Economic experts are advising people to stay calm and not to shuffle their cash around, even as the European Central Bank last week slashed interest rates to discourage borrowing.
“If the crisis abroad persists, then yes, I can see some folks being put off from buying villas,” said European University of Cyprus research executive Pambos Papageorgiou.
Tourism could also be impacted, and as a result businessmen less inclined to invest in new projects.
Loans based on Euribor (Euro Interbank Offered Rate) would be affected, added Papageorgiou, although the local Central Bank could take corrective measures.
Economist Costas Apostolides warned against doomsayers predicting an economic recession on this corner of the Mediterranean.
“Banks here are among the safest in the world. There is not a single Cypriot bank, at least that I know of, which gives out more money in loans that it has in deposits.
“In fact, our banking system – being quite traditional and conservative – has none of the weaknesses witnessed by other countries in the past few months. So unless people panic, there is no reason for a negative impact on our banks,” said Apostolides, stressing that this was not merely wishful thinking.
According to Apostolides, inter-bank lending in Cyprus was negligible when compared to other European countries.
“The credit crunch abroad is largely the outcome of banks inheriting the vices of companies they acquired and which were neck-deep in lending high-risk money. You don’t get that in Cyprus.”
While conceding that difficulties in obtaining cash might thwart land development and cause real estate prices to drop, the extent of the damage would be manageable.
For instance the housing market in the Famagusta and Paphos areas might experience a slowdown, but elsewhere such as Larnaca and Nicosia there would be little, if any, impact.
“At the end of the day, I don’t see major problems for individuals. The economy seems to be holding up well, with a projected three per cent growth for this year. So unless something dramatic happens, such as soaring unemployment, you can forget about a recession.
According to a rule of thumb, a recession occurs when real gross domestic product (GDP) growth is negative for two or more consecutive quarters. So for Apostolides, messages of gloom are both premature and unwise.
“Don’t listen to the Cassandras. Bar 1974, Cyprus has never suffered a recession,” said Apostolides, though he added that an economic slowdown was “likely”.
Words of reassurance, but how worried should people be, and what can they do to protect their savings?
“Pay attention to banks which give extraordinarily high interest rates on deposits or investments. That’s usually not a good sign, and might be an indication of a bank’s weakness to acquire liquidity,” advised Apostolides.
“And don’t move your money around to the highest interest rate on offer. If your bank is at its core financially sound, even though its share value may drop, stay put. Do not panic. If we start panicking, the game is up.”
By Elias Hazou, Cyprus Mail, October 12, 2008