The 2013 financial crisis in Cyprus is widely attributed to the reckless practices of its banks rather than the policies of the then-government, as stated by various independent institutions. As the parliamentary election approaches on May 24, political candidates are debating the economic management capabilities of their parties, particularly focusing on the legacy of the Christofias administration and the contrasting proposals from the left-wing party, Akel.
Cyprus banks: Political Disputes Over Economic Management
In the current political landscape, candidates from more conservative parties, including Disy, have positioned themselves against Akel, claiming that the latter cannot be trusted with the economy. The narrative presented by these parties attributes the financial crisis to the decisions made under President Demetris Christofias, who led the country from 2008 to 2013. However, this narrative is increasingly challenged by evidence suggesting that the root causes of the crisis lie within the banking sector.
Independent Assessments Highlight Bank Failures
According to a report from the International Monetary Fund (IMF), the crisis was primarily a banking crisis, driven by the activities and operations of Cyprus banks. The IMF notes that prior to the global financial crisis, Cyprus experienced significant internal and external imbalances, exacerbated by an oversized banking sector that was heavily exposed to Greece. The report states, “Cyprus built significant internal and external imbalances in the run up to the global crisis. These were exacerbated by an oversized and weak banking sector…”
The Role of Banks in the Economic Downturn
Leading up to the crisis, Cyprus banks were inundated with deposits, particularly from non-residents, and offered high-interest rates of up to 6 per cent annually. However, rather than investing these funds into viable economic projects, banks channeled them into speculative real estate ventures and household loans secured by rapidly depreciating properties. As a result, the ratio of non-performing loans surged from under 10 per cent in 2009 to over 45 per cent by 2013.
Impact of Greek Debt Restructuring
The situation worsened significantly due to Cyprus banks’ substantial investments in Greek government bonds. Following the Greek debt restructuring in 2012, these banks incurred losses exceeding €4 billion, which represented more than 22 per cent of the country’s GDP. This loss of confidence among investors and depositors led to an alarming outflow of funds, with bank deposits plummeting by over €50 billion from 2009 to 2013, draining the banks of liquidity.
Current Account Deficits Reveal Economic Imbalances
Prior to the crisis, Cyprus faced a current account deficit averaging around 10 per cent of GDP over six years. The influx of non-resident deposits had previously financed these deficits, but the subsequent withdrawal of such deposits left the economy vulnerable. The IMF’s analysis indicates that the volatility in non-resident deposit flows was a significant factor contributing to the financial crisis.
Government Oversight and Accountability
While the Christofias government has been blamed for the crisis, the Central Bank of Cyprus (CBC) and the European Central Bank (ECB) were primarily responsible for supervising the banking sector after Cyprus adopted the euro in 2008. Criticism has been levelled at the CBC for failing to adequately monitor the banks’ lending practices and approving risky investments in Greek bonds. Furthermore, allowing lower reserve requirements for non-resident deposits contributed to the banks’ precarious situation.
Fiscal Policies and Their Consequences
The government’s fiscal policies during this period also played a role in exacerbating the crisis. Between 2008 and 2012, the government recorded annual deficits of over 6 per cent of GDP, while public debt rose from 47.1 per cent to 84.4 per cent of GDP. As a result of deteriorating public finances, the government lost access to capital markets by May 2011, leaving it unable to support the banks during the crisis.
Akel’s Vision for Economic Management
In the lead-up to the elections, Akel advocates for a more socially responsible economic policy aimed at addressing the needs of ordinary citizens. They argue that the current government has failed to adequately utilise financial resources to support infrastructure and provide essential services to vulnerable groups. Despite reported increases in GDP and employment, rising income inequality continues to pose challenges for many Cypriots.
Calls for Improved Support and Accountability
Akel has urged the government to better allocate its resources, including a reported €6.1 billion in reserves, towards productive investments and support for those affected by economic hardships. With rising costs of living and external shocks impacting various sectors, the party is pressing for measures that would provide meaningful relief to low-income families and vulnerable individuals.
As the election draws near, the dialogue surrounding the 2013 crisis and the role of banks continues to shape the political landscape in Cyprus. The outcome may determine not only the future direction of economic policy but also the accountability of financial institutions in safeguarding the stability of the economy.
