Why the Cyprus crisis occurred and how it could have been avoided

According to the researchers from Imperial College (London) and the University of Cyprus, the reason for the economic crash in Cyprus and subsequent bailout was a result of overconfidence from the government, after it had over 35 years of almost continuous and healthy economic growth.

Why the Cyprus crisis occurred and how it could have been avoided

According to the researchers from Imperial College (London) and the University of Cyprus, the reason for the economic crash in Cyprus and subsequent bailout was a result of overconfidence from the government, after it had over 35 years of almost continuous and healthy economic growth. This resulted in the Cypriot government making poor choices in relation to public finances, such as increasing public spending in welfare too quickly, and delaying reaching a bailout agreement, which impacted the economy in a negative way.

The researchers state in the study that the Cypriot government's delay in taking action to avert the crisis was a mistake, which was worsened in that it was too slow to ask the EU for help. The team says that negotiated support should have been arranged in 2011 or summer of 2012, instead of finalising them in March 2013. This delay meant that the ECB had to increase the amount of lending money to keep the banking sector in Cyprus afloat. The impact of the delay meant that unemployment grew to more than 15% by March 2013.
Leading up to the crash, the government had also introduced financially unsustainable policies that contributed to the crisis. The researchers also found that the Central Bank of Cyprus (CBC) did not recognise the rapid increase by other banks in house lending.

The researchers used data from the Central Bank of Cyprus, ECB and Eurostat, to form their conclusions and stated that other countries can learn lessons from the crash in terms of preventing future financial crises.


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