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The recent Eurozone debt crisis has severally affected the region's financial stability, with Cyprus no exception, though the island had seen a certain degree of economic recovery throughout 2010. This was shattered however in July 2011 when the country became the latest victim of a sovereign debt downgrade by the infamous rating agencies....

The recent Eurozone debt crisis has severally affected the region's financial stability, with Cyprus no exception, though the island had seen a certain degree of economic recovery throughout 2010. This was shattered however in July 2011 when the country became the latest victim of a sovereign debt downgrade by the infamous rating agencies. On July 28, Moody's announced that it was dropping the government's bond ratings from A2 to Baa1, a categorisation that predicts a negative outlook for the country's economy.

The rating agency cited three key reasons for its decision: The exposure of Cypriot banks to the crisis in Greece, the uncertainty surrounding the government's ability to push through its new fiscal policy and the disruption caused by the destruction of the Vasilikos power plant on July 11.

This decision was followed by further bad news as Moody's then downgraded the deposit and debt ratings of Marfin Popular Bank and Bank of Cyprus.

At time of going to press it was still unclear how big an impact these decisions would have on the economy, but the outlook is not positive.

As a result of the overall environment, Cypriot law firms have experienced very little growth. "Because of the global crisis, a lot of work had been postponed, cancelled or suspended, therefore the job of lawyers here has been affected negatively," says one corporate partner.

Due to Cyprus' location and favourable tax regime most of the work done by practitioners has an international element, with businesses taking advantage of the islands favourable conditions and numerous double tax treaties. "When the country is used as a satellite country for rooting cross-border investments, we're doing well," says one lawyer, while another one adds: "We've been dealing with international clients, we see a lot of holding companies being established for tax benefits, and they are doing businesses either in Russia, India, or Poland."

In terms of the quantity of the work, while work emanating from India and Cyprus' traditional trading partner Russia remains relatively stable, the real growth is coming from the CEE (Central & Eastern Europe): "In Eastern Europe, we've seen mainly businesses coming from Poland, it's now the second biggest group in Cyprus," says one partner, while another says: "Investments have died down a bit in Russia. From what I know it's the stagnation for that and there are a lot of difficulties in Russian market."

The country's double taxation treaties with other jurisdictions prove to be the main driving force behind cross-border mandates, and for some even more needs to be done: "If you ask me [about double taxation treaties], I would say Cyprus needs to increase the number of the treaties," says one partner, "the more double taxation treaties, the better." While another adds: "The treaties have a huge impact, it is one of the reasons why people are very much interested in coming to Cyprus. They use Cyprus in their group structures, and set up holding companies. This generates huge litigation and huge corporate work by company registrations, by drafting contracts for financing, M&A. It generates a lot of work."

Another topical issue being discussed is the discovery of substantial natural gas deposits, 60 miles off the coast. It is believed that together with the existing oil and gas deposits in the Middle East, they will form a new source of energy supply to Europe.

"Imagine if tomorrow we become an energy country, the whole landscape [of work] could be totally changed," says one corporate lawyer. "Imagine if tomorrow an energy terminal needs to be created, the energy terminal will be worth a couple of billion, just to create it, there would be tremendous amount of legal work out there. You will have a chain of factors of various things."

It is expected that the first drilling could start in 2012 and firms will expect to see plenty of work related to the procurement of drilling rights licenses and indeed financing: "I expect a lot of financing work, I expect establishment of companies here," says one corporate partner, "I expect that maybe we would have some of the big companies coming to Cyprus, maybe we will have re-domiciliation."

Cypriot banks, in line with the rest of the Eurozone economies, have been trying to increase their reserve capital in order to comply with the new Basel III requirements. "I've seen the raising of capital through rights issue," says one partner, while another one agrees: "Some of the banks have already complied. For those who've not, they've either started or they're in the process of increasing share capital."

The banks have also been affected by its neighbouring Greece's economic turmoil. "The banking sector is a healthy sector," says one lawyer. "However, because of the fact they have subsidiaries [in Greece], they have exposure to Greek bonds, and now Greece is for the second year experiencing the negative growth. So if there's a hit in Greek bonds, then they would need to take a hit." While another lawyer adds: "The Cypriot banks are very very careful and conservative now where they lend money and they're only lending money to very good projects, they're asking for more security."