What Happened in Cyprus?

62 Pages Posted: 18 May 2014 Last revised: 6 Jun 2014

See all articles by Alexander Michaelides

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Date Written: May 15, 2014

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

JEL Classification: E00, E62, G00, H63

Suggested Citation

Michaelides, Alexander, What Happened in Cyprus? (May 15, 2014). Available at SSRN: https://ssrn.com/abstract=2437976 or http://dx.doi.org/10.2139/ssrn.2437976

Alexander Michaelides (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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