Cyprus prepares for presidential elections as bailout threat looms

Helena Smith in Nicosia guardian.co.uk, Friday 15 February 2013 19.38 GMT

With Greek debt contagion cutting GDP by 25%, opposition leader Nicos Anastasiades expected to inherit poisoned chalice

Rightwing candidate Nicos Anastasiades is expected to win Cyprus's presidential election. Photograph: Petros Karadjias/AP

Cypriots are preparing to vote on Sunday in crucial presidential elections amid rumours of money laundering that could imperil the bailout needed to keep the crisis-hit island's economy afloat.

For the first time since the 1974 Turkish invasion, the vote is about the economy and not the perennial efforts to reunite feuding Greeks and Turks on the isle. It is an election that takes place in an atmosphere of fear, and the uncertainty that has come with the shock of violent change.

From her flower shop in the heart of the divided capital, Nicosia, Avgousta Neophytou has had a front-seat view of that change. "Custom is down by 50%," she said. "This week was an exception because it was Valentine's Day and I did surprisingly well, but usually people walk through those doors and moan about how they have lost work, how their shares have been wiped out, how from being rich, they suddenly feel very poor."

Until last year, Europe's most easterly member seemed insulated from the economic crisis savaging Greece. But, say officials, a tempest took hold when Nicosia, in the name of EU solidarity, stood by debt-stricken Athens, agreeing to participate in a "haircut" that saw the value of privately-held Greek bonds drop by over 70%. Instantly, the island's banks lost 4.5bn euro. "Overnight Cyprus lost 25% of its GDP," said George Sklavos, a senior official at the finance ministry.

Reckless exposure to Greece plunged its banking sector – one of the key pillars of the economy – into crisis and brought the island to the brink of penury.

"When the banks got into trouble it underscored how bad the fiscal situation was and our failure to take necessary measures earlier," the former finance minister Michalis Sarris said.

In a replay of the scenario that has haunted Greece, officials now speak of public coffers running dry. With Nicosia cut out of international markets since May 2011, help is imperative if bankruptcy is to be kept at bay. "At the beginning of June we will face a big debt repayment of €1.6bn and if we are not given financial assistance, it will be a make-or-break situation," said Sklavos.

"It is vital that a rescue programme is agreed with the EU and IMF," he said dismissing concerns that public debt would likely reach 140% of the island's GDP. "We are not asking for a gift but a loan that will be paid back."

The tell-tale signs of crisis are not only in the closed shops that now dot the streets. Soup kitchens have begun to appear as both public and private sector employees have suffered steep salary cuts. In a blow to tourism, hotels, unable to afford heating oil for the winter, have closed. The Cypriot middle class – which grew with the resurgence of the Greek-populated south in the wake of an invasion that saw a third of the island seized by the Turkish army – has also been hit.Many complain they can no longer afford private tuition fees or the gas to run fancy cars. In a society that takes its status symbols seriously, maids – like Porsche Cayennes – have disappeared.

The outgoing president, Demetris Christofias, an unrepentant communist, has been widely blamed for bringing Cyprus to this point. But even those who do not hold him responsible for failing to act earlier, taking unpopular reforms to shore up the economy, express fear. They look at Greece and shudder.

"Yes, I am frightened," said Christos Tombazos, general secretary of the Pancyprian Federation of Labour, the island's biggest trade union. "Unemployment is at 15% when two years ago it was at 5%. I am in contact daily with comrades in Athens and we all know what's happened there. They're one step before fascism," he said, referring to the ascent of the neo-Nazi Golden Dawn party.

Whoever wins the poll – and it is widely expected to be the conservative opposition DISY leader Nicos Anastasiades – inherits a poisoned chalice.

The island's predicament has not only brought the eurozone crisis back into sharp focus, just when market sentiment was beginning to improve but, once again, has raised fears of the bloc breaking up.

The bleak mood has been exacerbated by a feeling of injustice at the way Cyprus, the fourth country to seek financial aid, has been treated by its fellow EU member states.

German accusations of money laundering have angered many, with Nicosia vehemently denying that the island has become a tax haven for Russian oligarchs. Instead, officials say Cyprus has fallen victim to internal politics in Berlin and vicious in-fighting ahead of general elections in September.

"If you look, you will find Russian money everywhere, Germany, the UK, everywhere," said the foreign minister Erato Kozakou-Marcoullis, pointing to international risk rankings giving the island a better rating than Germany in its ability to crack money-laundering.

"They are welcomed by everyone and definitely their money is not branded as dirty," she said. Hypocrisy is one element of the crisis enveloping Cyprus. Another is the massive reserves of natural resources in the form of oil and gas that Cypriot officials believe lie within the island's territorial waters. "It is a treasure, a gift from nature … and it has to be taken into account by our partners in the eurozone," said Marcoullis. "Whatever loans are given will be paid back fully."

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