Greek exposure to Cyprus: the unintended consequences of restructuring

Blog post

Greek exposure to Cyprus: the unintended consequences of restructuring

Europe failed to properly address the consequences of the Greek debt restructuring. The crisis came back with a vengeance when the Cypriot crisis even

Publishing date: 13 August 2013
Authors: Guntram B. Wolff

The restructuring of Greek government debt contributed significantly to the downfall of the Cypriot banking system and Laiki and Bank of Cyprus in particular. Laiki lost on these assets and Bank of Cyprus , representing around 60 % of the banks’ total equity. When the restructuring was undertaken, however, the European policy system did not pro-actively address its repercussions on Cypriot banks. This blog investigates the fragility of Greek banks to similar adverse surprises from Cyprus (without taking a stance on the likelihood of that possibility) and argues that Europe should be prepared to react.

Cypriot assets form a non-negligible part of the balance sheet of Greek banks. The figure below shows that they dwarf exposures on other Southern European countries by orders of magnitude. In 2013Q1, the Greek exposure to Cyprus totaled 9bn EUR. This represented 16.5 % of the total capital of the Greek banking system.

Exposure of Greek banks to selected Southern European countries.

Note: The spike in the share in 2012Q2 was a consequence of the temporary capital shortfall of Greek banks following the country’s sovereign debt restructuring.

Source: Bruegel based on BIS (cross-border exposure data) and ECB (capital and reserves).

Greek debt restructuring was arguably delayed to safeguard the stability of the European financial system. Yet, French banks – while having the largest exposure to Greece pre-crisis - still had a share below the Greek banks’ exposure to Cyprus. Their Greek claims as a share of total capital and reserves peaked at 14.2 % in 2009Q1 and stayed above 10 % until 2010Q2. In addition, Greek banks are in a weaker position to raise new capital.

Europe failed to properly address the consequences of the Greek debt restructuring. The crisis came back with a vengeance when the Cypriot crisis eventually came to the fore. note a similar interdependency in the Iberian peninsula, with claims by Spanish banks on Portugal totaling 13.4 % of total capital and reserves in 2013Q1. Our colleague Ashoka Mody has argued that more debt restructurings may be needed. If they are, Europe should be better prepared to act swiftly. Delaying the resolution of the consequences of restructuring is risky.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.