Cyprus is a little island nation situated in the Eastern Mediterranean .

In 1960 Cyprus became independent of Britain as the Republic of Cyprus.

The conflict between the Greek Cypriot and the Turkish Cypriot and an invasion of the island by
Turkish troops produced a division of the island and led to the establishment of Turkish Cypriot
state in the northern third of the country
The Turkish Cypriot state made a unilateral declaration of independence in 1983 and adopted
the name Turkish Republic of Northern Cyprus.
Its independence was recognized only by Turkey.
• Since independence, the economy has gone through several transformations:
v From an exporter of minerals and agricultrual products , an exporter of manufactured
goods (1970s) to transforming into an international tourist, business and services center
since the 1980-1990s.
• Classified by the World Bank as a high income country , today the economy is mainly
build upon the services sector including tourism, financial services and real estate, which
accounts for over 80% of both total GDP and employment.

• Cyprus population is less than a million, around 800,000 individuals live there .
• Cyprus became a member of the EU in 2004.
• It adopted the euro as its national currency in 2008 .
• It was listed by the IMF as one of the 31 advanced economies in the world in 2016.
• Cyprus economy has experienced external shocks that have been followed by revival.

• Cyprus went through a financial crisis in 2013 known as the “2012-2013” Cypriot
Financial Crisis”.
• The economy of Cyprus was booming before the 2008 crisis, it experienced a long
period of growth which kept low unemployment rates.
Cyprus was exposing its economy to more risk specially in the form of rapid credit growth which
in turn activated the housing boom , closed financial ties with Athens and lent money to
Greece

What happened is that

1. First: Banks assets were equal to 85% of GDP in 2011 which is equal to 8 times the
country’s GDP, this led to accumulating debt
2. Second A big percentage of their deposits was from tax avoiding Russians. Money has
flow in from Russian hoping to avoid charges back home, and Russian money has
overfilled Cypriot banks to a size a long ways past the government’s capacity to bailout.
Almost all of the foreign money is in uninsured accounts, and 68 percent of all uninsured
accounts come from abroad.
3. Third They invested a lot of money in Greece. Cyprus banks invested this money where
they thought they had a competitive advantage : Greece which is multiple times bigger
than the Cypriot economy, resembled a perfect spot to extend. But they were wrong. In
2012, two of the greatest Cypriot banks, Cyprus Popular Bank knows as Laiki Bank and
the Bank of Cyprus, lost a joined €3.5 billion on Greek bonds. That is more than 10
percent of Gross domestic product in a €31.8 billion Cypriot economy.
 4. Fourth They were very dependent on central bank financing to stay afloat. If it were not
for the emergency funding accepted by the European Central Bank (ECB), the Cypriot
banking system would have collapsed long ago in the past .

As we can see in this graph that the cyprus debt was higher than the average eurozone debt
from 2012-2013
And as I said that the Cypriot banks were dependent on the CB financing to stay afloat this
balance sheet shows us that It gets third of its capital from the central bank.
In conclusion Cyprus’ banks were too big to be saved at the time

Clearly two of the risks that were mismanaged are the sovereign and credit risk, since banks
lost money on Greek bonds and they couldn’t pay back its debt to the CB.

So the
• credit risk: is the risk of default on a debt that arise from a borrower failing to make
required payments
• sovereign risk :is the risk of a government becoming unwilling or unable to meet its loan
obligation,
Now lets talk about the famous haircut
• What happened is that A formal request for Europe's Assistance in return for a 10 Billion
euro bailout deal with the eurozone happened.
• So the Cypriot government has accepted to diminish the size of the sector.
• Laiki Bank which was the second biggest bank in the country shut down with healthy
assets merging into the Bank of Cyprus.
• Itself The bank of Cyprus encountered an enormous haircut on deposits of in excess of a
hundred thousand euros

• There are two ways a broke government could still come up with this money. First, it
could force its own creditors or the banks' creditors to take losses.  the Cypriot
government can't logistically force losses on its foreign lenders, and its domestic lenders
are mostly its banks. In other words, the only losses the government can force on its
bonds would make the banks' problems all the worse. That leaves the bank’s creditors.

• Deposits under €100,00 would get 3 percent haircuts

• Deposit amounts between €100,000 and €500,000 would get 10 percent haircuts,
• Deposits over €500,000 would get 15 percent haircuts.

Cyprus is the first eurozone nation ever to apply capital controls with limits on:
• credit card transactions
• every day withdrawals
• money transfers aboard
• cashing of cheques

The following is the Cyprus economic adjustment program

It was divided in 3 parts :
Banking sector reforms, Structural reforms and Fiscal policies reforms:

So A great deal of Cyprus' accomplishment in finishing its bailout program has been down to its
severe adherence to somberness measures and the execution of changes, including those to the
open division and benefits framework and a privatization plan, that was required by the troika
(ECB,IMF,EU).

Today the Lebanese Finical Crisis reminds us of what happened in Cyprus. The main difference
between both crisis is that Cyprus’ banks were bankrupted but in the Lebanese case it’s the
whole government. Both countries relies solely on the service sector , which is a weak point
during a crisis, because domestic production can help the economy of the country during hard
times. What we can learn is that all the countries should also rely on their domestic production.
In addition, banks should have diversify more their portfolio in less risky sectors in order to
reduce all the risks. In addition banks should pay more attention to their credit ,corporate and
sovereign risks. And they also should take into considerations all the scenarios that may occur
before lending or taking money. Finally each country should follow a specific and clear plan in
order to survive a crisis, like Cypriots successfully did.