Why did Cyprus need financial assistance?
Cyprus’s accession to the EU in 2004 and its adoption of the euro in 2008 contributed to a rapid growth of the financial sector and expansion of bank lending. At its height in 2009, the Cypriot banking sector was equivalent to nine times the country’s GDP, compared to the current ratio of 3.5 times GDP (close to the EU average). In addition, high current account deficits were recorded, and exports dropped due to Cyprus’s falling competitiveness.
The banking sector was increasingly cut off from international market funding and Cyprus’s largest banks recorded substantial capital shortfalls against the backdrop of the exposure to the Greek economy and deteriorating loan quality. Bank credit policy, poor risk management practices and insufficient supervision contributed to the problems. The excessive budget deficit limited Cyprus’s ability to help when the banks were on the verge of collapse.