The Cyprus Bailout - Is the European Zone Failing?


Code : ECC0055

Year :

Industry :Cyprus, European Union, Euro Zone, and Euro

Region : Cyprus, Greece, Europe, Euro-Zone

Teaching Note: Available

Structured Assignment : Not Available

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About Cyprus An island in the eastern Mediterranean sea, Cyprus lies to the south of Turkey. Due to its strategically important location, Cyprus has a long history of invasion and conflicts. It has remained divided between its different ethnic populations and only the Greek-Cypriot part of the island has gained EU membership. Cyprus was a part of the Ottoman Empire from 1571 until 1878. In 1878, under the Cyprus Convention, the island was given over to the United Kingdom (UK) to administer in exchange for their military support to the Ottomans in the wake of the Russian-Turkish war...

Exposure to Greek BondsBefore the onset of the Euro crisis in 2008, Cyprus, one of the smallest economies in the Euro Zone, had a manageable fiscal deficit, low debt, and a thriving economy. It was the richest of the 10 countries that joined the European Union in May 2004. Services in general had been Cyprus’s mainstay with tourism being the cash cow accounting for more than 10 per cent of the GDP in 2008...

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Capital Requirement In December 2011, EBA conducted another stress test and released its report on capital deficits at major European banks. EBA implied a threshold of 9% as a benchmark . According to the report, Cyprus’s capital shortfall was about €3,531 million and sovereign shortfall, €2,457 million. Bank of Cyprus and Laiki Bank fell short of €1,560 million and € 1,971 million respectively. EBA asked both the banks to come up with the capital by June 2012...

Bailout Agreement The Cyprus Parliament approved the country’s new international rescue plan drafted by the Troika on March 25, 2013, after a fear of financial collapse, by 29 votes to 27 on April 30, 2013. The deal secured a loan package of €10 billion (£8.4 billion; $13 billion) from the Troika. In return, it was estimated that Cyprus must raise €13 billion, largely through banking reforms...

Future of Euro Zone Cyprus’s bailout agreement had imposed losses on bank deposits. One of its largest banks had to be shut down and people were barred from moving funds out of the country. After forcing Cyprus to accept its conditions for restructuring its banking system, the European Commission in its ‘European Economic Forecast for Spring 2013’, predicted that the Cyprus economy would contract by 8.7% for the year 2013 and by 3.9% in 2014 and overall it expected the economy to contract by 15% during 2012-2014...

Should Cyprus Quit Euro? When banks were shut for more than two weeks, the powerful head of the Orthodox Church in Cyprus, Archbihsop Chrysostomos II expressing his opinion to Realnews, a Greek newspaper, suggested that his country abandon Euro Zone...

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