Cyprus financial troubles raise hopes for reunification

A view of the Turkish side of the divided city of Nicosia, Cyprus.

BRUSSELS, Belgium — Very little has changed in North Nicosia ever since a Turkish invasion cleaved Cyprus in half nearly 40 years ago.

The Turkish Cypriots in the capital of breakaway Northern Cyprus still live in international isolation, scraping by on handouts from Ankara.

But just a short stroll across the border separating the world’s last divided capital, life has changed dramatically in the past few months.

On their side of the island, Greek Cypriots are facing a future of economic hardship under new austerity measures demanded by international creditors who bailed the Mediterranean island out of a paralyzing banking crisis earlier this year.

However, the financial troubles may have a silver lining: hope that Cyprus’s scramble for economic lifelines will encourage a new effort to unite North and South for their common benefit.

Members of the international community have been making that case in recent weeks.

“The reunification of the island would give a major boost to the economic and social development of Cyprus,” Olli Rehn, the European Union's most senior economics official, told the European Parliament earlier this week.

Writing in an editorial for the New York Times last month, the former UN special representative for Cyprus, Michael Moller, said, “The new realities — good and bad — offer an opportunity to move forward on the long-term solution for Cyprus.”

That’s the optimistic view.

Others warn that bickering over who owns undersea natural gas deposits could propel the two sides back to the brink of war.

Turkey first sent troops to Cyprus in July 1974 after Greece’s military rulers botched an attempt to mastermind a coup by Greek Cypriots and fold the island into Greece.

The plotters and their Greek backers withdrew after they found themselves overwhelmed by the Turkish forces, leaving behind a divided island.

On-again-off-again peace talks, a referendum on reunification and easing border restrictions have failed to reconcile both sides.

The 40 percent of the island that constitutes Northern Cyprus remains recognized only by Turkey. Some 210,000 people are displaced on both sides of the border.

While Northern Cyprus languished in international isolation in the years following the split, Greek Cypriots aggressively promoted tourism and offshore banking. That fueled a decades-long economic boom that crashed after the banks racked up unmanageable debt.

Now Cyprus is scrambling to develop a plan to manage a bleak future as the growth forecast tumbles and unemployment soars.

The EU and International Monetary Fund have pledged $13 billion to stave off bankruptcy, but Cyprus must come up with $17 billion itself. Winding down its two biggest banks is expected to raise nearly $14 billion, and the central bank is considering selling some of its gold reserves.

Northern Cyprus has remained off the official agenda so far.

But economists say a deal would create not only a larger market and a boom in tourism, but also the potential for exploiting the recent gas finds.

An estimated 7 trillion cubic feet lies in the Aphrodite field off the island’s south coast, neighboring Israeli waters where similar finds are expected to provide Israel with billions.

Although many Greek Cypriots are pinning hopes for future prosperity on gas, Northern Cyprus also claims rights to the waters.

When rumors circulated in March that Cyprus would put the reserves on the table as part of its bailout negotiations, Turkey warned the move was “a dangerous manifestation of the illusion of being the sole owner of the island, which may lead to a new crisis in the region.”

But there are indications Ankara may be putting forward a solution. Fiona Mullen, an analyst with Sapienta Economics, believes that may have been Turkey’s subtext.

“What they seem to be saying here is maybe there is a way of solving the Cyprus problem here, maybe we can all cooperate on the gas,” she said.

The largest problem for developing the Aphrodite field is getting its gas to market. One practical option, a pipeline to Turkey, is “inconceivable ... without solving the Cyprus problem,” says University of Nicosia professor Hubert Faustmann.

“They could solve it in a win-win situation for everyone — if they do it smart,” he adds.

There are many different options on the table ranging from complete unification to friendly cohabitation. However, any solution would require serious political will to overcome deep wounds.

In 2004, days before Cyprus joined the EU, Greek Cypriots rejected a UN-brokered reunification plan Turkish Cypriots had backed.

However, one of the Cypriot politicians who campaigned for a “yes” vote was Nicos Anastasiades, whose recent election as president has raised hopes he’ll start another drive for a solution.

Dervis Eroglu, leader of the Turkish Cypriots, has said he hopes the economic crisis will produce “perhaps a greater desire for a settlement.”

The UN special adviser on Cyprus, Australian Alexander Downer, is trying to organize a meeting between the two leaders this month.

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For now, traders in the narrow streets around North Nicosia’s beautifully restored mosque are mainly worried that Greek Cypriots feeling the pinch of the economic crisis will no longer hop across the border to do their shopping.

Sitting in his antique shop in late March, Turgay Karamanali said he wished both sides would stop blaming everyone else for the island's woes.

“Let us not say this is the English fault, this is the German's fault,” the 59-year-old said. “Let's sit together as Turkish and Greek Cypriots and find some way to agree and make peace on this island.”