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p1059_9781783268757_tp.indd 20/1/16 9:12 AM May 2, 2013 14:6 BC: 8831 - Probability and Statistical Theory This page intentionally left blank PST˙ws Editors Alexander Michaelides Imperial College London Athanasios Orphanides MIT World Scientific NEW JERSEY • LONDON p1059_9781783268757_tp.indd • SINGAPORE • BEIJING • SHANGHAI • HONG KONG • TAIPEI • CHENNAI • TOKYO 20/1/16 9:12 AM Published by Imperial College Press 57 Shelton Street Covent Garden London WC2H 9HE Distributed by World Scientific Publishing Co Pte Ltd Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE Library of Congress Cataloging-in-Publication Data Names: Michaelides, Alexander G (Alexander George), 1969– editor | Orphanides, Athanasios, editor Title: The Cyprus bail-in : policy lessons from the Cyprus economic crisis / Alexander Michaelides & Athanasios Orphanides, [editors] Description: New Jersey : Imperial College Press, [2015] Identifiers: LCCN 2015035740 | ISBN 9781783268757 (alk paper) Subjects: LCSH: Financial crises Cyprus History 21st century | Debts, Public Cyprus History 21st century | Cyprus Economic conditions 21st century | Cyprus Economic policy Classification: LCC HB3808.3 C97 2015 | DDC 330.95693/04 dc23 LC record available at http://lccn.loc.gov/2015035740 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Copyright © 2016 by Imperial College Press All rights reserved This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA In this case permission to photocopy is not required from the publisher In-house Editors: Mary Simpson/Dr Sree Meenakshi Sajani Typeset by Stallion Press Email: enquiries@stallionpress.com Printed in Singapore January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-fm page v Contents Preface vii Introduction ix Section 1: Cyprus in Crisis: What Happened in Cyprus? 1 Cyprus in the Eurozone Michalis Sarris Self-Fulfilling Prophecies in the Cyprus Crisis: ELA, PIMCO, and Delays Stavros A Zenios Handling of the Laiki Bank ELA and the Cyprus Bail-In Package Costas Xiouros Cyprus: From Boom to Bail-In Alexander Michaelides What Happened in Cyprus? The Economic Consequences of the Last Communist Government in Europe Athanasios Orphanides v 33 103 163 January 27, 2016 vi 11:57 The Cyprus Bail-In 9in x 6in b2256-fm Contents Section 2: Overcoming a Crisis 209 The Cyprus Crisis: Lessons, Challenges, Opportunities Sofronis Clerides 211 Overcoming The Crisis in Cyprus Gikas A Hardouvelis 225 Making the Best of It: Lessons from Ireland’s Experience in An EU/IMF Program Alan Ahearne 273 Section 3: The Future of the Euro Area 281 Large versus Small States in The Eurozone, The Democratic Deficit, and Future Architecture Yannis M Ioannides 283 10 The European North–South Divide: Dealing with the Poor Relative Michael Haliassos 309 11 The Future Monetary Architecture in the Eurozone Lorenzo Bini Smaghi 327 Index 345 page vi January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-fm Preface This volume is based on the proceedings of the 2nd Scientific Conference organised by the Tassos Papadopoulos Centre for Studies, under the title “Cyprus: Five years in the Eurozone”, that took place at Nicosia, Cyprus, on May 17 and 18, 2013 The conference took place around two months after the Cyprus Bail-in, the agreement reached on March 25 between the Cyprus government and the Troika (the European Commission, ECB the and the International Monetary Fund) At the time of the conference there was substantial confusion and uncertainty about the future of the Cypriot economy Should Cyprus abandon the euro as some local politicians and international commentators were arguing? What caused the total sum of money to fund the public sector needs and recapitalize the banking system rise to 17 billion euros, around 100% of GDP? What did the future of Cyprus look like within the euro-area? What lessons could be drawn about the architecture of euro-area institutions in light of such crises? These were questions that the conference addressed and the collection of papers that follows is indicative of a wide variation of arguments that were aired at the conference We would like to thank the participants at the conference who came to Cyprus to present their views and also for their contribution in this volume The list of contributors includes authors from Cyprus, Greece, Ireland, Germany, Italy, and the USA and we hope that the contributions that follow will achieve the stated aim of the conference, which is to understand better what happened in Cyprus vii page vii January 27, 2016 viii 11:57 The Cyprus Bail-In 9in x 6in b2256-fm Preface and what lessons this crisis can offer academics and policy makers around the world We would like to thank the Tassos Papadopoulos Centre for Studies for continuing to support the objective understanding and scientific analysis of recent economic events in Cyprus We would also like to thank Chrisis Pantelides, the executive director of the Centre, for organizing the conference at short notice We would