Blog Post

A year since Cyprus

It is still too early to conclude that the Cyprus programme will be successful, particularly in terms of enabling the country to regain market access in a timely manner for a clean exit. But it can be said that so far so good: the programme is broadly on track with respect to conditionality compliance and the macroeconomic outcomes have been better than expected.

By: Date: March 19, 2014 Topic: European Macroeconomics & Governance

A year ago EU and Cypriot officials were in tense negotiations trying to find the right balance between bailing-in and bailing-out Cyprus; ultimately, only uninsured depositors were bailed-in meaning that the major blunder of breaching the EU deposit insurance scheme could be avoided (thanks to the rejection of the plan by the Cypriot House of Representatives), that the Cypriot government was bailed-out with the programme’s approval and contagion was prevented.  But despite our (and other economists) strong criticisms, capital controls were imposed for the first time in a euro-area member state, creating a de-facto second-league euro.

So far the programme has turned out slightly better than expected in terms of GDP growth; the latest European Commission economic forecast estimates that the Cypriot economy shrank by 6 percent during 2013 instead of the originally expected 8.7 percent; the economy will start growing again in 2015 as originally foreseen. However, as was the case in all other euro-area macroeconomic adjustment programmes, the unemployment rate overshot the forecast but only by one percentage point, increasing to 16 percent during 2013.

Cyprus real GDP (2012=100)

Sources: The Economic Adjustment Programme for Cyprus, Occasional Papers 149, May 2013 and European Commission Economic Forecast Winter 2014

Unemployment rate projections and realisations in euro-area financial assistance programmes

Sources: IMF WEO October 2013, programme documents and European Commission Economic Forecast Winter 2014

The financial system reforms, which are probably the most important part of the programme because the banking sector was the root of the Cypriot crisis, are broadly on track although with some delays. Fitch Ratings have upgraded the ratings of Bank of Cyprus and Hellenic Bank, the two largest credit institutions on the island, because they were successfully recapitalised. In the case of Bank of Cyprus, this was done even without relying on state aid, while Hellenic Bank is still being restructured. The restructuring of the cooperative banking sector is also ongoing. This entails the merging of 93 cooperative credit institutions into 18 institutions under the management of the Central Cooperative Bank (under state control). Nevertheless, some substantial risks remain as non-performing loans continue to soar.

The progress made on the financial system has allowed the planned relaxation of the restrictive measures on capital movement to take place, and the capital controls are now expected to be completely abolished by the end of year according to Cyprus’ Central Bank chief Panicos Demetriades, confirmed by Cypriot President Nicos Anastasiades. As we argued in our latest assessments of the Troika programmes: in a monetary union, the lifting of capital controls is in principle easier to achieve, because the common central bank can stand ready to replace out-flowing liquidity. However, solvency problems in the banking system need to be addressed first so that the European Central Bank can step in.

It is still too early to conclude that the Cyprus programme will be successful, particularly in terms of enabling the country to regain market access in a timely manner for a clean exit. But it can be said that so far so good: the programme is broadly on track with respect to conditionality compliance and the macroeconomic outcomes have been better than expected, with the exception of the labour market. Thus, the likelihood of Cyprus turning out to be a second Ireland is greater than that of it turning into a second Greece or even Portugal.

Republishing and referencing


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic More by this author

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2018 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 20, 2019
Read about event More on this topic

Upcoming Event

May
21
10:30

Europe after Sibiu: Towards differentiated integration?

A comprehensive follow-up to the Informal European Council in Sibiu, Romania.

Speakers: Andrew Duff, John Erik Fossum, Paweł Karbownik and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

May
28
12:30

The Ukrainian economy: the way forward after a year of political turbulence

What can Ukraine do to foster economic growth? How can the EU and other international partners help Ukraine with this process?

Speakers: Olena Carbou, Marek Dabrowski, Elena Flores, Ivan Miklos and Hlib Vyshlinsky Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More by this author

Book/Special report

Bruegel annual report 2018

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: May 16, 2019
Read about event More on this topic

Past Event

Past Event

CANCELLED: Future of taxation in the EU

Due to a previously unannounced air traffic controllers strike in Belgium, the Prime Minister Morawiecki is unable to land in time for the event. We apologise for any inconvenience.

Speakers: Marie Lamensch, Mateusz Morawiecki and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 16, 2019
Read article More on this topic

Blog Post

Germany’s even larger than expected fiscal surpluses: Is there a link with the constitutional debt brake?

Germany is having a political debate on the adjustment of its budgetary plans due to revised forecasts, and an academic debate on the debt brake. Yet, since 2011, general government revenues and surpluses have been systematically and significantly higher than forecast. The German surplus reached 1.7% of GDP in 2018. This bias did not exist from 1999-2008 before the introduction of the debt brake. While the IMF also got its forecasts of German surpluses wrong, the extent of the bias is larger for the German government’s forecasts. These data suggest that the political debate should focus on the debt brake and its implementation rather than on how to close the budgetary ‘hole’.

By: Catarina Midoes and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 13, 2019
Read about event More on this topic

Upcoming Event

Jun
17
12:30

Role of national structural reforms in enhancing resilience in the Euro Area

At this event Gita Gopinath, Chief Economist at the IMF will discuss the role of national structural reforms in enhancing resilience in the Euro Area

Speakers: Maria Demertzis, Gita Gopinath and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Blog Post

Spitzenkandidaten visions for the future of Europe's economy

What are the different political visions for the future of Europe’s economy? Bruegel and the Financial Times organised a debate series with lead candidates from six political parties in the run-up to the 2019 European elections.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Global Economics & Governance, Innovation & Competition Policy Date: May 8, 2019
Read article More on this topic More by this author

Opinion

When facts change, change the pact

“When facts change, I change my mind,” John Maynard Keynes famously said. With long-term interest rates currently near zero, the European Union should reform its fiscal framework to allow member states to increase their debt-financed public investments.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 1, 2019
Read article More on this topic More by this author

Blog Post

EU enlargement 15th anniversary: Upward steps on the income ladder

Since their accession to the EU 15 years ago, the incomes of most central Europeans have increased faster than the incomes of longer-standing members and, thereby, they moved upwards in the EU distribution of income. Yet the very poorest people have not progressed in some countries.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: April 30, 2019
Read article Download PDF More on this topic

Working Paper

What drives national implementation of EU policy recommendations?

The authors use a newly-compiled dataset to investigate whether and why European Union countries implement the economic policy recommendations they receive from the EU.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 25, 2019
Read article Download PDF More by this author

External Publication

European Parliament

Taking stock of the Single Resolution Board: Banking union scrutiny

The Single Resolution Board (SRB) has had a somewhat difficult start but has been able to learn and adapt, and has gained stature following its first bank resolution decisions in 2017-18. It must continue to build up its capabilities, even as the European Union’s banking union and its policy regime for unviable banks continue to develop.

By: Nicolas Véron Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: April 18, 2019
Load more posts