Cyprus the day after the Golden Passport scandals. Another bubble is burst. What’s next?
It’s the 31st of October and we are faced, yet again, in front of a huge burst bubble. Tomorrow marks the end of Cyprus’ troubled and heavily criticised Golden Passport scheme.
The decision was announced after Al Jazeera’s investigative journalists released a follow up video to their original #Cypruspapers exposé. Following the release of the original video (linked below), Cypriot politicians were quick to cry out “entrapment” and suggested that the network had done a politically motivated “hit job” and was misleading and out of context in its report.
They justified the fact that they had given people with criminal records passports as “glitches in the system” and insisted that they had since made controls stricter in order to avoid such cases in the future. Then came the second video….
The second video features undercover footage from Al Jazeera investigators pretending to be representing a rich client with outstanding warrants looking to escape conviction and invest in Cyprus’ now infamous “Golden Passport” programme.
They are openly welcomed by property agents, developers, lawyers and even the head of Cypriot parliament who all promise them that their client will be looked after as long as the price is right.
In Cyprus we were all aware of our politicians’ non existent moral standings but this was different. This wasn’t a vague story whispered around the coffeeshops of the island. They were all captured on video. There was no discretion, no savoir vivre, just blatant, almost biblical, greed and sleaze.
The exposé managed to burst a 7 year long property bubble as the disgraced government quickly announced the end of the controversial passport scheme.
The aim of this article is to explore some of the under-reported negative effects the passport scheme had on the economy, the potential impact of the sudden halt of the scheme, as well as the possibilities for the Cypriot economy moving forward.
Backstory to the Passport Programme:
There has long been a way for investors to gain a Cypriot passport by investing in the country long term. However a fast-tracked passport scheme with more relaxed criteria was devised by the government shortly after the 2013 failure of the island’s 2 largest banks, which saw deposits over 100 thousand euros vanish overnight. The government created the passport programme to inject some money into the flailing economy and keep the housing market from crumbling. However as unemployment grew and salaries slumped the house prices were moving in the opposite direction.
The island quickly filled up with Russian and Chinese language advertising banners which, quite plainly, promised wealthy investors a chance to get a highly coveted European passport. That is, if they invested enough in the local property market. The economic benefits of this inflated housing bubble are debatable, but one consequence that was not up for debate was the devastating effect it had on the millennial housing market.
Local, young and educated millennials could no longer afford to rent their own place, nevermind owning a place of their own.
The investment programme had tiers:
300k would get you a Resident’s Permit
And 2.15 million Euros would get you a passport
“non-Europeans could get a Cypriot passport for a minimum of €2.15 million by investing €2 million in real estate and donating €75,000 to the government’s research and development fund, and €75,000 to the country’s land development organisation.”
Under the table payments to the correct people could get that passport issued in record time.
The less reported negative effects of the property bubble:
This scheme had a predictable, inflationary, effect on property prices. Properties over 200k in value were promptly rounded up to the 300k magic number and with that rise so came the rise in the price of all other properties.
At the same time this small part of the economy was artificially propped up, the rest of the economy was left to the free market to balance out. I.e. wages stagnated, businesses went under and owning a house became something of a far away dream to the average worker.
A sad state for the most educated, most productive generation to date (milennials).
The surviving banks may have welcomed the decision as high property prices could have stopped them from crumbling as their non-performing loans by some of the island’s largest developers mounted up to incredible amounts*. A potential sudden fall in property prices could have also left the banks’ growing portfolio of repossessed properties freefalling.
*However many of these prestigious developers are still not paying their previous loans despite seemingly flourishing under the years of the Golden Visa. The problem being structural and moral rather than economical.
Could being corrupt be a competitive advantage?
Many countries engage in Visa selling schemes in one form or another. Spain, Greece, the UK, Bulgaria and Malta among others are all open to selling their citizenships in order to attract investors. However Spain, Greece and Malta could be considered as more direct competitors due to their similar visa scheme offerings*.
All 3 countries offer stunning landscapes and the dream of owning luxury seaside property on the mediterrenean coastline as well as offering investors a chance to obtain a European passport.
Our politicians’ openness to corruption could have worked as a competitive advantage for many applicants with dubious pasts, applicants in a hurry who are willing to bribe someone to get the job done sooner and blatant criminals. An unorthodox way of getting ahead in an already dubious and questionable scheme aimed at inviting investment.
(*Malta and Cyprus were also the only countries directly offering passports instead of a more complicated Citizenship investment programme)
Potential economic impact of the sudden halt:
The most obvious and direct impact will be on the property market as much of the demand for housing arises from applicants for the passport programmes. Housing prices will likely slump to their pre-inflated, almost deflated prices. There could also be an additional downward pressure on prices as developers built new houses anticipating a continuing high demand. This could mean an excess in supply which will further push housing prices down. Unfinished developments may stay vacant or even unbuilt as demand sees a sudden drop, and developers too exposed in reinvesting in new properties (they were assuming a never ending demand for EU passports) may risk bankruptcy. Construction companies,building suppliers and homeware companies are likely to be directly impacted by a sudden fall in demand for housing but it is the (often unregistered) day workers who are likely to suffer the worst fate as they were already living near the poverty line.
