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The Cyprus Debt: Perfect Crisis and a Way Forward

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  • Stavros A. Zenios

    () (Department of Accounting and Finance, University of Cyprus)

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 storm of a financial 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 Cyprus 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) selective 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. A postscript discusses the potential impact of the Eurogroup decision of March 2013 on the Cyprus crisis.

Suggested Citation

  • Stavros A. Zenios, 2013. "The Cyprus Debt: Perfect Crisis and a Way Forward," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 7(1), pages 3-45, June.
  • Handle: RePEc:erc:cypepr:v:7:y:2013:i:1:p:3-45
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    Cited by:

    1. Gorovaia, Nina & Zenios, Stavros A., 2013. "Innovation in Times of Financial Crisis," Working Papers 13-31, University of Pennsylvania, Wharton School, Weiss Center.
    2. Elias Giannakis & Theofanis P. Mamuneas, 2018. "Sectoral linkages and economic crisis: An input-output analysis of the Cypriot economy," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 12(1), pages 28-40, June.
    3. Andrea Consiglio & Stavros Zenios, 2015. "Risk profiles for re-profiling the sovereign debt of crisis countries," Journal of Risk Finance, Emerald Group Publishing, vol. 16(1), pages 2-26, January.
    4. Christos Christodoulou-Volos & Andreas Hadjixenophontos, 2017. "Empirical Determinants of the Non-Performing Loans in the Cypriot Banking System," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 6(4), pages 1-1.
    5. George Christou & George Kyris, 2017. "The Impact of the Eurozone Crisis on National Foreign Policy: Enhancing Europeanization in the Case of Cyprus-super-," Journal of Common Market Studies, Wiley Blackwell, vol. 55(6), pages 1290-1305, November.
    6. DIMITRIOU Georgia & METAXAS Theodore, 2018. "Mapping Economic Crisis In South Europe: Greece, Portugal And Cyprus," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 18(2), pages 41-54.
    7. Sofronis Clerides, 2014. "The Collapse of the Cypriot Banking System: A Bird’s Eye View," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 8(2), pages 3-35, December.
    8. Scott Brown & Demetra Demetriou & Panayiotis Theodossiou, 2018. "Banking Crisis in Cyprus: Causes, Consequences and Recent Developments," Multinational Finance Journal, Multinational Finance Journal, vol. 22(1-2), pages 63-118, March - J.
    9. Duane, Michael & Schuermann, Til & Reynolds, Peter, 2013. "Stress Testing Bank Profitability," Working Papers 13-30, University of Pennsylvania, Wharton School, Weiss Center.
    10. Papafilis, Michalis-Panayiotis & Psillaki, Maria & Margaritis, Dimitris, 2020. "The effect of the PSI in the relationship between sovereign and bank credit risk: Evidence from the Euro Area," MPRA Paper 98182, University Library of Munich, Germany.

    More about this item

    Keywords

    financial crisis; debt overhang; banking crisis; competitiveness; labor cost; GDP-linked bonds; crisis management; Eurozone; Cyprus.;

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F01 - International Economics - - General - - - Global Outlook
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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