Michaelides, Al., (2014), “Cyprus: from boom to bail-in”, Economic Policy, Vol. 29, Issue 80, pp. 639-689.
This is a case study of how a country nearly reached bankruptcy in March 2013, within five years of 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.
Relevant Posts
- Hardouvelis, Gikas (2014), “Overcoming the crisis in Cyprus”, Economy & Markets, Vol. IX, Issue 1.
- Theophanous, A., (2013), “The way out of the Cyprus economic crisis”, Notre Europe – Jacques Delors Institute, Policy Paper 96, September.
- Coutinho, Leonor, (2013), “Capital Controls in Cyprus; Shooting at a moving target”, Ceps, Ceps Commentaries in Economic Policy, 14 June.