also like to thank KPMG Cyprus for generously sponsoring the conference Alexander Michaelides Athanasios Orphanides London and Cambridge June 15, 2015 page viii January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-fm Introduction Alexander Michaelides and Athanasios Orphanides This volume is motivated by the Cyprus economic crisis that culminated in the decision to bail-in uninsured deposits in March 2013 as a way to prevent sovereign debt bankruptcy The events in Cyprus were one of the acts in the euro area crisis that started in early 2010 with no signs of abating at the time of writing in June 2015 In addition to the events in Cyprus, the volume discusses the experience in two other crisis-stricken countries (Greece and Ireland) in the broader context of the growing pains of the Economic and Monetary Union (EMU) project The objective is to draw lessons from the crisis that could help improve the design of the institutional architecture of the euro area and provide guidance to policy makers, practitioners and academics to improve decision-making both in preventing crises but also in managing crises once they develop The volume has three parts The first part aims to document the chronology of events and offer a narrative about the crisis The second part presents ways to overcome a crisis based on the Cypriot and Irish experiences, while the third part puts the Cypriot crisis in a broader perspective and discusses the future of the euro area based on the experience from the evolution and final resolution of the Cypriot crisis The first part of the volume consists of five contributions that discuss in detail various aspects of the evolution and final resolution of the Cyprus crisis The issues discussed include Cyprus’ long term competitiveness problems, the deterioration of public finances, the ix page ix January 27, 2016 336 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Cyprus Bail-In: Policy Lessons from the Cyprus Economic Crisis whether the liquidity injected in the system was appropriate and would not create distortions The conflict of interest is relevant only if the central bank which performs both functions does not have sufficient independence nor a clear mandate If instead the objective of monetary policy is clearly defined, i.e., price stability, the central bank would have no incentive to use monetary instruments for different purposes, in particular for financial stability, at the risk of missing its own statutory target The problem is thus the opposite of the one claimed by those who oppose granting supervisory responsibilities to central banks An independent central bank, which has price stability as its primary objective and uses instruments which produce side effects on the banking system, is at risk of taking incorrect decisions if it does not have enough information about these instruments and their effects If there is a tension between the pursuit of price stability and financial stability, a central bank which has only the former in mind and no prudential instrument will tend to ignore the latter This has led many observers and commentators to propose a broadening of the scope of central bank activity, by giving such institutions two objectives rather than only one This proposal was not adopted, because using one instrument (monetary policy) to achieve two goals (price stability and financial stability) would have put the central bank in a position to choose between the two, playing a political role with the risk of losing its own independence How legitimate can a central bank be in giving more importance to price stability, rather than financial stability, if it has to pursue both objectives which are mutually inconsistent? On the other hand, how is it possible to achieve price stability unless financial stability is also ensured? This issue was partly discussed in Section The best solution is to give the central bank two objectives and two distinct instruments, each to be used with a specific purpose, and a system of accountability so as to give account of how each instrument is used to avoid conflicts of interest Central bank independence may become a political issue when bank supervision involves decisions related to bank resolution and thus the possible use of taxpayers’ money The latter should be the page 336 January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Future Monetary Architecture in the Eurozone page 337 337 responsibility of democratically elected authorities, which have political legitimacy The experience shows, however, that in countries where supervision is conducted by authorities which are not independent, as in the UK or Germany, taxpayers have borne higher costs Supervisory institutions which are not independent tend to be more easily influenced by bank lobbies, and are tempted to deregulate and supervise in a lighter way Furthermore, when problems emerge in the banking system, political authorities often tend to delay action, for fear of having to confront parliament and the public with a request for