Cyprus has pulled off a minor miracle. Less than a year after crashing into the arms of the Troika (the EC, International Monetary Fund and the European Central Bank), the outlines of recovery are near.
There have been no riots. The tight-knit society of 840,000 has held together, helped by sacrifice at the top. Ministers took a 45pc pay cut, the lowest-paid public workers just 6.5pc. Those on under €1,000 (£825) a month were spared.
The country elected a no-nonsense government that is abiding strictly to the terms of the EU-IMF memorandum. Cypriots speak Greek, but the political climate is a far cry from the tumult of Athens where Syriza leads the polls with vows to tear up Greece's memorandum, and Golden Dawn fascists are on patrol.
"We're aligned with the Troika," said finance minister Harris Georgiades. "The memorandum could have been our own manifesto. It's a chance to correct our own shortcomings, and do what should have been done in Cyprus long ago."
The Cypriot economy did not shrink by 20pc after the banks collapsed last March, as some feared. It did not even shrink by 8.7pc, as the Troika had expected. The final figure for 2013 has just come in at 5.4pc. The EU-IMF team has for once been confounded by success after vastly underestimating the damage of austerity in a string of countries.
"I don't want to paint a rosy picture," said Mr Georgiades. "This is still the most serious recession since the Turkish invasion in 1974, but it has been much less severe than anticipated."
Cyprus is not out of the woods. The economy is expected to contract by 4.8pc this year, worse than thought as the ordeal is stretched out. The IMF says Cyprus faces a decade-long debt purge, with the jobless rate hitting 19.8pc next year, and no guarantee of success at the end.
Public debt should peak at a ratio of 126pc of GDP in 2015, but it could exceed 170pc if things go wrong. "Public debt sustainability remains vulnerable to shocks," it said. External debt is still 350pc of GDP.
Yet this already seems too gloomy. Tourism is holding up, worth 7pc of GDP. Russian visits jumped 28pc to 610,00 last year, and they are famously big spenders. The port of Limassol is becoming the new Crimea for wealthy Muscovites. There is even a monument to the poet Pushkin in the city park.
Cyprus has the world's tenth biggest merchant fleet, with 155 shipping companies controlling 2,300 seagoing vessels. None of these firms has left since the crisis.
Mr Georgiades said internal capital controls will soon be lifted. External controls will remain, leaving Cyprus in limbo. All money in accounts before the guillotine fell in March remain frozen. "They cannot be transferred outside the country without a reason," he said.
Fresh deposits since March are free, creating a two-tier system. A black market has arisen to play the arbitrage game. Russians trying to get their money out can swap for new deposits for a 30pc fee.
It is still too dangerous to risk opening the capital account. Cypriot bank deposits have shrunk from $70bn to $47bn, and are still shrinking. The IMF says bad loans of the banking system have reached 46pc. Moody's says the banks will need an extra €1.2bn in capital beyond the €2.5bn set aside.
Phidias Pilides, head of the Cyprus Chamber of Commerce, said the money will be forthcoming. "The sums are peanuts for the Troika. They are not going to let this experiment fail."
Cyprus has certainly been an experiment. At some point between March 4 and 6, 2013, a decision was made – allegedly in Berlin – to impose a depositor "bail-in" for the first time on an EMU crisis state. Cyprus would have to supplement its €10bn rescue loan with seizure of bank savings. "We are bitter. We had a harsher treatment than anybody else," said the foreign minister, Ioannis Kasoulides.
There was an ugly twist. The government sought to shield rich Russian depositors from full losses at Bank of Cyprus and Laiki by imposing haircuts on state-guaranteed deposits below €100,000, at least until the Cypriot parliament rebelled. "Some politicians were trying to protect Russian clients," said a senior official.
In the end, the haircuts amounted to 47pc of deposits above €100,000. A precedent has been set for the future crises, much to the horror of the ECB, afraid that this will trigger capital flight from any country in trouble.
For all the anguish, the formula has proved a blessing for Cyprus. "If we'd had a bail-out, we would have ended up like Greece," said the official. "The bail-in has limited the pain to a small group of people holding just 4pc of deposit accounts. Two- thirds were foreign, and half of those were Russian. It was really the Russians who took the hit," he said.
If one goal of the Troika was to shrink Cyprus's financial service sector, it has failed. Few companies have left. There were 1,454 fresh registrations in January, bringing the total to 273,000.
Evgenios Evgeniou, head of PwC in Cyprus, said he is recruiting 50-60 people this year. "People misunderstood what was going on in Cyprus. We were a hub for services long before the banks came along, because we have English Common Law and a regulatory framework inherited from the British, with good quality at good prices," he said.
Companies use Cyprus to list shares in London, or issue eurobonds. That has not stopped. A fresh wave of business is arriving as Noble Energy, ENI, and Total eye the giant natural gas fields of the eastern Mediterranean.
Nobody knows how much gas there is. Noble has found 3.6 trillion to 6 trillion cubic feet in the Aphrodite field. Optimists say there could be 60 trillion cubic feet in Cypriot waters, enough to meet Europe's entire gas needs for three years.
Whether this bonanza will be flowing as planned in 2022 is hostage to geo-politics.
Turkey has threatened military action to block extraction until there is a deal for the 300,000 Turkish Cypriots in the north. It chased out a Norwegian ship drilling two weeks ago.
Ten years after Greek Cypriots voted to reject the "Annan plan" for an end to partition, that wasted chance has returned to haunt them.
No oil company will invest much in defiance of Turkish warships. The Cypriots now have a second chance as Washington intervenes, cajoling the two sides to back a fresh plan. This time, the Cypriots are not hesitating. The government has made overtures to Nato, and locked Cyprus deep into the western security structure. "The eastern Mediterranean has become the focus of attention for the whole world. We are in the front line of a volatile area and we are upgrading our responsibility," said the foreign minister.
He hailed the peace proposals as a workable formula that upholds Cypriot sovereignty. In reality, it is little different from the Annan plan. "Times have changed," he said, with a wry smile.
Source: The Telegraph