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The Cyprus Debt: Perfect Crisis and a Way Forward

Stavros Zenios ()

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: The Cyprus crisis is one of the most complex in the Eurozone -although in absolute terms it is a minor crisis. An analysis of the ongoing developments from different perspectives leads to the conclusion that we are witnessing a "perfect crisis" at the confluence of sovereign debt and banking crisis together with debt overhang of business and households and a severe decline of competitiveness. As a result CY has amassed a large external debt that cannot be repaid, no matter what fraction of the country's real domestic economic output is appropriated through austerity measures. Hence, fiscal austerity leads to deflationary stagnation and alone does not work. We advocate a policy response that addresses multiple dimensions of the problem with policy options of (1) austerity deleveraging, (2) structural reforms, (3) financial innovations, (4) partial privatizations and (5) debt restructuring. These options are drawn from lessons of what worked well, and what not, in crises of other countries and these lessons are summarized in lieu of conclusions.

JEL-codes: A10 C10 E10 E40 F01 F02 F32 G21 G31 H10 J24 (search for similar items in EconPapers)
Date: 2013-03
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