Cyprus Crisis Case Study Solution
Abstract
The case illustrates the Cyprus crisis which is termed as one of the most complex crises of the history while being a small crisis in terms of spread. The analysis discusses the ongoing developmental forms and perspectives to overcome the crisis while qualifying for the EU bailout loans to overcome the issues. In doing so, Cyprus has developed internal methods and techniques to deal with the economic downturn and quality for abail out. It imposed the tax rate on withdrawing and savings at a different level. The event outraged the local citizens due to the signal of Government robbing the citizens through various tactics. It created a run on the bank and collapsed the whole business market.
The crisis occurred due to sovereign debts aligned with banking debts and over hand business and household loans which the country did not plan to receive backing a defined business cycle, and hence lead to un payable debts leading to economic imbalance and bad deficits while also affecting the interest rates and inflation.
In order to deal with the issues, we recommend practicing the strategy of Audacity Deleveraging to re-boost the private economy through business revival that will attract trade, and will also help business to stand through crisis.
Introduction
Cyprus is a small island that joined the EU in late 20th century to enhance the economy by mitigating the loan offerings obligations and improving the business cycle. After 30 years of uninterrupted economic growth, the economy remained unharmed from the international crisis (Asian & Latin America), but after that, the growth of the country came to a halt, mainly due to lack of business activities and foreign policies.
In 2011, the country was cut off from the international market which gave rise to Cyprus crisis that intensified to the level, that the government applied for International Monetary Funds (IMF) to overcome and trigger the economy. Analyzing the Cyprus economy from the microscope, its presence in the European Union constitutes 0.2% of the total GDP presence with 18 billion Euro GDP.
The crisis occurred due to excessive local lendings to the EU members especially Greece. It also developed strong money Laundering system with Russia. However, the country failed to recognize the Bubble effect that continued the investment and landings at low rates.
In the light of the above critique, the paper provides an analysis of the Cyprus Situation from different perspectives, taking into consideration the dimension and magnitude of the crisis, while analyzing it from shareholder perceptive.
Background of Cyprus
The country has been one of the consistent developing growth countries in the world after the freedom from the invasion of Turks and remained stable accompanied by continuous growth. The average GDP of the country remained to be 4% with an unemployment rate 2.5%.The rate remains stable until the first crisis hit the country.
Also during the bubble period, the economy grew by 12% with additional 11% three years after the 1994 crisis.The acts represent the strong policies and business sectors to sustain the crisis.Although,the distribution of wealth is substantial in the Cyprus as 83% of the people invested In house hold and stocks through annual incomes with general needs and return on a business cycle.
Problem Statement
The country Cyprus is facing financial mess due to the crises,and has applied for IMF for which it has to meet certain criteria.To meet the criteria, the country has imposed taxes on Citizens saving and withdrawal, leading to a chaotic situation in the country especially in the banks.
Analysis
- Identify the causes of the crisis situation in Cyprus. Determine the similarities to and differences from other crises that happened previously in the Eurozone.
The country Cyprus have a communist presidential system, which the country elected two months after joining the EU in 2008.Due to the communist presidential system, the country has full control over executive banking branches with virtually no check and balance from external bodies like ECB, EU, and IMF.This led the country to offer the local loans without any barriers and restrictions, disturbing the balance of trade and lending borrowing equilibrium of the Banks.In addition, the government started overspending immediately due to the absence of a regulatory body of policies that control and monitors the spending.
In doing so, it offered the maximum loans to the Greece followed by Russia. However, in 2010, the Greece faced the financial crisis which made Cyprus more vulnerable due to high inter connected of the Banking sectors. However, the Government failed to consider the severity of the crisis, and continue to lend money through its two principal banks.Thus accumulating the local loans in other countries and exceeding the balance between loans and deposits.
In addition to the following this lead to out comes of the ignorance, the country was thrown way from international trade which worsens the situation, followed by the failure of the Cyprus biggest energy plant, which intensified the situation more and made Cyprus vulnerable.
Cyprus Crisis Harvard Case Solution & Analysis
Similarity and Difference from prior Crisis
European Debt Crisis, occurred in 2009, when Greece, Portugal, Ireland and Spain failed to repay or refinance their government in order to revive the business cycle without any help from the third party. The crisis was similar to Cyprus crisis, as the crisis occurred due to over-lending of the loans and collapse of the financial institution. However, it is different from Cyprus crisis, because in the particular crisis the government its el flowered the interest rate to offer an attractive mortgage loan to the citizen without auditing the income capacity.While in this particular crisis, the government overlooked the symptoms of the bubble burst and un-deliberately formed the policies which lead to crisis.In addition, the European crisis engraves the overall sectors of the country, while the Cyprus crisis only focuses on the Banking Sector.(Orphanides, 2014)...............
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