Property prices could already be affected by the global Covid outbreak and subsequent economic downturn it will likely bring. This could further accelerate the decline in housing prices and increase economic pressure on the economy.
Large liquidating companies who took over some of the bank’s properties may also feel the crunch as properties decline in price. Companies such as Gordian and Remu handle tens of millions of euros worth of properties. Despite having portfolios worth combined hundreds of millions, the amount of staff they employ is relatively low (considering the total worth of their property portfolio) so even if they were to capsize ( in an extreme scenario) the larger part of the economic damage would be contained mostly to investors.
Much like pulling a band aid the sudden ripping off of the passport programme is likely to shock and hurt. Hopefully it won’t reopen an existing wound (the ongoing economic downturn from 2013) and make the economy bleed out.
A more indirect impact will be felt by the industries, companies and employees who indirectly live off this ecosystem of constant property development. Advertising and marketing companies, web developers and even printers may feel the pinch as the property boom meant an increase in demand for their services.
However it is important to point out that the overwhelming amount of money brought in by these schemes was accumulated in a tiny fragment of the overall economy.
Hence the biggest impact will be felt by those directly benefitting from the scemes — law offices, developers and corrupt politicians. So not all is terrible.
The future of the Cypriot Economy:
Passport Scheme 2.0(?)
Despite Europe trying to stamp out Golden Visa Schemes out and threatening legal action (Europa, 2020) it is quite possible that the huge amounts of money involved in lining up politicians’ and their crownies’ pockets will tempt the government to reintroduce a passport scheme, albeit a “cleaner” and more transparent version. A passport scheme 2.0 as such.
The lobbies pushing for such schemes to be introduced have much to lose with the abolition of the passport scheme and will be desperate to restart the flow of “easy money”. This is however unlikely since the legal political pressure and possible sanctions from Europe will make this not viable.
Some economists are advocating for a differentiated and cleaner investment visa programme based on companies setting up and operating in Cyprus. This, compared to the rather hollow investing in property scheme — which saw many applicants not even live in Cyprus, but rather simply maintaining a minimum threshold property portfolio — is likely to have a much bigger positive benefit on the Cypriot economy. Companies operating in the local business environment add to the economies in much deeper and meaningful ways. They don’t only occupy commercial and private properties but they generally employ people, outsource work to other local companies and add to a more diverse business environment. Simply put people who live in Cyprus add to, and participate in, the local economy.
What’s the next bubble?
By now, people monitoring the economy must be wondering what will the next bubble be which will partially prop up our distressed economy( until it bursts and the cycle repeats itself)? Much of Cyprus’ economy is based on quick, not well thought out, patch-up jobs and artificially created investments which work well in the short term and hugely and disproportionately affect the finances of the few vs benefiting the economy as a whole. At some point “premium land” will run out, as it is a finite resource, and “get rich quick” schemes can’t prop up an economy long-term. It’s probably time to realise that the low hanging fruit has long been taken. Only investing in long term projects that actually require thought and work by our political parties and the society as a whole are now viable to sustain long-term growth and a healthy economy. The opportunities are endless, but require strong political will and most importantly action.
Green energy, future-proofing our educational systems for a rapidly changing world and incentives to invite genuinely positive investment could transform the island and secure its future. US diplomat Keith Krach recently expressed the opinion that Cyprus could transform itself to an technologies & innovation hub and become a regional “Silicon Valley” (Cyprus Mail, 2020). If this is to happen serious structural improvement has to happen to our ailing public services and inefficient legal system. Perhaps some introspection from all of us is needed to reinvent the social and political landscape of the island….but just imagine how great that could be.
Corrupt Politicians Caught on Camera by Al Azeera willingly accomodating criminals with Cypriot Passports.
A Passport Programme has existed for a while but a faster, more lenient way to obtain a passport was devised shortly after the 2013 closing of the island’s 2 largest banks.
The plan allowed for people investing in Property to quickly obtain a Cypriot passport. Our corrupt political landscape gave us a competitive advantage for attracting dubious businessmen and even blatant criminals.
The housing market was artificially propped up by this scheme (real estate bubble) while wages spiralled — meaning that young millennials could no longer afford housing on their salaries.
Corruption could have been a form of competitive advantage in the scheme as it attracted dubious investors and criminals to the island — they were willing to pay to get the job done and Cypriot lawyers and politicians were happy to oblige.
The largest burden of the collapse will likely be felt by the direct industries benefiting from the scheme — local law firms, developers and sleazy politicians as the overwhelming majority of revenue went to a fragment of the economy.
A passport scheme 2.0 is unlikely although a more organic, transparent naturalisation scheme could be devised to attract healthier long term investment.
We can invest in futureproofing our economy and cease to rely on a series of bubbles to artificially prop it up but that will take long term structural and societal changes.