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C O N F I D E N T I A L NICOSIA 000077 
 
SIPDIS 
 
E.O. 12958: DECL: 02/09/2020 
TAGS: ECON EFIN PREL CY
SUBJECT: CYPRUS: POOR ECONOMIC MANAGEMENT HURTS GREEK 
CYPRIOT SUPPORT FOR REUNIFICATION 
 
Classified By: Ambassador F Urbancic for reasons 1.5 B and D 
 
 ¶1. (C) Concern about the Cypriot economy is growing among 
Greek Cypriot businessmen and economic technocrats. They are 
alarmed at the rapid growth of the fiscal deficit, from a 1 
percent surplus to a 6 percent deficit in less than three 
years. Worse, they believe the GoC is exacerbating the 
problem by denying for too long that there was a problem, by 
increasing the size of the public sector, and by being 
unwilling to reduce the benefits paid to public sector 
workers towards parity with what the private sector provides. 
 
¶2. (C) Manthos Mavromatis,  president of the Cypriot Chamber 
of Commerce and Industry, noted  to the Ambassador that 
Cyprus' labor force productivity is not keeping up with its 
EU peers and, with adoption of the Euro, the country can no 
longer use its currency as a means to achieve cost advantages 
for its exports. "Even if the UK economy comes back, they are 
not going to be a source for new construction and additional 
tourists as they have been. And we can't compete on price 
with Turkey or Egypt. All we have is our services, especially 
financial services, and we must protect that." Mavromatis 
sees a potential risk to this sector from a reunified Cyprus. 
He described Turkish Cypriot banks as a "black hole" whose 
unprofessional standards and/ or financial collapse "of even 
one bank" could harm the reputation of the financial system 
on the entire island. Central Bank Governor Athanasios 
Orphanides agreed with this analysis and pledged that, until 
his bank examiners did a thorough audit of Turkish Cypriot 
banks, they would not be allowed to integrate into a single 
bank sector for Cyprus. 
 
¶3. (C) The Greek Cypriot business community has traditionally 
been among the most pro-solution sectors in the society. As 
Mavromatis pointed out to us, however, people are less 
willing to take the risk of reunification when they are 
feeling uncomfortable about their economic security. He 
contrasted the sour economic outlook now to the high economic 
confidence prevailing in 2004 (when Greek Cypriots voted 
against a reunification plan.) While most economists here 
believe that reunification would be an economic boon, some 
argue the opposite-that Greek Cypriots would be expected to 
transfer funds to Turkish Cypriots to make up the funds 
currently provided by Turkey. A book written by a former Bank 
of Cyprus Governor (and published with help from the 
Archbishop of the Church of Cyprus) paints a stark economic 
future if the island is reunified under any scenario 
currently considered politically realistic. Orphanides has 
made clear in the press that he disagrees with this negative 
analysis, but has told us privately that true economic 
integration of the island (as opposed to reunification with 
the economic derogations to the EU acquis reportedly being 
demanded by the Turkish Cypriots) is a prerequisite for his 
positive analysis. Orphanides implied that, if a settlement 
depended on what he views as institutionalizing uncompetitive 
economic structures and practices, he would be unlikely to 
support the reunification agreement. 
 
¶4. (C) The fallout from Greece's current troubles were of 
less concern to our interlocutors. The Central Bank Governor 
acknowledged that Cypriot banks, due to their significant 
operations in Greece, will likely have an increase in bad 
loans and pressure on their profits. However, he did not 
believe it was more than they could manage given that 
"Cypriot banks have high liquidity and conservative 
practices." To our comment that with Greece as Cyprus' 
largest trade and investment partner the real sector would be 
impacted by the Greek turmoil, the Chamber president argued 
that Greece was primarily a trans-shipment point and that 
Cyprus was not very reliant on capital or customers from 
Greece. 
 
¶5. (C) Comment: The dissatisfaction with the Christofias 
government among the Greek Cypriot economic elite is growing. 
They believe he and Finance Minister Stavrakis have severely 
mishandled the economy. They also have no confidence that 
Christofias is making progress in his talks with Talat. 
Former Finance Minister (and World Bank official) Michael 
Sarris confirmed to us that there is discussion about his 
reassuming the Finance Minister portfolio - although he said 
he would do so only if the President agreed to allow him 
almost total control of fiscal policy. 
URBANCIC