Crisis in Cyprus: Was it Different this Time?
(6 pages of text)
Cyprus is a small island member of the European Union, constituting 0.2 per cent of the eurozone gross domestic product. During its growth phase, the Cypriot banking system developed vulnerabilities after suffering heavy losses during the Greek sovereign debt crisis. The European Central Bank, the International Monetary Fund and the European Union offered a bailout of US$16.9 billion if the Cypriot government could raise US$7.54 billion from within. The government had a few options on the table — a “one-off” stability levy on all bank deposits (a solution loathed by both native and foreign depositors), a bank restructuring plan, seeking help from Russia (which expected access to the island’s oil and gas reserves) and a complete banking system bailout (which would come with oversight and control from those offering the bailout). The economy was fast approaching a standstill and Cyprus had only two days to strike a deal to avoid the collapse of its banking system.
- Understand the vulnerabilities of an economy, including the occurrence of banking crisis and sovereign debt crisis and their linkages and costs.
- Appreciate and evaluate various options of crisis resolution.
- Analyze the crisis from different stakeholders’ perspectives.
- Appreciate the working of a currency union.
- Appreciate the interconnectedness of policy and economics.
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