taxpayers’ money The situation typically gets worse over time and the impact on public finances may get even worse yet The issue of political legitimacy of non-elected institutions is of great concern in western democracies The easiest way to address it is to separate supervision from crisis resolution This has been done in Europe with the creation of a Single Resolution Mechanism, which has the responsibility for taking decisions when a bank does not meet the solvency requirements To come back to the separation between monetary and supervisory powers, the ECB created a Supervisory Board, composed of the representatives of the national authorities plus four members nominated by the ECB, which has the responsibility for taking the main supervisory decisions Unless the ECB Governing Council objects to such decisions within a short time period, they are directly applicable The ECB thus have responsibility for supervision, but it has delegated it internally to an organism which is distinct from the monetary policy functions This should ensure that there is a functional separation between the two tasks and that there are no conflicts of interest, in particular that monetary policy is not bound by the supervisory responsibilities of the ECB On the other hand, the presence on the Supervisory Board of four members nominated by the ECB, including the Vice President who is also member of the ECB Executive Board, should facilitate an adequate flow of information to ensure that monetary policy takes into consideration all relevant aspects related to financial stability, in particular concerning the ECB’s counterparties January 27, 2016 338 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Cyprus Bail-In: Policy Lessons from the Cyprus Economic Crisis In fact, given the structure of the European financial system, where banks play a key role in the channeling of savings to investments, the soundness of financial institutions is a key factor in the transmission mechanism of monetary policy The use of the key monetary policy instruments, such as the interest rate but also nonstandard measures, has to be well calibrated by the ECB by taking the monetary transmission mechanism into account Furthermore, given that the central bank plays the role of lender of last resort for banks which are solvent but may face a liquidity shortage, it is essential for the ECB not only to have adequate information about the soundness of banks but also to be able to implement regulatory measures and assess the adequacy of the capital and liquidity position of financial institutions This will prevent a distorted use of monetary policy In summary, for an independent central bank like the ECB, the ability to use both monetary and prudential measures is the best way to avoid conflicts of interests and ensure that both monetary and financial stability can be achieved in parallel Saving the Euro With the famous sentence “Within its mandate, the ECB is ready to whatever it takes to preserve the euro”,4 in July 2012 the ECB seems to have taken on board a new objective, subject of course to price stability This issue has been widely debated and is the object of a legal challenge to the German Court of Justice It can be questioned whether the ECB is indeed responsible for the integrity of the euro, and for which countries should participate It can also be questioned whether the actions it should take to ensure such an integrity create other distortions or violate its own mandate It should be recalled in particular that the ECB Statutes indicate, in article — where the central bank objectives are defined — that Speech by Mario Draghi, President of the European Central Bank at the Global Investment conference in London 26 July, 2012 Available at: https://www.ecb.europa.eu/ press/key/date/2012/html/sp120726.en.html page 338 January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Future Monetary Architecture in the Eurozone page 339 339 “The ECB shall act in accordance with the principle of an open market economy with free competition, favoring an efficient allocation of resources” There are no doubts that at some points during the crisis, markets feared that some countries might leave the euro, and the euro could disintegrate The Treaty does not make any reference to the possibility for the member countries to exit, as the move to the euro is considered “irrevocable”, but in practice it would be difficult to prevent a country that chose to exit to so, even though this might produce broader effects such as an exit from the European Union It could thus be suggested that it is up to the member states to clarify whether they have the intention to leave the euro or not The question is whether this would be sufficient to convince financial markets and eliminate any “redenomination risk” The answer is no, because given the above possibility, countries can always renege on their commitment and decide to exit at any point Several observers have suggested that a formal procedure should be designed to allow countries