Neglect Private Debt at the Economy’s Peril?

Applying Balance Sheet Recession Analysis to the Post Bail-in Cyprus Economy

• Author(s): Leslie G. Manison & Savvakis C. Savvides • Published: March 2017
• Pages in paper: 16


Abstract

The role of private debt as a cause of financial crises and prolonged recessions is often neglected. In Cyprus policy concern has focused on government debt despite the problem of a rapid growth of private debt and its wasteful use. Private debt in Cyprus stands at over 350% of GDP, but the European Commission’s policy of austerity and encouraging the redeployment of private assets through bankruptcy is based on a misdiagnosis of the problem. Studies of the importance of private debt and balance sheet recessions following financial crises conclude that policy-imposed austerity can only worsen and delay economic recovery. In Cyprus there is scope to raise productive government expenditures through using European Union funds, by raising revenue from the large base of unpaid taxes and by taxing the large shadow economy estimated at over 25% of GDP.



Register for personal access to all papers for just £47.99

To download papers you need a subscription to World Economics Journal.
Get access to the full 20 year archive of thousands of papers and abstracts.

Order online now for 1 years immediate access for 1 user via username/password.


You do not need a PayPal account to pay by card.

Institutional Subscriptions, Contact Us
Existing Subscriber Log-in



More Papers From These Authors in World Economics:


The Marketing Evaluation of Capital Investment Projects

Through this article the author attempts to put together in one logical and coherent sequence the steps to be followed when attempting to evaluate the competitiveness of a capital investment project. Over and above applying the correct cost–benefit analysis methodology and building an integrated and manageable financial model it is imperative to research the marketing aspects of the project and build these findings into the projections.

Read Full Paper >


Risk through the Looking Glass

This article argues that the general acceptance of volatility constituting a good measure of risk is not appropriate in the context of capital investment appraisal. It is argued that expected loss should be employed as a measure of risk. It is further illustrated how the risk aversion attitudes of potential investors can be taken into consideration in the capital investment decision. The pursuit of return without risk inevitably leads to the transfer of wealth through an underperforming banking system which collaborates with an unregulated financial market seeking low risk and relatively safe returns for the benefit of their wealthy clients. The promise of a ‘return without the risk’ leads financial intermediaries in an elusive direction: the only way to attain this is through directing funding to capture existing assets rather than investing in the real economy to create new wealth.

Read Full Paper >


The Disconnect of Funding From Wealth Creation

This article identifies concentration of money and power and loosely regulated financial markets as impeding the efficient allocation of economic resources. The pursuit of return without risk inevitably leads to the transfer of wealth through a failing banking system which collaborates with hedge funds and global wealth management groups, who constantly seek low risk and high returns for the benefit of their wealthy clients. It is further argued that conditions conducive to economic development hardly exist in highly indebted countries and that wasteful finance inevitably brings about financial crises and recessions. The promise of a ‘return without the risk’ leads financial intermediaries in the direction of a quest, since the only way to attain this is through directing funding towards the capture of existing assets rather than it being invested back in the real economy to create new wealth.

Read Full Paper >


Funding Economic Development and the Role of National Development Banks

Prior to its privatisation in 2008, the Cyprus Development Bank played an important role in the economic development of Cyprus, intermediating international finance from multilateral development banks. This function was subsequently undertaken by commercial banks, which are currently limited by balance-sheet fatigue, however, and lack necessary elements for successfully executing this role. Our analysis shows a current void of institutional capacity in funding growth-bearing projects. Proceeding in a normative way, we recommend reinstalling a development finance agency that will tackle the issues by swapping equity for debt relief.

Read Full Paper >