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 about event More on this topic

Upcoming Event

Sep
19
12:00

Crypto assets: is a regulatory framework needed?

The economic potential and risks of crypto assets: is a regulatory framework needed?

Speakers: Thierry Philipponnat and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: France Stratégie, 20 avenue de Ségur, 75007 Paris
Read about event More on this topic

Past Event

Past Event

Structural reforms in Europe: policy lessons from the crisis

When are structural reform efforts successful in fostering productivity and growth when and why do they fail?

Speakers: Ana Fontoura Gouveia, Paolo Manasse, Klaus Masuch and Alessio Terzi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 18, 2018
Read article More on this topic More by this author

Blog Post

Reforming the EU fiscal framework

Researchers have often highlighted the problematic nature of the currently very complex EU fiscal framework. Here we review economists’ views on how it should be changed.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: September 17, 2018
Read article More by this author

Podcast

Podcast

Director’s Cut: Europe’s migration policy challenge

Immigration is one of the most contentious policy matters currently facing the EU. In this Director’s Cut of ‘The Sound of Economics’ Bruegel director Guntram Wolff welcomes Ana Palacio, member of the Spanish council of state and former foreign affairs minister, as well as Bruegel visiting fellow Elina Ribakova for a constructive discussion as to which approaches will yield the best results.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: September 14, 2018
Read article More on this topic

Blog Post

The economic case for an expenditure rule in Europe

Proposals for reforming the euro area back on the agenda. An overhaul of the European fiscal rules should be on high on this agenda, because the current fiscal framework has not worked well. This column proposes substituting the numerous and complex present rules with a new, simple rule focused on limiting annual growth rate of expenditures.

By: Zsolt Darvas, Philippe Martin and Xavier Ragot Topic: European Macroeconomics & Governance Date: September 13, 2018
Read article Download PDF More on this topic

External Publication

The EU’s Multiannual Financial Framework and some implications for CESEE countries

Bruegel scholars Zsolt Darvas and Guntram Wolff contributed to the September 2018 edition of the OeNB's Focus on European Economic Integration.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 12, 2018
Read about event More on this topic

Past Event

Past Event

Reforming Europe's fiscal framework

This event will discuss reforming Europe's fiscal framework in order to make it less complex and more effective.

Speakers: Zsolt Darvas, Lars Feld, Philippe Martin, Lucio Pench and Beatrice Pierluigi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 12, 2018
Read article More on this topic More by this author

Opinion

Should central European EU members join the euro zone?

Eurozone membership (or the use of a fixed exchange rate) was not a factor determining economic success in Central Europe. There were both good and bad macroeconomic performances in both the flexible and the fixed exchange rate regimes of Central European countries. The implication is that Central European “outs” could be economically successful both with and without the euro, yet the EU is not only about economic benefits.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: September 11, 2018
Read article More on this topic

Blog Post

The higher yield on Italian government securities could soon be a burden for the real economy

The increase in the spread between Italian (BTP) and German (Bund) government securities is directly an additional burden for Italy public finance, and thus for tax payers. But it could soon also become a burden for the real economy, as the increased yield on Italian government securities could pull up the cost of bank loans for Italian firms, thus imparting a deflationary impact onto the economy.

By: Francesco Papadia and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: September 10, 2018
Read article Download PDF

Policy Contribution

The economic potential and risks of crypto assets: is a regulatory framework needed?

What is the economic potential and the risks of crypto assets? Regulators and supervisors have taken great interest in these new markets. This Policy Contribution is a version of a paper written at the request of the Austrian Presidency of the Council of the European Union for the informal ECOFIN meeting of EU finance ministers and central bank governors.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance, Testimonies Date: September 6, 2018
Read article Download PDF More on this topic More by this author

Policy Contribution

High public debt in euro-area countries: comparing Belgium and Italy

This Policy Contribution looks at the evolution of public debt in Belgium and Italy since 1990 and uses the debt dynamics equation to explain the contrasting evolution in the two countries in the run-up to the introduction of the euro, during the early years of the euro and since the beginning of the crisis, arguing that the euro could have been used also by Italy to undertake sufficiently large fiscal adjustment.

By: André Sapir Topic: European Macroeconomics & Governance Date: September 6, 2018
Read about event More on this topic

Past Event

Past Event

Youth UP Europe: transforming the migration narrative

This joint Bruegel - European Youth Forum event will discuss how we can shift the narrative of migration to a more positive one ahead of the European elections next year?

Speakers: Carina Autengruber, Zsolt Darvas, Thodoris Georgakopoulos, Lilika Trikalinou and Sofia Zaharaki Topic: European Macroeconomics & Governance Location: The American College of Greece, 6th Gravias Street, GR-153 42, Agia Paraskevi Athens, Greece Date: September 6, 2018
Load more posts