to exit In some member states, several political parties have announced their intention to call for referendum in case they have a mandate to govern The issue is whether a country that does not want to exit may be forced to so, independently of its will Given the nature of the monetary union, and the separation between the monetary power allocated to the ECB and the fiscal and political powers, which instead remain with the member states, financial markets determine the relative risk of investing across countries With fully integrated markets, participants can “run away” from one country to another, bringing all their savings with them without any exchange rate risk The risk is reflected in the interest rate of maintaining financial assets in one country rather than another If one country wished to exit the euro and reintroduce a national currency which would depreciate vis-` a-vis the euro, market participants would immediately transfer their assets away from that country in order to protect their savings This would produce sharp rise in the risk of the assets issued in that country, meaning a higher interest rate and a sudden stop of capital inflows Unless the central bank fully accommodates the shift in portfolio January 27, 2016 340 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Cyprus Bail-In: Policy Lessons from the Cyprus Economic Crisis preference, the country’s financial system would collapse Such a collapse would be justified if indeed the country wanted to exit from the euro Incidentally, such an effect might be precisely the reason why countries not want to exit, i.e., to avoid financial collapse However, if the country did not want to exit but the markets feared such an exit, what could stop a run on the country? The issue is relevant given the nature of financial markets and the structure of the euro area As fears of an exit rise, and the risk of investing in that country increase, the interest rates on lending to that country also rise, which produces restrictive effects on domestic financial conditions and make the private and public debt unsustainable In other words, expectations become self-fulfilling This is a well-known phenomenon in financial markets, where multiple equilibria can arise, some of these equilibria being unstable In these circumstances, it may not be enough for the country to state that it has no intention to exit It may not even be enough to adopt restrictive domestic measures The market expectation of an exit can be calmed down only with a so-called “bazooka”, which has a fire power so big that it discourages any agent from trying to run the system The bazooka is the unlimited commitment to purchase any asset issued in a country against another safe asset, for instance a central bank deposit or a banknote Only when this commitment is fully credible can economic agents be reassured and not be inclined to escape This is not that different from the role of lender of last resort that central banks play with respect to the banking system If depositors fear that a bank may default, even it is solvent, they may run on the bank and provoke the default Only lending by the central bank can restore confidence The lending has to be against good collateral, of course, and only under the condition that the bank is solvent The same applies to the member states of a monetary union Without the bazooka, i.e., the possibility for the central bank to intervene in the markets and avoid a run on the country, such a run may start independently of the solvency of that country Of course the central bank has to be reassured that the country is solvent and does not intend to exit from the euro Otherwise its interventions would lead page 340 January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Future Monetary Architecture in the Eurozone page 341 341 to losses in its balance sheet that would be borne by the taxpayers of the other countries It would also seriously undermine its credibility This is the reason why the OMT was announced conditional on the country applying for an adjustment program, aimed at ensuring that its domestic policies were consistent with participation in the euro and with the sustainability of the debt Making Monetary Policy Work Monetary policy affects its objective, primarily price stability, through the interaction with the financial sector and the real economy In normal times the transmission mechanism of monetary policy is stable and relatively predictable, so that the change in the key monetary instrument, which is the short-term interest rate, can be calibrated with a view to achieving the desired final outcome There are periods, however, which may last relatively long, during which the transmission mechanism is unstable and unpredictable The question for the central bank is how to cope in such a situation and to what extent it should act with a view to repairing the broken mechanism There is no clear delimitation between what should be in the realm of the central bank’s responsibility and what is clearly outside