European Countries with a Sovereign Debt Crisis: Cyprus

Over the past decade, there has been an economic phenomenon that has gripped several powerful countries in the European Union, causing an economic crisis that has caused several countries to spiral into a conflict of identity and policy. While some of these countries have gotten better, others have not. This series is devoted to looking at the actions of each country that faced a sovereign debt crisis, and the actions they took to combat it. Some of these actions have worked tremendously, while others have not. Looking at these actions can give us knowledge about how to handle such issues in the future, while also giving an idea of the strength of the European Union to handle handle such disasters.

Cyprus

Recession

Although Cyprus was the smallest country to suffer from the sovereign debt crisis, they still had a relatively strong economy before the recession. In 2009, however, that economy began to decline. The entire economy initially fell 1.67%. In the meantime, property values begin to plummet by 30% in response to the retracting market. Because of this drop, commercial loans had difficulty making any returns, with non-performing loans rising to 6.1% in 2011. This caused unemployment to rise, drastically, which made those non-performing loans even more volatile.

Problematic banks

Cyprus had a gigantic offshore banking industry, and was considered a tax haven for wealthy individuals around the world. While the entirety of Cyprus’ GDP was only 19.5 billion euros, Cypriot banks had over 22 billion euros of private Greek debt. However, when the Greek economy fell into crisis, that debt became non-performing, and no returns were being made on it. This caused the entire Cypriot banking system to collapse, along with severe mismanagement.

Bad credit rating

The international investor ratings began to drop for Cyprus, which made any stimulus package pretty much impossible for the small country to finance. Yields on long-term bonds continued to rise, at the same time, which drained the nation’s budget, rather than fuel it. Eventually, those yields rose to an astounding 12%. By 2012, the credit rating for Cyprus was at junk status, which made it impossible to fund state expenses.

Response

Eventually, the Troika granted Cyprus a 10 billion euro bailout in 2013. In return, several Cyprus banks that were being used as tax havens had to be closed, such as the Cyprus Popular Bank. At the same time, a levy on existing Cyprus deposit banks was also imposed, which would put a tax on the many foreigners who were using Cyprus as a tax haven. However, no deposits below 100,000 euros were affected.