In the aftermath of the 2008/2009 global financial crisis, the economy of Cyprus was at the bleak of collapsing due to the imminent threat of collapsing banking system. The country had three major banks and two of them, which include Laiki and the Bank of Cyprus, were on the verge of collapsing. Cyprus was only a few years of being a member of the EU considering that it had joined the EU in 2008 (Nandita & Biswal, 2013). At the height of the crisis, the country hoped that the EU would come to its rescue, but this call came with serious hurdles forcing it to make hard choices. The current paper presents the analysis of the Cyprus financial and economic crisis of 2013. The paper has been organized into three main sections, which include the identification of all pertinent issues, analysis and evaluations of the financial management issues, and the recommendations.
Identification
Cyprus was considered a tax haven. As a result, the country attracted bank deposits from many parts of the world with Russia being a major source of the foreign bank deposits. It was believed that the deposits from foreigners were made out of fraudulent money. Cyprus could only issue 30% of the foreign deposits as loans and advances until when the country joined the EU, and some of the foreign deposits became local deposits, meaning that a higher lending threshold was applicable. It led to the country lending more and attracting more in bank deposits. One of the countries that Cypriot banking system lent funds was Greece whose economy was also facing a crisis. Other than the high deposits, the country continued to give high-interest rates on the deposits. At the time of the analysis, the assets held by the banking sector were amounted to 7.5 times of the GDP, meaning that the banking sector was already too big, and its collapse or bankruptcy would have devastating implications for the country (Nandita & Biswal, 2013). To prevent the collapse, Cyprus sought funds from the EU and the IMF, but the deal came with preconditions that the country was to contribute 7.5 billion USD for the EU and the IMF to give the country 11.7 billion USD in emergency liquidity assistance (Nandita & Biswal, 2013). The country deliberated on how to raise the funds, and it settled on introducing a levy fund on the customers' bank deposits, but this would result in protests from the masses and then frighten away investors. The other option was to seek help from Russia but EU would be opposed to this move since Russia would seek to exploit the country's oil resources. The question then remained as to which option was more preferred.
Analysis
Analysis of the case indicates that the problems began when Cyprus joined the EU. It is easy to say that the 2008/2009 financial crisis caused the problems for Cyprus but centrally, the EU’s action on Greek debt sent the very first shivers to the financial sector of Cyprus. It took place when the Greek debt cut by 75% in 2012 resulted in massive losses for the banking sector in Cyprus (Nandita & Biswal, 2013). Secondly, Cyprus started lending out more money to foreigners only after joining the EU; meaning that credit risk increased considerably with increased lending. Thirdly, the bailout pre-conditions had turned out to be political meaning that the EU did not only focus on bailing out Cyprus but also on protecting the interests of gaining control of the offshore oil wells in Cyprus. It is for this very reason that the EU pushed for a levy fund introduction on deposits. The sole aim was to punish the Russian depositor and hence the judgment of the EU was biased. Lastly, Russia’s offer to assist Cyprus would not hurt the customers since it would only require agreements between the two countries on how the $7.54 would be repaid whether it is from the oil fields or through any other agreements. At the bottom line, the EU was a major cause of the Cyprus financial crisis (Nandita & Biswal, 2013).
In concluding, this paper recommends that Cyprus seeks assistance from Russia in to raise the $7.54 billion required to secure ELA from the EU. Secondly, Cyprus may enforce regulatory policies to reduce the bank’s credit exposure by limiting the amounts of debt that the banks can sell and limit the interest rates that the banks can offer on deposits. Lastly, the country must consider reducing the banking assets to meet the EU standard of not more than 3.5 times of GDP. Lastly, Cyprus must pursue regulatory autonomy from the EU.
Reference
Nandita & Biswal, P. C. (2013). Crisis in Cyprus: Was it Different this Time? Ivey Publishing.pdf