The world financial crisis has challenged such delimitations The functioning of the banking system was, until November 2014, largely under the responsibility of the national authorities, which supervised the banks This has changed with the creation of the banking union The Eurozone banking system is now supervised by the ECB, in a direct way for the 130 major banks The ECB can now take action to overcome some of the problems faced by the major banks, which in the Eurozone play a key role in the transmission of the monetary impulse to the real economy The insufficient solidity of the banking system has been one of the major obstacles to the conduct of an effective monetary policy since the start of the crisis In August 2007, the ECB had to inject over 90 billion in facing the sudden interruption in the good functioning of the money market, which was provoked by the uncertainties surrounding the solvency of counterparties Such uncertainty was not reduced by the successive stress tests which were conducted by the national authorities January 27, 2016 342 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Cyprus Bail-In: Policy Lessons from the Cyprus Economic Crisis The ECB has to replace de facto the money market, issuing central bank liquidity through fixed-rate full allotment tenders, which increased the intra-Eurosystem positions (the so-called Target2 balances) The ECB had also experienced a reduction in their own balance sheet in the course of 2013–2014 as a result of the fall in banks’ demand for central bank money, deriving from the deleveraging process and the weak demand for credit coming from their clients The deleveraging is expected to slow down after the ECB’s comprehensive assessment, but for banks that just passed the test, the strengthening of the capital position will remain a significant constraint This is the reason why the ECB decided to adopt new instruments to increase the size of its balance sheet, in particular through direct purchase of assets The start of the SSM allowed the ECB to have a better grip over the stability of the banking system, and thus ensure a better functioning of the transmission of monetary policy There are, however, other aspects of the monetary policy transmission that are completely outside the control of the central bank One of these is the market for government bonds Given the relevance of the public debt in the functioning of financial markets in advanced economies, any shock to the latter affects financial stability and thus the effectiveness of monetary policy What can the central bank about it? Should it intervene? Would this not lead to trespassing the border between monetary policy and interfere with other policies? This would apply to other markets also With a badly functioning goods and labor market, monetary policy becomes less effective, and may create distortions Should the central bank care about these distortions? One possibility would be not to be concerned about side effects of monetary policy, caring only about the price stability objective and leaving it to the other authorities to cope with the effects This was the understanding at the very start of the monetary union when all the member states were perfectly aware that they were not joining an optimal currency area Monetary policy would not be set on the basis of each member state’s requirement but for the overall union page 342 January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Future Monetary Architecture in the Eurozone page 343 343 This would meritably produce side effects that countries would have to address through other policies, in particular fiscal and structural policies However, in the middle of a financial crisis, a full separation between monetary and other policies can create problems for the sustainability of these policies As shown previously, the self-fulfilling nature of expectations can lead to perverse dynamics, which might make the adjustment harsher Monetary policymakers thus need to cooperate with the other policymakers Such a cooperation is not well structured in the euro area The crisis helped shape some of the features of such a cooperation, which remains largely based on ad hoc arrangements The most obvious one is the Troika, formed by the IMF, European Commission and ECB The Troika is in charge of defining and monitoring, on behalf of the European Council, the adjustment programs for countries that experience difficulties in accessing financial markets These programs are needed for countries to be eligible to the ECB’s monetary policy, both with respect to the refinancing of banks with instruments whose rating has fallen below the preset floor or to benefit the OMT or the SMP Without such assurance the central bank cannot intervene in the markets or accept collateral from these countries, as it would put at risk its own balance sheet However, without the ECB’s intervention the adjustment program could not be sustainable and would probably end in the exit of the country from the euro In the monetary union