What Happened in Cyprus?

Alexander Michaelides

No 9993, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This is a case study of how a country nearly reached bankruptcy in March 2013, within five years from entering the Eurozone. The magnitude of the requested assistance is extremely large relative to GDP (100%) and studying this event provides useful lessons for avoiding such crises in the future. The crisis resulted from a worsening European economic environment (especially in Greece), bad choices with regards to public finances, weak corporate governance within the local banking sector, inadequate and/or difficult regulation of cross-border banking, worsening competitiveness, and bad political decisions at the European and, especially, the local (Cypriot) level. Local politics, reflected in short term political calculations and/or inadequate understanding of the magnitude of the crisis, delayed corrective action for 18 months until election time, making a bad situation almost impossible to deal with. Overconfidence can be one behavioural explanation for why local politicians ignored the dramatic costs of inaction.

Keywords: Cyprus; Bail-in; Stress tests; Cost of inaction; Sovereign debt; Banking crisis; Fiscal imbalances; European sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: E00 E62 G00 H63 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (4)

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