Case | HBS Case Collection | October 2013 (Revised April 2014)

Cyprus (A)

by Eric Werker, Sebastian Berardi, Stelios Elia, Omar Muakkassa and James Zumberge

Abstract

Cyprus is a small Mediterranean island located at the cross-roads of Europe, Africa, and the Middle East. Since its 1974 split, Cyprus has grown real GDP more than fivefold – in large part because of its development as an “international business” center. The country developed a large network of double-taxation-treaties (including some of the most robust agreements with Russia and other ex-Soviet Republics) that allowed it to serve as a tax-efficient conduit for international capital flows. In 2002 it acceded to the European Union and in 2008 to the Eurozone. However in 2012, facing fiscal deficits and an insolvent banking sector, the island became the fourth EU country to formally request assistance from the EC-ECB-IMF Troika. The final assistance package required a “bail-in” from uninsured depositors in order to return the nation’s largest banks to solvency. How had Cyprus’s development model contributed to both the island’s financial crisis as well as the structure of its ultimate assistance package?

Keywords: tax havens; financial crisis; Cyprus;

Citation:

Werker, Eric, Sebastian Berardi, Stelios Elia, Omar Muakkassa, and James Zumberge. "Cyprus (A)." Harvard Business School Case 714-010, October 2013. (Revised April 2014.)