the ECB can thus not ignore how its own monetary policy affects the real economy and cannot detach itself from the problems related to the transmission mechanism The way in which this is currently done is, however, far from ideal and needs a more accountable and structured framework Conclusions The crisis has exposed the monetary architecture of the Eurozone to new challenges The full separation between monetary policy and other policies, which is ideal in normal times, may actually make January 27, 2016 344 11:57 The Cyprus Bail-In 9in x 6in b2256-ch11 The Cyprus Bail-In: Policy Lessons from the Cyprus Economic Crisis things worse in times of crisis The central bank needs to step in without compromising its independence The narrow definition of its mandate is very helpful in this respect; it prevents it from doing things that would lead it to lose control over monetary autonomy But this is not enough While the ECB needs to be engaged and cooperate with the other policy makers, it also needs to be protected The European Union is an evolving entity and several layers of the institutional framework still need to be built up, taking into account the political integration process It is thus important to continue reflecting on the challenges going forward, with a view to preserving the confidence and credibility that the ECB has been able to gain over recent years page 344 January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-index Index A C accountability, xiii, 71, 99, 303, 333, 336 adverse scenario, 21–22, 24, 26, 64, 78, 81, 83, 85–87, 89–90, 197 AKEL, 190–191, 268 Alvarez & Marsal, 54, 192–193 Anglo Irish Bank, 50 architecture in the Eurozone, xiii, 4, 343 Artemis, 198 Assad, 182 capital, x, 3–4, 13, 18–22, 24, 40–41, 43–46, 48–49, 56–58, 61–62, 64, 71–72, 81, 84–85, 88, 91–92, 96, 98, 165, 176, 184–188, 192, 194, 196–199, 201, 212, 218, 223, 226, 238, 240, 242–243, 250–251, 256–257, 273, 287, 321, 324, 335, 338–339, 342 capital controls, xii, 97, 226, 246–247, 252, 257, 259, 267 capital gains, 217, 273 capitalization, 13, 86, 95 capitalized, 22, 34, 86, 88–89, 94–95, 97 capitalizing, 69 Central Bank of Cyprus (CBC), 13, 21, 23–25, 35–36, 44, 54, 57–60, 64–72, 84–85, 87, 91–92, 95–96, 167, 173–174, 176–177, 191–194, 197, 199–200, 239, 241, 246, 251 Central Bank of Ireland (CBI), xii, 50, 275, 279 Christofias, 29, 170, 182, 200, 202, 240, 242, 251 Clayton/Eurorisk, 23–25, 28 co-operative, 22, 225, 246, 251 co-operative credit institutions, 251 collateral eligibility, 190 communist government, 169, 173, 184, 187, 204 B bad bank, 34, 69, 86, 95, 278 bail-in, x bank of cyprus (BOC), 13, 18, 21–23, 29, 33–35, 51, 69–70, 72–74, 76–77, 80–81, 83–88, 90–91, 94, 96–99, 187, 192, 198, 248, 250–251, 320 banking union, xii, 8, 311, 321, 341 bankruptcy, ix, 37–38, 42–43, 61, 65–66, 72–73, 91 Basel Committee, 184 Blackrock, 23, 25 BND, 242 BOCY, 24 boom, x–xi, 27, 213, 216, 221, 273 boomed, 214 booming, 274 bubble, 217–218, 240, 273–274, 309, 329 345 page 345 January 27, 2016 346 11:57 The Cyprus Bail-In 9in x 6in b2256-index Index communist party, 168–170, 172–173, 177–178, 182–184, 188–189, 191, 193–196, 198–199, 201, 203–204 competitiveness, ix, x, 3–5, 8, 10, 176, 220, 229–230, 240, 265, 267, 287, 304, 310, 315 consumption, 8, 212, 220, 237, 258, 265, 267, 289, 292, 294, 299 contagion, 10, 26, 244, 247, 276, 335 core tier, 13, 21–22, 58, 62, 72, 185–187, 250 corporate governance, 219, 251 cost of delay, 28 CPB ELA, 29 credit, x–xi, 4, 27, 30, 37–39, 43, 55, 57, 60, 62, 71, 186, 247, 253–254, 257, 273, 333, 335, 342 credit default swap (CDS), 14, 165 credit rating agency, 60 creditor, 22, 35, 42–43, 61, 70–71, 87, 89, 94, 97, 200, 309, 332 crisis resolution, 337 currency union, 288, 296 current account deficit, 8, 212, 229, 266 Cypriot Ministry of Finance, 257 Cyprus Popular Bank (CPB), x, 12–14, 16, 18–22, 24, 28–29, 238, 248, 250 Cyprus Presidency, 202 D Deauville, 4, 275, 279 debt, 10, 12, 18, 22, 26–28, 50, 56, 58, 69, 73–74, 94–95, 98, 164, 170, 175, 184, 186, 188, 200, 211, 221, 223, 225, 232, 234, 244, 248, 275, 277, 287, 302, 304–305, 309–312, 314, 317, 325, 329–330, 341 debt brake, 287, 304 debt sustainability, 22 debt-to-GDP, 199 debtor, 309, 332 deficit, 3, 5, 8, 21, 170, 174, 176, 189, 195, 212–213, 218, 230, 234–236, 267, 273, 275, 277–278, 286–287, 304–305, 329 delay, x–xii, 12, 14, 28–29, 188–191, 200, 221, 252, 263, 314, 335, 337 deleveraging, 41, 58–60, 77, 83, 259, 276, 278, 342 Deloitte, 241, 243 Demetriades, 12, 20, 28, 182, 191, 193, 200, 251 Demetriou, 193 democratic deficit, xiii, 284, 307 deposits, 4, 13, 16, 26, 29, 33–35, 41–42, 46, 54–55, 58–59, 66, 69–70, 81, 83, 85–86, 90, 93, 96–98, 165, 185, 193, 200–201, 214, 216, 226, 242, 244–248, 250, 255, 275, 311, 318, 320–322, 324 Dornbusch, 204 Draghi, 186, 239 due diligence, 12, 21–22, 64, 241, 243 E economic and monetary union (EMU), ix, 226–227, 239, 259, 268, 286, 303 economic sentiment, 252, 257, 259 EFSF/ESM, 241 Egnatia Bank, 51–52 emergency liquidity assistance (ELA), x, 12, 16, 18–21, 28, 