Working Paper: CEPR ID: DP9993
Authors: Alexander Michaelides
Abstract: This is a case study of how a country nearly reached bankruptcy in March 2013, within five years from 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.
Keywords: bail-in; banking crisis; cost of inaction; cyprus; european sovereign debt crisis; fiscal imbalances; sovereign debt; stress tests
JEL Codes: E00; E62; G00; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local political decisions (H70) | economic decline (F44) |
| delay in seeking assistance (I19) | worsening of economic situation in Cyprus (E66) |
| overconfidence among local politicians (H70) | ignoring crisis's severity (H12) |
| economic environment in Greece (E66) | worsening situation in Cyprus (F65) |
| economic policies implemented (E65) | financial distress experienced (G33) |
| decisions made at the European level (O52) | compounded crisis (H12) |