18 February 2013

Tony Barber: Cyprus crisis offers reunification hopes

Over the past three years, the island has turned into a banking, sovereign debt and economic problem, too. Cyprus is the third smallest of the eurozone’s 17 states, accounting for less than 0.2 per cent of its economic output. But its size is in inverse proportion to its capacity to tip the eurozone back into the peril that gripped the area until last summer. This is because the island’s rescue needs – up to €10bn for banks and €7.5bn for government operations and debt servicing – will raise its public debt to an unsustainable 140 to 150 per cent of gross domestic product. One remedy is a debt restructuring, similar to that applied to private-sector holders of Greek government bonds. Another is to reorganise the banks, as in Spain, and impose losses on deposit holders. Cyprus’s eurozone partners seethe with indignation at bailing out a country whose banks are flush with billions of euros owned by wealthy non-resident Russians.

Whatever the answer, Cyprus’s emergency presents European governments with the best chance in almost 40 years to overcome the island’s division. The outlines for a settlement are clear: a two-zone federal state with a common citizenship, and compromises on territorial and property disputes. Such a deal, brokered by the UN, appeared within reach in 2004 when Turkish Cypriots approved it in a referendum. But Greek Cypriots, certain of being admitted into the EU no matter how they voted, rejected the plan. Europe’s leaders now have a chance to tell the Greek Cypriots, in a friendly but firm way, that financial aid requires progress on a diplomatic settlement.

Conveniently, the 2018 election will come just before gasfields recently discovered off Cyprus’s coast start to pump out their riches. This bonanza for the Greek Cypriots will probably close the window for a Cyprus settlement. Mr Anastasiades, and his European counterparts, have five years to deliver a deal.

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