34–37, 39–44, 46–51, 54–55, 57, 59–61, 65–69, 71–72, 74, 77, 81, 84–85, 87–88, 90–92, 94–95, 97, 99–100, 199, 238, 248, 251, 256 EU/IMF, 68, 273–275, 279 Eurogroup, 11, 15–16, 22, 33, 36, 65, 67–70, 72, 74, 77, 83–84, 96–100, 165, 212, 225, 243–248, 252, 279 European Banking Authority (EBA), 13, 20–21, 58, 64, 184–185, 334 European Union countries, 235 page 346 January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-index Index European Central Bank (ECB), x, xiii, 5, 14, 16, 18–21, 29, 35–36, 39–40, 45–51, 55, 57–62, 64, 67–69, 77, 92, 173–175, 186–190, 196, 216, 233, 241, 248, 250, 256, 275–276, 284–285, 288, 314, 327–331, 333–335, 337–339, 341–344 European Commission, 5, 21–22, 33, 64, 164, 172, 179, 276, 284, 287, 325, 343 European Financial Stabilisation Mechanism (EFSM), 276 European Financial Stability Facility (EFSF), 21, 57, 64–66, 276 European Parliament, 202 European Stability Mechanism (ESM), 20–22 European Union, xi, xiii, 10, 35–36, 39, 58, 70, 164, 169, 172–173, 186, 194, 201, 203, 211–214, 218, 220, 227–228, 236, 239–241, 248, 258, 279, 284–286, 303–305, 311, 313, 317, 319, 322, 325–326, 328, 339, 344 Eurosystem, 34, 36–37, 39–41, 43–45, 47–49, 68–69, 92, 238, 253, 256, 276, 342 expenditure, 3, 6, 8, 170, 172, 174, 203, 219, 233, 261, 292, 312–313, 318, 325 F Federal Open Market Committee (FOMC), 286 Federal Reserve, 167, 286, 328 financial instability, 97, 335 financial markets, 4, 6, 9, 169, 244, 339–340, 342–343 financial stability, xiii, 19–20, 47, 68, 71–72, 287, 304, 328–329, 336–338, 342 fire sale, 26, 34, 73, 95, 99 fiscal compact, 286–287, 296, 329–330 fiscal discipline, 5, 68, 228, 267, 309–310, 328 page 347 347 fiscal union, 283 Fitch, 16, 60, 64, 177, 190, 239, 241 forced sale, 199 Friedman, Milton, 131 G goodwill, 52, 57 Governing Council, 35, 39–40, 45, 47–48, 67–68, 285, 337 government debt, xi, 4–5, 22, 27–28, 188, 199, 233, 237, 274, 287, 309, 318, 320 Greece, ix, xi–xii, 14, 26, 34, 43, 51–52, 55, 57, 69–70, 77, 84–86, 89–90, 94–95, 97, 99, 165, 169, 174–176, 179, 185–186, 216, 225–226, 237–239, 241–242, 247, 262–263, 275, 309–310, 312–315, 317, 323–324 Greek branches, 16, 33–34, 74, 80–81, 83–86, 89, 92, 94–95, 97, 99, 247 Greek government bonds (GGBs), 10, 13, 54–57, 98–99, 185, 196, 212, 238–239, 262, 267 Grexit, 238–239, 241 gross domestic product (GDP), 10, 13, 22–23, 26–28, 34, 51, 59–60, 69, 83, 164, 170, 172, 174, 181, 185, 187, 199, 201, 203, 212, 214, 216–219, 225–226, 230, 232–238, 242, 244, 247, 261, 265, 267, 273, 275, 286–287, 304–305, 323, 329 growth, xii, xiii, 4–5, 7–8, 23, 27, 164, 169–170, 181, 192, 212, 214, 218, 223, 226–227, 229, 233, 241, 253, 257–258, 263–268, 275, 285, 289, 292–293, 301, 305, 310, 313, 315, 323, 325–326, 328 H haircut, 10, 21–22, 26, 34, 39, 58, 61, 69, 72, 76–77, 84–85, 88, 93–95, 97–99, 184, 186, 200, 212, 245, 311, 318, 320–321 Hamilton, Alexander, 305 January 27, 2016 348 11:57 The Cyprus Bail-In 9in x 6in b2256-index Index Hellenic Bank (HB), 13, 74, 248, 251 Household Finances and Consumption Survey, 314 I illiquidity, 41 imbalances, x–xii, 4, 10, 170, 173, 184, 203, 212, 220, 227, 267, 329 IMF/EU, 233 indebtedness, 6, 23, 26, 28 inflation, 3, 38, 228, 265, 289, 291, 295, 298, 328, 331–333 inflationary, 285 insolvent, 12, 18–20, 35–41, 51, 60–61, 65, 67–68, 71–73, 199 international central banking, 165 International Monetary Fund (IMF), 5, 21, 25–27, 64, 83, 173, 179, 185, 188, 197, 199, 242, 257, 276–277, 319, 343 Investigation Commission, 10–11, 18, 20, 24, 29 Investigation Committee on the Economy, 65, 177, 198 investment, x, 3, 6, 13, 21, 33, 51, 77, 188, 212, 218, 220, 222–223, 227, 236–238, 240–241, 257, 259, 265, 267, 269, 273, 310, 319, 321, 323, 325–326, 339 Iran, 181–182 Ireland, ix, xi–xii, 5, 14, 50–51, 165, 179, 185, 213–214, 225, 230, 273–275, 277–279, 309, 335 Irish Investigation Commission, 10 Italy, 175, 177, 263, 309, 314, 329 J Juncker, 15–16, 325 K Kazamias, 189 Keynesian, 326 KPMG, 21, 23, 25–26, 28 Kypri, 18 Kyprianou, 193, 198, 201 L Laiki Bank, 20, 33, 52, 65, 213 Last National Bank, 27 leaked, 54, 58, 74, 182, 242, 260 leaks, 192, 197 lending rates, 216–217 leverage, 49, 201, 231–232 liquidation, 36, 42–43, 50, 70, 73, 80–81, 83–84, 87–89, 91, 93, 95, 99 liquidity, x, xii, 19, 36–37, 39, 41, 47, 55, 58, 62, 71–72, 97, 165, 185, 188, 213, 215, 218, 238, 240, 248, 335–336, 338, 342 liquidity ratio, 165 loan, 21–22, 25, 34, 37–38, 42, 44, 46–47, 49, 54–56, 61, 77, 165, 169, 186, 188, 200, 215, 218, 232, 238, 246–247, 250–254, 276–279, 309 loan-to-deposit, 278 loan-to-value, 165 loan-to-value ratios, 165 M Maastricht, 9, 28, 327–328 Maastricht deficit, 229 Marfin Bank, 52 Marfin Investment Group (MIG), 51–52, 54 Marfin Popular Bank, 52 Marfin-Laiki, 187–188, 199 Marfin-Laiki bank, 193 Mari, 180, 202, 212, 237, 267 memorandum of understanding (MoU), 5–6, 27, 105–166, 189, 191, 196, 220–221, 240, 242–243, 245, 260, 263, 267–268, 277–278 Merkel, Angela, 275 Minimum wage, 278 Ministry of Finance, 20, 170, 173, 176, 189 monetary and financial institutions (MFIs), 