Cyprus and the Financial Crisis: The Controversial Bailout and What It Means for the Eurozone PDF
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Cyprus and the Financial Crisis The Controversial Bailout and What It Means for the Eurozone John Theodore and Jonathan Theodore Cyprus and the Financial Crisis This page intentionally left blank Cyprus and the Financial Crisis The Controversial Bailout and What It Means for the Eurozone John Theodore and Jonathan Theodore Palgrave macmillan ©JohnTheodoreandJonathanTheodore2015 Foreword©MichaelSarris2015 Softcoverreprintofthehardcover1stedition2015978-1-137-45274-0 Allrightsreserved.Noreproduction,copyortransmissionofthis publicationmaybemadewithoutwrittenpermission. Noportionofthispublicationmaybereproduced,copiedortransmitted savewithwrittenpermissionorinaccordancewiththeprovisionsofthe Copyright,DesignsandPatentsAct1988,orunderthetermsofanylicence permittinglimitedcopyingissuedbytheCopyrightLicensingAgency, SaffronHouse,6–10KirbyStreet,LondonEC1N8TS. Anypersonwhodoesanyunauthorizedactinrelationtothispublication maybeliabletocriminalprosecutionandcivilclaimsfordamages. Theauthorshaveassertedtheirrightstobeidentifiedastheauthorsofthis workinaccordancewiththeCopyright,DesignsandPatentsAct1988. Firstpublished2015by PALGRAVEMACMILLAN PalgraveMacmillanintheUKisanimprintofMacmillanPublishersLimited, registeredinEngland,companynumber785998,ofHoundmills,Basingstoke, HampshireRG216XS. PalgraveMacmillanintheUSisadivisionofStMartin’sPressLLC, 175FifthAvenue,NewYork,NY10010. PalgraveMacmillanistheglobalacademicimprintoftheabovecompanies andhascompaniesandrepresentativesthroughouttheworld. Palgrave®andMacmillan®areregisteredtrademarksintheUnitedStates, theUnitedKingdom,Europeandothercountries. ISBN978-1-349-55792-9 ISBN978-1-137-45275-7(eBook) DOI 10.1057/9781137452757 Thisbookisprintedonpapersuitableforrecyclingandmadefromfully managedandsustainedforestsources.Logging,pulpingandmanufacturing processesareexpectedtoconformtotheenvironmentalregulationsofthe countryoforigin. AcataloguerecordforthisbookisavailablefromtheBritishLibrary. LibraryofCongressCataloging-in-PublicationData Theodore,John,1945– Cyprusandthefinancialcrisis:thecontroversialbailoutandwhat itmeansfortheeurozone/JohnTheodore,JonathanTheodore. pages cm 1. Cyprus—Economicconditions—21stcentury. 2. Finance— Cyprus—History—21stcentury. 3. Banksandbanking— Cyprus—History—21stcentury. 4. EuropeanUnioncountries— Foreigneconomicrelations—Cyprus. 5. Cyprus—Foreign economicrelations—EuropeanUnioncountries. I. Theodore, Jonathan,1985– II. Title. HC415.2.T422015 330.95693—dc23 2015002670 This book is dedicated to all Cypriots and their hopes and aspirations for a better economic and united political future. This page intentionally left blank Contents ForewordbyMichaelSarris ix PrefaceandAcknowledgements xiv AbouttheAuthors xvi Introduction 1 1 BirthofaNation 6 TheRoadtoIndependence 6 Nationhood,ItsCostsandConsequences 8 AUnifiedCountryBreaksDown,1963–1964 12 2 ForeverDivided? 19 TheTurkishInvasionandItsAftermath 19 AFinalHope?TheAnnanPlan,2002–2004 27 3 TheFinancialCrisisSpreadstoCyprus 38 TheSingleCurrencyandInternationalFinance 38 AKEL:AnEasyTargetforBlame? 46 Greece,thePSI,andSacrificeofCyprus 50 GreekFalloutinCyprus 57 CasinoEconomicsandPoliticalGames 61 FromBailoutstoBail-in 67 4 BailoutsandBail-Ins 71 TheCyprusExperiment 71 InternationalReactionstotheBail-In 82 ThePiraeusAssetTransfer 92 Austerity,BankingandHousingBubbleParallels 95 CyprusandthePoliticised‘Russian’Connection 99 5 EconomicRecoveryandStrategicChallenges 102 BankingConfidenceandtheEurozone 102 TheRapidRecoveryofCyprus 105 vii viii Contents NaturalGasandtheStrategicConflictwith Turkey 116 6 Bail-InandtheFutureoftheEurozone 123 ADreamUndone? 123 MonetaryUnion:StabilityorSystemicWeakness? 134 Conclusion 138 Notes 145 Bibliography 163 Index 170 Foreword Several years after the onset of the world economic crisis, the eurozoneeconomycontinuestostagnate,withunemploymentespe- ciallyhighintheperiphery.Withweakaverageeconomicgrowthand overall prospects uncertain, the cost of serious policy-making and crisis management failures is rising fast, both in terms of economic welfareandpoliticalpolarization.Thebookinyourhandsmakesan importantcontributiontothekindofreflectionandanalysisthatis neededtohelpinchartingasustainablewayforward. Thisdebateabouttheoriginsandthemanagementoftheeurozone crisis needs to be carried out along three different axes, which have notalwaysreceivedthemeritedequalattention.First,andmostfre- quently discussed, is the narrative of policy-making failures at the national member-state level in terms of heavy public and private indebtedness and declining external competitiveness. Second, the shortcomings in the design of the monetary union which the crisis broughttothesurfacebutwhoseshareintheblameforthecrisishas attracted relatively little attention; and third, the mismanagement of the crisis by the eurozone leadership that has sent the necessary correctionthewrongway.Theoriginsandmanagementofboththe GreekandCypriotcrisesprovidevividillustrationsinallthreeareas. Inthefiftyyearssinceindependencein1960,Cyprushadavoided major economic policy errors. In the context of a sound pub- lic/private sector partnership, Cyprus took advantage of external opportunities to build a strong service-oriented economy based on export. In parallel, during the process of joining institutions with sound economic practices such as the WTO, the EU and the eurozone,Cyprusimplementedseveralmuchneededeconomicand structural reforms. But the arrival of the eurozone crisis found the countrywithseriouspre-existingandhomegrownimbalances. Thesubstantialincreaseincapitalinflows,encouragedfirstbythe prospectandthenbytheactualentryintotheEUandtheeurozone, together with the narrow emphasis of the Maastricht criteria on fiscal performance rather than on also monitoring the potentially ix
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