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Cyprus – A Year after the Bail-in

In March 2013 Cyprus experienced the shock of a depositor bail-in for its two systemic banks. Large capital inflows, bad banking practices, excessive construction activity and a general culture of over-consumption had created huge imbalances during the boom years of 2004-2008 (as described in “The Time of Truth for Cyprus”, Opinion Article No 5, March 2013). The global financial crisis burst the bubble and a painful adjustment was inevitable. The pain was made much greater by catastrophic policy failure that culminated in the bail-in, causing a tremendous loss of wealth, the destruction of the banking sector, a loss of trust and credibility, and significant economic hardship. The economic outlook in March 2013 was extremely bleak.

 

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