Greek Cypriot economy on brink of collapse

"In the last five years, the Greek Cypriots have spent considerable sums of money on new weapons," Ozan Ceyhun, vice chairman of the Turkish policy unit of the Social Democratic Party of Germany (SPD), has said, basing his observation on media reports. Even in the midst of a major economic crisis, Greek Cypriot Defense Minister Dimitris Iliadis announced at the beginning of February that the country's defense budget would be increased 3.3 percent this year, maintaining that Turkey poses a genuine threat to Greek Cyprus. The Greek Cypriot Politis daily reported in late January that the country was planning to buy major weapons, including unmanned aerial vehicles (UAVs) and modern warships. The defense ministry, in a statement made public on its webpage, admitted that the country was considering buying corvettes along with weapons but added that the idea had not yet reached the bidding stage as nothing had yet been decided. The same daily also maintained following the country's purchase of Mi-35 attack helicopter simulators that the ministry was about to complete a deal for artillery simulators for training purposes. Crisis-stricken Greek Cyprus has narrowly avoided bankruptcy and a possible exit from the eurozone thanks to the almost $13 billion in financial aid it secured at the beginning of last week, following heated negotiations, from the European Union. The European Central Bank (ECB) had warned that it would stop the flow of financial assistance to the country by Tuesday of last week -- funds essential for the collapsing economy -- if Greek Cyprus failed to reach an agreement with the EU.
 
Mehmet Hasgüler, a professor of international relations at Çanakkale 18 Mart University, is also of the opinion that Greek Cyprus is spending a more-than-negligible portion of its budget on armament. "Though Greek Cyprus is a small economy, they keep spending on arms in spite of the fact that Turkey, which is in favor of a solution in Cyprus, is no longer a threat to the Greeks, who are a member of the EU," he told Sunday's Zaman.
 
The country's banking sector will suffer heavily as a result of the bailout deal with the EU. To obtain the financial aid package, the country needed to raise a sum of nearly $7.5 billion, which it will come up with, to a great extent, by inflicting heavy losses on depositors with more than €100,000 in their bank accounts. The rest of the money will be obtained through the raising of taxes and privatization deals.
 
As per data from the Stockholm International Peace Research Institute (SIPRI), at least the official figure of military spending by Greek Cyprus seems to have decreased in relation to the country's gross domestic product (GDP) over the last 10 years compared to the military expenditure in the 1990s. In the second half of the '90s, military expenditure made up around 4 percent of the country's GDP. At the turn of the century, the figure dropped to approximately 3 percent, and as of 2002, Greek Cyprus' military spending was at around 2 percent of GDP, SIPRI data show. However, official data on arms purchases may not reveal the whole truth. In the case of Greek Cyprus, these expenditure figures may be all the more disputable because the country is claimed to be a haven for money-laundering activities. "Not only Germany, but also many EU member countries do not seem to be eager to lend money to these [Greek Cypriot] banks that operate like money laundering mechanisms as they don't want to make their taxpayers pay for the damages Russian billionaires may make," wrote Hélène Flautre, co-chairperson of the EU-Turkey Joint Parliamentary Committee, in Today's Zaman on Feb 27.
 
The Greek Cypriot side denies these allegations, but Ceyhun, who is also a regular columnist for the Kıbrıs Postası daily, published in the Turkish Republic of Northern Cyprus (KKTC), strongly believes that illicit money may have been utilized in the purchase of new weapons. Noting that the Greek Cypriot National Guard has, as part of a project to modernize the country's armed forces, purchased a great deal of new weapons systems in the last couple of years, he said: "You can't fully trust official figures [on military spending]. It's highly probable illicit money was used." Hasgüler thinks no differently. Maintaining that the amount of money circulating in the Greek Cypriot financial system is three times what the real economy of the country would normally generate, he said, "Spending on arms may have been done with illicit money." As per SIPRI data, Greek Cyprus spent $494 million on weapons in 2011, which represents a little more than 2 percent of GDP, while the figure was $478 million in 2010 and $460 million the preceding year. Over the period from 2006-2011, Greek Cyprus' military spending increased by about 11 percent in real terms but is lower, in terms of its ratio to GDP, than in most of the 1990s and early 2000s. According to the CIA's "The World Factbook," Greek Cyprus' military spending last year amounted to 3.8 percent of GDP.
 
However, Sam Perlo-Freeman, director of the SIPRI Programme on Military Expenditure and Arms Production, is not of the opinion that military spending has played a contributory role in the country's current financial crisis. "It [military spending] is not large enough to have a significant impact on the current crisis, which, as I understand it, has its origins in the banking sector rather than in excessive public sector deficits," he told Sunday's Zaman. Behind the Greek Cypriots' spending on arms lies the fact that they see Turkey as a genuine threat. "There is the possibility of hot conflict with Turkey," the country's defense minister, Iliadis, maintained in February, hinting that Turkey may attempt to violate the country's sovereignty rights over gas fields in the eastern Mediterranean.
 
Mehmet Ali Talat, then president of the KKTC, expressed concern in 2007 that the per capita spending on arms by Greek Cyprus ranked among the highest in the world. Ata Atun, another columnist for the Kıbrıs Postası, wrote in December of 2009 that the Greek Cypriots had bought a Tor-M1 surface-to-air missile system and artillery guns, and placed an order for Tor-M2 missiles, anti-tank missile systems, 42 tanks and three helicopters from Russia. So, it would not be surprising for arms purchases to have put a considerable burden on the Greek Cypriot economy, given the small size of its economy with a GDP of less than $25 billion. Among EU member states, Greek Cyprus ranks third in terms of its ratio of military expenditure to GDP, coming after Greece and the UK. Drawing attention to this fact, Sylvia Tiryaki, deputy director of the Global Political Trends Center at Kültür University in İstanbul, has told Sunday's Zaman that military expenditure may be at least partially responsible for the economic situation in Greek Cyprus.
 
The fact that a final settlement of the Cyprus issue has not been reached has also taken its toll on the Greek Cypriot economy. Turkish EU Affairs Minister Egemen Bağış said in January that not being able to fly directly to Athens, through Turkish airspace, has cost Greek Cyprus' national airline $38 million a year. Greek Cypriot ships also lose considerable business as they are not allowed to dock at Turkish ports due to the fact that Turkey does not recognize Greek Cyprus diplomatically. The words of Hasgüler, who is originally from the KKTC, seem to ring true as regards the way out of the financial crisis for Greek Cyprus. "To get out of the crisis, Greek Cyprus needs to reconsider its military spending," he said.