The Financial Crisis Spreads to Cyprus

The collapse of the Cypriot banking system has to be seen in the context of the global economic downturn, which was triggered by the US subprime mortgage crisis of 2007–8 but had its origins in the macroeconomic policies of at least the past decade. A broad-based consumer boom coupled with ultra-loose monetary policy by central banks in the US and Europe fed a global speculative bubble in real estate and equity markets. The fallout of this gigantic credit bust took its time to unwind across the eurozone; emerging as an ongoing sovereign debt crisis that owes its origin as much to the structural problems of the single currency, and state spending in the eurozone, as it does to banking leverage, global finance, and the securitisation of toxic debt. Cyprus itself saw the worst of its effects comparatively late — until 2012, in fact, it had appeared to weather the global recession remarkably well. What makes the story of this island somewhat different is the extent to which the causes of the crisis were reaped after, rather than before, the global bubble burst in 2007–8. In this light, the island marks a new phase in the evolving dilemma of the eurozone — one bound up in the problems and processes of how the region has struggled to adapt to the world after the financial crisis; and the difficult and fraught consequences of its various bailouts, austerity plans, and monetary policy solutions.