The banking crisis in Cyprus resulted in economic instability in the country. This prompted for rapid measures by the government, the central bank and the European Union in general. Various policies were implemented to counter the effects of the crisis. The adopted policies were designed to restore financial stability (Weisenthal 2013).
The government of Cyprus was swift in the introduction of policies that would save the economic situation in Cyprus and restore the confidence of investors. This is evident through the implementation of a number of policies. In the year 2012, the government of Cyprus introduced stringent measures that were focussed on reducing social expenditure in a way that the poverty situation in the country would not be worsened. The government targeted benefits such as the student grant and the universal child benefit (Hobson 2013).
Another policy that the government adopted was increasing the rate of value Added Tax (VAT) and excise duty on commodities such as property and oil affected everyone. This was a measure that was meant to help bailout financial deficits. Additionally the government also introduced amendments in social policy. Examples of these included removal of mother’s allowances, Easter allowance reduction for pensioners, grant reduction for different schemes (Neuger 2013).
The third policy measure that the government adopted is the introduction of an economic adjustment programme. The program was designed to cater for medium and the short-term financial challenges that Cyprus was faced with. The program had a number of objectives which included restoring the stability of the banking sector through approaches such as financial institutions downsizing and addressing any form of capital shortfalls. The second objective of the programme was to address government deficit while maintaining fiscal consolidation (Genay & Mei 2013).
The last policy that was adopted by the parliament of Cyprus was the creation of a “solidarity fund”. The fund was aimed at pooling state assets. The fund would enable the creation of emergency bond besides giving the government additional power to have capital controls imposed on banks. The reason for this swift measure by the government was to ensure that international lenders were satisfied in order to attain a better chance of getting €10bn bailout from EU. The government deemed this measure appropriate in averting bankruptcy (Genay & Mei 2013).
Central bank of Cyprus policy response
The banking sector in Cyprus also came up with measures which were focussed on restoring financial stability of the banking sector. The central bank of Cyprus (CBC) came up with the Due diligence review. The CBC in liaison with Troika assigned the Due diligence review to a consulting firm. The review targeted cooperative credit institutions and a sample of banks. It involved evaluating the economic value of assets owned by banks. The goal of the review exercise was to...