send a clear message to some of its foes in core continental Europe that Turkey has indeed matured and is worthy of a place at the heart of Europe – though after developments this week I am not sure that Europe would be worthy of Turkey.
Any financial assistance could be backed by stakes in the Cypriot banks – although, as the Russian banks seem to be indicating, these may offer little value given the holes in their balance sheets.
Peace and unification on the island could then perhaps open up the energy reserves south of the island for joint exploration by Cypriot (Turkish and Greek) and Turkish companies. Remember here that perhaps Turkey’s biggest current strategic priority is to reduce its dependency on energy imports, which cost the country around $55bn a year, and in 2012 came in larger than the country’s current account deficit (equal to 6 to 7 per cent of GDP).
For Turkey, €7bn is relatively small change, equivalent to just over 1 per cent of GDP, especially when set against the “peace dividend” which could come with the unification of the island, progress on EU accession and the associated “feel good factor” for the economy and business more generally, alongside the potential energy dividend. The Turkish treasury has ample funds in its cash reserves and could easily tap markets for an injection into Cyprus, perhaps borrowing under a new Cyprus-Turkey friendship bond programme, for which the likely cost would be only 4 to 4.5 per cent at most. The US would no doubt be happy, as it would remove one further regional dispute in a tricky region, and it would also counter talk of Russia moving its naval base in Syria to Cyprus in exchange for a bail-out.
In times of crisis, you really find out who your friends are. The hope is that the neighbours will rally around. On the Kurdish problem, prime minister Erdogan seems willing to take a (huge) gamble for peace. The current crisis in the Republic of Cyprus could present a similar opportunity for peace and prosperity for both sides.
Timothy Ash is head of emerging markets research ex-Africa at Standard Bank. A version of this post was issued as a note to clients on Thursday.
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