The financial crisis in the Republic of Cyprus was a debt, financial, fiscal and economic crisis in 2012-2013, which led to the paralysis of the banking system and put the country’s economy at pre-default state. The crisis also involved downgrading the Cypriot government’s bond credit rating to negative status by international credit rating agencies. Noticeable was the reluctance to restructure the problematic financial sector of Cyprus by the government of the republic (Dixon 2).
There were a number of reasons for the severe banking crisis. Firstly, the economy of Cyprus was centered around the offshore sector. Secondly, unsuccessful investments of Cypriot banks to Greek debentures led to great losses connected with large write-downs on Greek bonds. Thirdly, the government was unable to reimburse state expenses. Finally, the countries of the euro area experienced a general weakening after the global financial crisis in 2008, which affected the countries of the so-called European periphery that Cyprus was bound with by same currency, labor and trade markets. In particular this applies to Greece experiencing the economic downturn since 2008.
Regardless of the deterioration of economic indicators in 2008 the Cypriot banks held the interest rates on deposits several times higher than interest rates in the same currency in Germany (4,45% comparing to 1.5%). Moreover, around 55% deposits in the Cypriot banks contain the amount exceeding EUR 100,000, and more than 30% of the deposits belong to Russian citizens. In these conditions, such high interest rates were paid mostly at the expense of new investors, creating a scheme known as the financial pyramid. These and other problems have brought the republic's economy to collapse, and the country developed a necessity of obtaining financial aid from international lenders.
Was it possible to prevent the banking crisis in Cyprus? There is evidence that even if the crisis was unavoidable the scale of the disaster could be reduced significantly by the Cypriot government (Strupczewski & Breidthardt 1). The euro area being a currency union with very strict rules, has a defined market economy and was not adaptable to the communist government and communist president Demetris Christofias elected in 2008. Cypriot economist Athanasios Orphanides in his interview told that before the new president was elected and new government was formed the economy of Cyprus had a banking system with excellent health. The fiscal finances were in excellent state and there was a surplus in the fiscal accounts of the country. The new government made a range of mistakes that resulted in harshly negative consequences for the Cypriot economy. Orphanides emphasizes that the communist government started overspending “not only for unproductive government expenditures but also they raised implicit liabilities by raising pension promises, and so forth” (1). Shortly before the crisis started the European Banking Authority examined two largest Cypriot banks with a stress test which had to be disturbing background for the Cypriot government that it should pay attention to. With minor structure adjustments and a reasonably small package from the troika Cypriot economy had great chances to protect itself from the collapse.
Works Cited
Dixon, Hugo. "Cyprus Refuses to Learn From Its Mistakes". The New York Times. Web. 31 Mar. 2016
Orphanides, Athanasios. “What happened in Cyprus”. The Economist. Web. 31 Mar. 2016
Strupczewski, Jan, and Annika Breidthardt. "Last-minute Cyprus deal to close bank, force losses". Reuters. Web. 31 Mar. 2016
