March 29, 2024

No Matter Outcome, Cyprus Crisis Is Blow to Business

Also vitally at stake in this island country’s banking crisis is Cyprus’s credibility as a place for international companies to continue doing business.

Take Avid Life Media, the Canadian-owned operator of some of the world’s biggest online dating sites. Only a few weeks ago it set up an office here as a base for its international operations, attracted to Cyprus — as hundreds of other foreign businesses have been — because of its reputation for financial stability, a low corporate tax rate, a friendly banking environment and most of all, a strong rule of law.

Sure, the Avid Life Media executives were aware that a banking crisis was brewing, but they had ventured ahead. They were assured in part by a promise from President Nicos Anastasiades when he was elected in February that he would soon arrange an equitable bailout with the international organizations that have guided the euro zone through four previous bailouts while keeping bank depositors whole.

“We went from paradise to hell in a minute,” said Keith Lalonde, Avid Life Media’s top executive here. He recounted the cellphone call he got from his financial adviser a week ago Saturday while strolling under a bright sun on Limassol’s fine white beach.

“We have a problem,” the adviser told him. The Cypriot government had just declared it would seize nearly 10 percent of the €2 million, or $2.6 million, the company had on deposit in Cyprus — and about 7 percent of Mr. Lalonde’s personal funds — to help secure its bailout.

As haggling over the bailout terms continued since, the company’s bank accounts — and all others on the island — have been frozen, making it nearly impossible to do business. Hundreds of other foreign-owned companies in Cyprus are in similar straits, whether new arrivals like Avid Life Media or long-timers like KPMG, PricewaterhouseCoopers and Lukoil.

As soon as Mr. Lalonde got the call, he punched the speed dial to Avid Life Media’s chief executive in Toronto, Noel Biderman, to relay the news.

“We jumped into panic mode,” Mr. Biderman recalled the other day in a telephone interview.

Although Avid Life Media’s business model has stoked controversy, and the occasional lawsuit, for Web sites like CougarLife.com and AshleyMadison.com that critics say promote promiscuity, the company has seen its European and global traffic grow rapidly. About a quarter of the sites’ 18 million members are outside North America, almost 4 million of them in Europe, according to the company. Mr. Biderman says he chose Cyprus for the same business-friendly, tax-attractive reasons that have drawn so many other foreign companies.

Now, Mr. Biderman and Mr. Lalonde are wondering whether to pull up stakes. If that happened on a large scale, Cyprus, which has evolved into one of Europe’s most important financial centers in the past decade, would face a blow to the cornerstone of its economy. Other than mom-and-pop shops, most businesses in Cyprus have foreign owners.

“Most of the money here comes from foreign investors and companies like us,” Mr. Lalonde said. But given the enormous uncertainty churned up, “Why would anyone come here?” he asked. “They have put the nails in their own coffin.”

On Sunday, President Anastasiades and finance ministers from the 17-member euro zone were meeting in Brussels, hoping to find a resolution to the Cypriot financial crisis. Whatever they come up with, it may not be nearly enough to contain the damage.

Much of what has made Cyprus so alluring to businesses has blown up in the past week. Cyprus’s 10 percent corporate tax rate would rise to 12 percent under the tentative terms of the bailout. That would still be the lowest in the euro zone, still below Ireland’s 12.5 percent and well under the 29.5 percent rate in Germany and 33.3 percent in France. But to be a tax haven requires a stability that Cyprus has lost.

Article source: http://www.nytimes.com/2013/03/25/business/global/no-matter-outcome-cyprus-crisis-is-blow-to-business.html?partner=rss&emc=rss