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Neglect Private Debt at the Economy’s Peril: Applying Balance Sheet Recession Analysis to the Post Bail-in Cyprus Economy

Author

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  • Leslie G. Manison

    (Independent Consultant)

  • Savvakis C. Savvides

    (Independent Consultant)

Abstract

The authors discuss the role of private debt in financial crises and attempt to apply the debt deflation logic to the data and facts surrounding the post bail-in years in Cyprus. It is found that the financial crisis in Cyprus was indeed predictable and that a key problem facing the country remains that of avoiding a balance sheet recession which threatens to impede sustainable economic growth. Another interesting finding is that for the three years after the bail-in Cyprus households have been living off their savings rather than making the required additional savings to reduce their debt and restore balance sheet positions. With greater forced or needed savings and the resultant contraction of aggregate demand a downward spiral of debt/deflation can inevitably be expected to set in along lines expounded most notably by Richard Koo. In addition policy recommendations aimed at countering the onset of a balance sheet recession are advanced.

Suggested Citation

  • Leslie G. Manison & Savvakis C. Savvides, 2017. "Neglect Private Debt at the Economy’s Peril: Applying Balance Sheet Recession Analysis to the Post Bail-in Cyprus Economy," Development Discussion Papers 2017-06, JDI Executive Programs.
    • Handle: RePEc:qed:dpaper:303
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    References listed on IDEAS

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    1. Savvakis C. Savvides, 2016. "Overcoming Private Debt: Unblocking and rebuilding the loan burdened real economy in Cyprus," Development Discussion Papers 2016-08, JDI Executive Programs.
    2. International Monetary Fund, 2013. "Jamaica: Request for an Arrangement Under the Extended Fund Facility," IMF Staff Country Reports 2013/126, International Monetary Fund.
    3. Savvakis C. Savvides, 2014. "The Pursuit of Economic Development," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 3(2), pages 1-1.
    4. Leslie G. Manison & Savvakis C. Savvides, 2016. "Towards Sustainable Growth: Rebuilding the Foundations of the Cyprus Economy," Development Discussion Papers 2016-07, JDI Executive Programs.
    5. International Monetary Fund, 2013. "Pakistan: 2013 Article IV Consultation and Request for an Extended Arrangement Under the Extended Fund Facility," IMF Staff Country Reports 2013/287, International Monetary Fund.
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    Cited by:

    1. Leslie G. Manison, 2017. "Lack Of Adjustment Of The Cyprus Household Sector: Results From The Eurosystem’S Household Finance And Consumption Surveys," Development Discussion Papers 2017-10, JDI Executive Programs.

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    More about this item

    Keywords

    balance sheet recession; debt deflation spiral; sustainable growth; debt minimization; dissaving; aggregate demand; credit risk.;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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