With a population of only 1 million and no more than half a percent of Euro zone economy, it is surprising to find out that the financial crisis in a tiny country called “Cyprus” has enormous global implications (Long 2013). It cannot be also denied that the “Subprime Mortgage Crisis” of the US in 2008 has its downbeat domino effect to the world including European Union and Cyprus. In this report, not only the most critical reasons but also the aftermath of Cyprus financial crisis and possible alternatives which could have been done to ease such economic downturn will be carefully examined.
1. Main Reasons
The root of the crisis lies when Cyprus experienced a terrible recession in 2009 when the country’s economy was diminished by 1.67% including significant reduction in tourism and shipping which obviously caused high unemployment rate (CIA 2013). Since then, the country’s economy worsen and with the 30% decline of the real estate market has put enormous pressure on a rise in non-performing loans of banking system (The World Bank 2013). Therefore, the banks ended up with Greek Private Sector debt of Euro 22 billion and accumulated $120 billion inclusive of $60 billion from Russia according to Jolly and Castle (2012).
Furthermore, it is the direct result of the crisis in Greece known as Greek Debt Crisis where the second biggest retail bank in Cyprus over-invested in Greek Bonds and as a result of this, Cyprus failed on its recapitalisation where the Government is left with limited time and option as mentioned in Aljazeera news podcast (2012). Besides, Hans Humes pointed out during an interview conducted on 21 February 2012 that one of the significant reasons that led to a threat in collapse of the Cyprus Banks is 50% haircut in 2011 during Greek Crisis. Next, Cypriot Banking system is in shortage of at least 10 billion Euros in new capital plus 8 billion to satisfy public debts (Long 2013) and to make matter worse, the government has not got enough money to help out as it is impossible to raise money in bond market due to high level of borrowing rates.
The country’s credit rating was rated CCC by Standard & Poor’s in September (Bases 2013) and this left the country with no benefits but high rise in percentage of yields on long term bond. This can be added as a reason to confirm that the country is not in the position to calm down its banking sector.
They also made a wrong step in refusing UN’s plan for uniting their island which clearly annoyed their E.U partners and caused weak strategic position (Dixon 2013).The country’s economy could be a lot healthier if it had restructured the banks.
The consequences of the Cyprus financial crisis has had a surprising impact on the eurozone and raised concerns about the euro currency in the market. The two main financial institutions in Cyprus were both effected by the Greek financial crisis due to their operation heavily in the Greek Government Bond & the Greek Debt. The two largest banks in Cyprus, the Bank of Cyprus and Laiki Bank were both heavily impacted by the Greek financial crisis through exposures to their own operations in Greece and to Greek sovereign debt. According to the latest confirmation of GDP data, Cyprus is gliding deeper into recession and no sign of financial stress in economy is abating (Ernst & Young 2013). The Cyprus financial crisis have had helped driving the value of the euro currency to fall down from $1.36 at Feb to $1.28 at the end of March and lead to rising unemployment caused industrial unrest. Many workers struggle against wage cuts. However, the unemployment rate will likely continue to rise and wages fall, contributing to reduced consumption in the next few years (Ernst & Young 2013). To resolve the nation debt a solution was introduced by the government to force depositors and savers to scarify 10% of their life savings. As part of the Government’s austerity...
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