Change and Continuity in Cyprus Since the 2013 Crisis

Since the global financial crisis in 2007 started in the US, several countries in Europe faced financial crises. After the collapse of the Greek economy in 2010, Spain, Portugal, Italy and several others followed. While much less talked about, the financial crisis of the Republic of Cyprus, or shortly Cyprus crisis, is one of the last cases of this domino effect. The economy of Cyprus got into a recession by 2012 and then a serious financial crisis erupted in March 2013. In mid-2013, Cyprus became the fourth Eurozone member (after Greece, Ireland, and Portugal) to be bailed out by Troika. It was rather a “bail-in” program as the Troika imposed a levy on the country’s bank deposits. Besides a harsh austerity package was also imposed on Cyprus through a three-year Economic Adjustment Programme, which included high cuts in public salaries and public spending, creating a serious recessionary period with high unemployment. This paper will give a detailed account of the Cyprus crisis and evaluate the economic conditions before the crisis. The purpose is to show how Cyprus got exposed to a devastating financial crisis in 2013 and to critically examine the core causes of the Cyprus crisis. The Cyprus case may look like a less significant one compared to Greece or Spain, simply because it is a smaller economy. However, an analysis of the Cyprus case manifests similar factors that have caused other peripheral Eurozone countries to get into crisis. At the same time, the Cyprus economy has some peculiar characteristics which calls for elaboration. The most pronounced risk came from the oversized Cypriot financial sector. Not only the size of the banking sector relative to the Cypriot economy was quite large, but also the financial sector was quite concentrated. This paper groups the factors that led to the Cyprus crisis in two categories: structural factors vs. triggering factors. The structural factors are identified as the Cyrus’s accession to the EU in 2004 and to the Eurozone in 2008 as a ‘peripheral economy’, which caused a rapid liberalization of the financial system and created an extremely financialized economy which was very vulnerable to any disruption in the international markets. The global financial crisis and especially the Greek crisis were triggering factors which caused the collapse of the already fragile Cypriot economy. Cyprus formally exited from the Troika supervision in March 2016. By analysing the macroeconomic and financial data, this paper will also argue that in fact the structural weaknesses of the Cypriot economy are still prevalent. Although the banking sector looks healthier through restructuring and better regulation, the current growth is based on a surge in FDI due to the new citizen investment scheme (citizenship by investment) which fuels growth in the construction sector. Although the newly discovered gas reserves may stimulate investment, that would be another speculative kind of growth for the Cypriot economy, especially without the Cyprus problem resolved. Thus, as a peripheral economy of the EU, the prospects of Cyprus still do not look very favourable.