286 monetary financing, 39, 47, 49–51, 60, 62, 67–68, 87 page 348 January 27, 2016 11:57 The Cyprus Bail-In 9in x 6in b2256-index Index monetary policy, xiii, 35, 37, 40–41, 45, 47, 68, 190, 283, 286–288, 294–296, 298, 300–304, 307, 327–338, 341–343 monetary policymakers, 343 money laundering, 16, 222–223, 242 moral hazard, xiii, 38, 40, 311, 321 N National Asset Management Agency (NAMA), 278 National Central Bank of Cyprus (CBC), x National Central Banks (NCB), 34, 36–37, 45, 39–49, 92, 285, 330 National Recovery Plan, 276 Nicolaou, Eliana, 11, 199 non-performing loans (NPLs), 25, 57, 197, 248, 254 North–South divide, 326 O OMT, 330, 341, 343 Organisation for Economic Co-operation and Development (OECD), 324 Orphanides, xi, 12, 24, 55, 173–175, 182, 185, 240 overconsumption, 217–218 P Papadopoulos, 10, 167 pari passu, 42–43, 78, 81, 87 Patsalides, Christos, 176 pensions, 172, 177, 190, 219, 242 PIMCO, x, 12, 21–29, 64–65, 67, 69, 72, 76, 80, 83, 90, 197–199, 241, 243 Piraeus Bank, 34, 74, 203, 247 Polyviou, Polys, 182–183 Populism, xi, 172, 191, 204 Portugal, 14, 165, 177, 179, 185, 225 Presidential elections, 12, 15, 29, 65, 168, 183, 188, 201, 240, 244, 268 page 349 349 price stability, 39–40, 44–45, 48, 68, 285, 327–331, 335–336, 338, 341–342 private debt, 174, 216 private sector involvement (PSI), xi, 4, 10, 12, 18, 26, 28, 56–57, 186, 194–196, 203, 238–239, 241, 310, 319–321 promissory notes, xii, 46, 50–51, 279 public debt, 10, 21, 26, 29, 174–175, 187, 213, 217–218, 225, 246, 275, 340, 342 public debt sustainability, 22, 174 public finances, ix–x, 4–6, 28, 56, 175, 189, 217, 219, 228, 233, 237, 274–275, 337 R real estate, 77, 165, 212–213, 216–218, 220, 222–223, 227, 232–233, 237, 240, 266, 273–274 recapitalization, xi–xii, 12–14, 18–20, 22–23, 25, 46, 49, 51, 59–60, 62–63, 65, 69, 77, 81, 87, 94, 98, 100, 186, 199, 213, 242, 247, 251 recapitalize, 13, 20, 22, 28, 33, 45–46, 49, 57–59, 61, 65–66, 69, 83, 92, 94, 250–251, 269, 276, 279 recapitalizing, 29, 46–47, 67, 246, 276 recession, 3–4, 26–28, 169, 181, 184, 186, 212, 218, 226, 232, 252, 254, 257–258, 260, 262–263, 267, 275 redenomination risk, 339 reflexivity, 12 rescue package, 15–16, 21, 29, 225, 242, 319 Resolution Authority, 23, 70–71, 73–74, 84, 91, 96, 100 resolution law, 69–71, 73 restructuring, 23, 35, 70, 72–74, 76, 91, 96, 99, 219, 221, 247–248, 251–252 revenues, 3, 217, 233, 273–274, 288, 315 ring-fencing, 69, 85–86, 97 January 27, 2016 350 11:57 The Cyprus Bail-In 9in x 6in b2256-index Index Russia, 231, 244 Russian, 16, 169, 188, 200, 238, 242, 246–247, 251, 320 S Sarkozy, Nicolas, 275 Sarris, Michalis, x, 10, 245 securities markets programme (SMP), 175, 329–330, 343 Self-fulfilling prophecies, x, 12, 27 Shiarly, Vassos, 189, 195 single supervisory mechanism (SSM), 333, 342 Sinn, Hans-Werner, 313 solvency, x, 19–20, 40–41, 44, 57–59, 61, 64, 66–69, 72–73, 334–335, 337, 340–341 sovereign debt, ix–xi, xiii, 4, 8, 54, 175, 186, 274–275, 307 Spain, 14–15, 28, 165–166, 175, 177, 213, 232, 263, 303, 309, 314–315, 329 Stability and Growth Pact, 286, 304, 330 Standard & Poor’s, 238, 259 State guarantees, 36, 39, 43–44, 46, 48–50, 58, 66–67 Stavrakis, Charilaos, 170, 176–177 Stavrinakis, Spyros, 20, 191 Steering Committee, 21, 24, 64–65, 197 Stefanou, Stefanos, 196 stress test, 13, 18, 58, 184, 242, 334, 341 structural reform, x, xii, 5, 7–8, 188, 226, 263, 267, 277–278 sudden stop, 339 Supervisory Board, 337 sustainability, 5–6, 27, 169, 172–173, 188, 191, 200, 268, 275, 279, 341, 343 symmetric target, 332–333 Syria, 181–182 systemic bank, 12–13, 20, 27, 38, 56–57, 70, 72 T tax haven, 221, 244 transparency, x, xii, 23–24, 30, 222–223 Transparency International (TI), 265, 324 Trichet, 175 Troika, xi, xii, 5–6, 20, 29, 33, 64–66, 69, 100, 165, 185, 190, 196–197, 200, 220, 233–234, 237, 239, 241–242, 252, 257, 259, 262–263, 269, 274, 276–278, 280, 343 U undercapitalized, 34, 199 unemployment, 4, 7, 166, 181, 228, 252, 258, 269, 318, 325 uninsured depositors, 22, 34–35, 61, 81, 83, 85, 87, 89, 94–95, 97, 99, 200, 248, 251 uninsured deposits, ix, 34–35, 66, 69, 84, 86–87, 94, 98, 200, 248, 256 Unit Labor Costs, 3, 266, 310, 315–316 V Vassiliou, George, 192, 203 Vgenopoulos, Andreas, 193 W well-capitalized, 34 windfall profit, 199 World Bank, 219, 263, 323 X Xenofontos, 18–19 Z Zenios, Starvros, x, 10–11, 14, 18–19, 24, 27, 29 zero-risk weight, 194 page 350 ... The Cyprus Bail- In: Policy Lessons from the Cyprus Economic Crisis A debt crisis was fermenting in Cyprus long before the country was cutoff from the markets Zenios (2013b) describes the state... 11:56 The Cyprus Bail- In 9in x 6in b2256-ch02 The Cyprus Bail- In: Policy Lessons from the Cyprus Economic Crisis In January 2012, Jean-Claude Juncker (Luxemburg) was succeeded as president of the. .. Names: Michaelides, Alexander G (Alexander George), 1969– editor | Orphanides, Athanasios, editor Title: The Cyprus bail- in : policy lessons from the Cyprus economic crisis / Alexander Michaelides

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