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What Happened in Cyprus?

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  • Michaelides, Alexander

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.

Suggested Citation

  • Michaelides, Alexander, 2014. "What Happened in Cyprus?," CEPR Discussion Papers 9993, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9993
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    Cited by:

    1. Athanasios Orphanides, 2014. "The Euro Area Crisis: Politics over Economics," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 42(3), pages 243-263, September.
    2. Andros Kourtellos & Kyriakos Petrou, 2021. "Trends and disparities in economic inequality in Cyprus and the EU," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 15(1), pages 16-45, June.
    3. Alexander Popov & Neeltje Van Horen, 2015. "Exporting Sovereign Stress: Evidence from Syndicated Bank Lending during the Euro Area Sovereign Debt Crisis," Review of Finance, European Finance Association, vol. 19(5), pages 1825-1866.

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    More about this item

    Keywords

    Cyprus; Bail-in; Stress tests; Cost of inaction; Sovereign debt; Banking crisis; Fiscal imbalances; European sovereign debt crisis;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G00 - Financial Economics - - General - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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