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Cyprus Crisis

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Submitted By danigui
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Cyprus Crisis
Nowadays the question of the Cyprus banking crisis is still a matter for debate. Scholars, researches and economists suggest their own versions of what has been the main reason for strike of the economy of the recently flourishing state and what governmental actions might have been taken to prevent it from financial fiasco. The aim of this paper is to investigate these points and other related issues.
As have been stated, there were a lot of reasons for the crisis to happen. On the one hand, Cyprus was indeed affected by a wave of crisis coming from both sides EU in general and Greece in particular. The one coming from Greece was even the most threatening one due to the traditionally tight trade relations between Cyprus and Greece. In addition, the banking sector of the country was flooded with money coming from Russia through investments and deposits (Barrington, 2013). Russians exploited the favorable tax regime in order to store their funds in the Mediterranean island with lax tax obligations (Miller, 2013). Then this money started to circle through the net of banks and ended up in Cyprus economy. As a result, the volume of Cyprus banks oversized the country’s GDP seven times (Miller, 2013). After big world’s rating agencies had downgraded Cyprus banks, they remained afloat only due to the efforts taken by ECB.
In general, the crisis could be prevented if the appropriate measures had been taken on time. In large part, the breakdown was also caused by the decisions of Cyprus government as well as malfunction of EU occurring during the recent years. Two years before the crisis, the citizens of Cyprus had chosen Demetris Christofias who promised to resolve political tensions existing between his country and Turkey. He remained silent on his plans regarding the economy of the state. Cyprus citizens had made a mistake assuming that communist government could live up with the strict market-governed rules of the EU. The government did not take appropriate measures to prevent the crisis. Instead, it increased the spending and raised governmental liabilities, for example increased the amount of pensions paid (“What happened in Cyprus,” 2013). At the end of 2011, Cyprus no longer had the ability to loan money from foreign markets. In such a situation every effort of the government had to be directed at diminishing the worries of investors, returning to the foreign markets and increasing its positions in various ratings. After all, the government should have sought for financial assistance from EU partners or Troika. However, no appropriate measures have been taken and now it is what it is.

References
Barrington, R. (2013). Five reasons you should care about Cyprus. Forbes. Retrieved from http://www.forbes.com/sites/moneybuilder/2013/04/01/five-reasons-you-should-care-about-cyprus/
Miller, M. (2013). What caused the Cyprus banking crisis? Retrieved from http://blog.firstaffirmative.com/2013/04/09/what-caused-the-cyprus-banking-crisis/
What happened in Cyprus. (2013). The Economist. Retrieved from http://www.economist.com/blogs/freeexchange/2013/03/interview-athanasios-orphanides

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