Journal Article

Cyprus: from boom to bail-in

Alexander Michaelides

in Economic Policy

Published on behalf of Center for Economic Studies of the University of Munich

Volume 29, issue 80, pages 639-689
Published in print October 2014 | ISSN: 0266-4658
Published online November 2014 | e-ISSN: 1468-0327 | DOI: https://dx.doi.org/10.1111/1468-0327.12040
Cyprus: from boom to bail-in

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  • Economic Growth and Aggregate Productivity
  • Financial Regulation
  • Health, Education, and Welfare
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  • Regional Government Analysis

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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.

— Alexander Michaelides

Journal Article.  22054 words.  Illustrated.

Subjects: Economic Growth and Aggregate Productivity ; Financial Regulation ; Health, Education, and Welfare ; Labour and Demographic Economics ; Macroeconomics and Monetary Economics ; Public Economics ; Regional Government Analysis

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