Banking Crisis in Cyprus: Causes, Consequences and Recent Developments

Multinational Finance Journal, 2018, vol. 22, no. 1, pp. 63-118

Posted: 28 Aug 2019

See all articles by Scott Brown

Scott Brown

University of Puerto Rico

Demetra Demetriou

Cyprus University of Technology

Panayiotis Theodossiou

Ball State University

Date Written: August 24, 2018

Abstract

The economy of Cyprus was barely affected by the U.S. subprime mortgage debacle. The economic crisis in Cyprus was initially driven by fiscal mismanagement and subsequently by the failure of the government and its regulatory branches to monitor the imprudent behavior and risky investment actions of top executives in the banking sector. That is, banking executives ran amok from poor monitoring leading to severe agency problems in the Cypriot banking industry. The economic effects of the first capital-controlled bail-in in the EU in 2013 temporarily hobbled the real economy and the banking sector of Cyprus. Nevertheless, in less than five years, the economy of Cyprus recovered almost fully. This paper provides an economic analysis of the macroeconomic, banking and political events that led to the economic collapse in Cyprus. We also cover the interim period between collapse and recovery. The Cyprus case is an opportunity for European economic agents and regulators to learn how to avoid bail-in and welfare bloat. Studying Cyprus helps the reader see the most troubling cracks in the foundations of the European Fortress.

Keywords: cyprus banking crisis, bail-in, fiscal deficit, European Union

JEL Classification: E44, E62,G01, G18, G28

Suggested Citation

Brown, Scott and Demetriou, Demetra and Theodossiou, Panayiotis, Banking Crisis in Cyprus: Causes, Consequences and Recent Developments (August 24, 2018). Multinational Finance Journal, 2018, vol. 22, no. 1, pp. 63-118, Available at SSRN: https://ssrn.com/abstract=3442231

Scott Brown

University of Puerto Rico ( email )

Ponce De Leon Avenue
00931-3300
Puerto Rico

HOME PAGE: http://coursetrading.com

Demetra Demetriou

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Panayiotis Theodossiou (Contact Author)

Ball State University ( email )

2000 W. University Ave
Muncie, IN Delaware 47306
United States

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