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TheStreet Open House

Cyprus Looks To Its Past For Economic Reboot

However, one unintended consequence of that drive to educate was the unbalancing of the Cypriot economy away from agriculture and tourism towards financial services, said Ker-Lindsay.

The booming financial sector got a further turbo charge from the collapse of the Soviet Union in the early 1990s, and Russian money â¿¿ some thought to be of dubious origin â¿¿ started flowing into the country's banks. The influx of capital that further unbalanced the economy.

Membership in the EU in 2004 and the adoption of the euro four years later were meant to solidify the country's advance and set a course for further prosperity.

However, Europe's debt crisis and in particular the problems of Greece tore up the Cypriot economic model and the country eventually had to accept an onerous package of measures to stave off bankruptcy, including the closure of its second-largest bank, Laiki, and a whack on big depositors.

With capital controls likely to be in place for the time being, Cyprus' status as an offshore financial haven is likely gone for a generation at least. And with its banking sector crippled from restrictions imposed, the country will undoubtedly lose a chunk of its credit lifeblood.

"Should the current banking sector instability result in a prolonged breakdown in the domestic payments system, this would lead to a surge in corporate bankruptcy and drive a deeper GDP contraction," the ratings agency Fitch warned.

A severe economic depression looms that many think could see the Cypriot economy shrinking by a quarter over the coming years â¿¿ equivalent to the contraction seen in the immediate post-invasion period â¿¿ as companies go bust and unemployment likely rises to Spanish and Greek levels above 25 percent.

The country's European partners know there are grim times ahead. Olli Rehn, the EU's top monetary official, sought to find comfort in the lessons of the past.

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