The miracle of the European country that almost went bankrupt and now has the largest surpluses on the continent

The euro zone sovereign debt crisis will forever be remembered for the controversial bailouts (the conditions imposed in exchange for receiving loans) of the weakest countries in the bloc. The rescued economies currently present an apparently more sustainable financial situation (with the invaluable help of the European Central Bank), but within these countries today one stands out that was then the one that went most unnoticed due to its small size and the particularity of its crisis: Cyprus was the last country to be rescued. The Bible says that the last will be the first and in this case this expression has come true. Cyprus’ economy today has the lowest public debt of all countries that received aid. But not only that, Cyprus has the honor of being the country in Europe with the largest fiscal surpluses and being the only economy that is truly reducing its debt, that is, in absolute terms.

Just as the Troika (IMF, ECB and European Commission) liked, at dawn on a Sunday in March 2013, after ten hours of very tough negotiations, the troika and the euro countries reached an agreement with Cyprus to save the country Mediterranean crisis of default, caused by the collapse of a banking system, full of deposits from Russian oligarchs, which was disproportionate in size to the economy of Cyprus.

Cyprus: lights and shadows

Since then, the economic history of Cyprus has had lights and shadows. On the one hand, The country’s per capita income has not recovered the levels prior to the financial crisis. But on the other hand, a kind of miracle has occurred in the country’s public finances based on fiscal discipline. Public debt has been reduced to levels not seen in more than 13 yearswhile Cyprus enjoys the largest fiscal surpluses in the euro zone, which has allowed it to reduce public debt in absolute terms, something unknown in developed countries in recent years.

When the media publishes that make up the debt and meet its objective”>Spain’s public debt has fallenreference is made to debt over GDP, which also takes into account inflation (which inflates nominal GDP), but the truth is that debt in euros continues to rise, a normal trend in advanced countries, except for Cyprus, which has reduced its debt from 25,000 million euros to the current 23,000 million.

This austerity policy has its defenders, but also important detractors. An important Cypriot newspaper (the only one that also has a publication in English) recently published a harsh article after the achievement of a new budget surplus for the Government and the presentation of the budget plan for the coming years. This newspaper openly criticized the objectives of the Government of Cyprus for focusing its efforts on containing and reducing debt instead of improving the lives of its citizens.

“The 2024 to 2026 budget proposals presented to the House of Representatives in early October 2023 are once again self-serving in the sense that the short-term financial and political interests of the decision-making elite are amply rewarded.” , while the long-term interests of society are largely neglected. The government’s absolute obsession with achieving fiscal surpluses regardless of the costs and circumstances aims to impress the EU and credit rating agencies, but at the same time leave room to comfortably compensate the growing army of public sector employees, advisers and political collaborators by keeping social and development spending at very low levels “said the newspaper.

The criticism comes, in part, because the austerity policies implemented by the Government may have been one of the causes that have prevented the Cyprus economy from recovering the GDP per capita levels prior to the 2008 financial crisis. Currently, Cypriots have a GDP per capita that slightly exceeds $34,000compared to $36,000 in 2008. The containment of spending and public investment has been able to reduce the potential growth of the Cypriot economy.

The good side of austerity

On the positive side, as noted, is the notable improvement in Cyprus’ fiscal position. The debt reduction has been impressive, not only in absolute terms, but also in relative terms. At the beginning of 2021, debt to GDP was 119%, while the last Data published by Eurostat reveal that the ratio has even fallen below 80%. This has allowed in a few months the yield on Cypriot debt to fall from 4.2% (the 10-year bond) to 3.18%, which the bonds are quoted this week.

This has been thanks to the significant fiscal surpluses that the country has enjoyed for much of the last decade. In 2022, Cyprus had the highest surplus in the entire euro zone at 2.4% of GDP. In 2023 the same thing happened again, although the surplus has fallen slightly to 2.3%.

However, Cyprus has also received important praise from international agencies and organizations. The latest mission from the International Monetary Fund highlighted that “supported by strong policies, Cyprus has recovered quickly from the pandemic and has generally demonstrated great resilience in the face of multiple adverse crises. Growth is above that of most of its European peers and inflation is close to the 2% target. Furthermore, fiscal performance remains strong and significantly reduces public debt.”

Cyprus, IMF case study

The IMF itself published an occasional document studying Cyprus’ success in emerging from the crisis. This document, titled ‘Cyprus, case study’, highlighted the strong fiscal adjustment undertaken by the Cypriot authorities in difficult economic circumstances. “While overall public spending was reduced, efforts were made to protect the most vulnerable through a well-targeted income support programme. Cyprus also introduced legislation to modernize the budget process, strengthen public spending accountability and establish medium-term fiscal planning. Tax collection became more efficient and equitable.”

Furthermore, the IMF highlights that after the harsh crisis of 2013-2014, “Cyprus regained access to international financial markets just 16 months after the crisis and since then had successfully issued debt on favorable conditions on multiple occasions,” the IMF highlighted. IMF.

“The economy returned to the path of growth and the banking system returned to a more solid base. Growth recovered sooner than expected and unemployment began to fall. Although the crisis affected public finances, fiscal balances have fluctuated up to to achieve large surpluses, which has helped public debt decline rapidly and allowed it to be repaid ahead of schedule. Thanks to this good performance, Cyprus ended its IMF bailout program ahead of schedule,” the report concluded. .

The agencies recognize the effort

Although the rating agencies have raised the credit rating rapidly (in some cases like Moody’s announcing the rise of two steps at once), the rating has not yet reached ‘A’. Despite everything, the agencies recognize Cyprus’ efforts and the good path they have taken: “Fitch expects a general government budget surplus this year of 2.3% of GDP, higher than the 1.7% projected in the previous review of June, and in contrast to an estimated deficit position for the ‘BBB’ median (3.2%)”.

Furthermore, “despite the extension of support measures to mitigate the impact of high prices and fiscal costs, we expect a new surplus for next year and 2025 (averaging 2.2% of GDP). We assess that the Cypriot authorities are committed to maintaining sufficient primary surpluses to achieve a sustained reduction in the public debt/GDP ratio,” the Fitch agency states in its latest review.

The case of Cyprus can be considered as a real success from the fiscal side. However, the risks and room for improvement remain present. The IMF itself highlighted in March of this year that, although the risks have decreased, some factors still need to be monitored, such as “the slowdown in the main tourism markets and an escalation of regional conflicts that could slow down Cyprus’ efforts to reorient its services exports.” “In the medium and long term, climate change also poses adverse risks, while an accelerated rebalancing of the growth model has room for improvement.”