Was it Possible to Solve the Cyprus Financial Crisis without Undermining Europe?

Jean MESSIHA Administrateur civil hors classe, économiste en chef, délégation aux affaires étrangères, ministère de la défense.

Bruno-Laurent MOSCHETTO Maître de conférences, université de Valenciennes, IDP-LARIME.

Frédéric TEULON Département finance, IPAG Business School, Paris ; directeur, IPAG Research Lab. Contact : frederic.teulonsdbmail.com.

The two major banks in Cyprus – Bank of Cyprus and Laiki Popular Bank – have lost more than €4 billion because of their exposure to the Greek bond market. In this paper, we look at how the European Union has responded to banking and financial problems that affected Cyprus since the end of 2011. Although the financial crisis is minor in absolute terms, it showed that even the failure of a small country can generate systemic risk throughout the euro area.

The rescue plan drawn up by the European Commission, the European Central Bank and the IMF was adopted very late. Taxation of deposits and exchange controls establishment create an unprecedented situation that could affect investor confidence in the euro area. Furthermore the control of Cyprus gives authorities very small margins of action and may jeopardize the future of this country.