ABSTRACT
While the experience of Cyprus in crisis was characterised by the two main common elements of the crisis in the Eurozone, namely national economic policy failures and shortcomings in the monetary union architecture, it was also uniquely marked by a ‘bail-in’ of bank depositors. This chapter tells the story of the combination of excessive growth in bank lending with a sharp increase in public debt, which landed Cyprus into a vicious circle: of banks needing capital and in danger of bankruptcy and public finances not in a position to help. It also describes the circumstances around the "bail-in" and economic developments in its aftermath and goes back in time to economic developments and policy choices since independence. Policies which resulted in home grown imbalances culminating in a variety of bubbles, which when they burst, played a key part in the severity of the Cyprus crisis and the high ratio of non-performing loans on bank balance sheets.
