FINANCIAL CONTAGION RELOADED: THE CASE OF CYPRUS

Iulia Oehler-Şincai

Global Economic Observer, 2013, vol. 1, issue 1, 66-74

Abstract: In the present case study, our main objective is to bring to the forefront the main factors that led to the double-dip recession of the Cypriot economy. We analyze determinants such as "tax haven" status, interlinks with the Greek economy, spillovers originating in the Euro Area as a whole (through the debt crisis) and Greece in particular. In spite of the fiscal reform of 2002 and the new fiscal system in force since the 1st of January 2003, Cyprus continued to be a "tax haven". Its high investment attractiveness spurred the "Cyp-Rus" relations, boosted an outsized banking sector (representing 800% of Cyprus GDP in 2010-2011) and generated an unsustainable proportion between the real and the "virtual" economy. Besides, the public sector became larger than required by such a small economy, its share in the total yearly value added being close to one quarter. Taking into consideration all these factors, we conclude that the „W"-shaped recession of the Cypriot economy is a sui generis one and the questioning of its "fiscal paradise" status is even more acute than in the case of countries such as Luxembourg or Liechtenstein.

Keywords: Cyprus; financial contagion; tax haven; Cyp-Rus; Cyprus-Greece; recession; euro zone; debt crisis (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 E66 F21 F33 F34 F44 F62 G01 G11 G15 G21 H81 (search for similar items in EconPapers)
Date: 2013-05
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Working Paper: Financial contagion reloaded: the case of Cyprus (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ntu:ntugeo:vol1-iss1-13-066

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