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Bank Restructuring in Cyprus: A Step in the Right Direction but Too Late to Avoid Prolonged Recession

3/29/13

Bank Restructuring in Cyprus (Liliana Rojas-Suarez on CNN)

In this CNN interview, Senior Fellow Liliana Rojas-Suarez argues that the recently announced measures in Cyprus that imposes losses on non-insured depositors as part of a full-fledged bank restructuring program is adequate, but implemented too late to avoid a long-lasting recession. Liliana explains that the right time for action should have been a year ago when the Greek debt was restructured. At that time, the Troika (IMF, European Community and European Central Bank) knew that banks in Cyprus—which held significant amounts of Greek debt—would be adversely affected. As in all banking crises, delaying intervention only aggravated the problems, which will result in a sharp contraction of credit and economic growth. Liliana also argues that the Cyprus case should not be taken as indicative of future treatments of banks in the Eurozone or elsewhere. Banks in Cyprus are not global systemically important financial institutions and, therefore, the Troika can feel comfortable limiting a bail out. This would not be the case if a large European bank were to face deep insolvency problems.