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Faculty, Global Business, Newsroom, OCB Commentary

The Weigh-In: Why Does Cyprus Matter?


The European Union is once again facing a significant financial crisis as Cyprus has pushed Greece, Portugal, Italy and Spain from the headlines. How can such a small country – with fewer than one million citizens – have such a large impact on the global economy? The answer is complicated, much like the March 25 bailout agreement between the troika – the European Union, the International Monetary Fund and the European Central Bank (ECB).

The agreement with the Cypriot government paves way for Cyprus to receive a €10 billion bailout. In return, Cyprus has agreed to downsize its large financial sector and undertake a macroeconomic adjustment program that will require fiscal consolidation, structural reforms and privatizations (among other concessions). In return, the ECB will continue to provide emergency liquidity assistance to Cyprus banks.

Read the rest of this post in the UST Newsroom

Lalith Samarakoon is professor and chair of the Department of Finance in the Opus College of Business. As a financial economist, Samarakoon has two decades of advisory experience in financial sector reforms and development, and public debt management. He teaches Global Finance Issues and Policy: Eurozone Debt Crisis.

Faculty, Newsroom, OCB Commentary

What Are the Short- and Long-Run Impacts of Raising the U.S. Debt Limit?

With the Deficit Super Committee’s deadline to engineer $1.5 trillion in deficit reduction over the next decade, approaching this week, we thought it fitting to share some related faculty research on the impacts of raising the U.S. Debt Limit, featured in the Fall 2011 edition of B. Magazine.
via Wikipedia

There are three primary short-term impacts of the increase in the U.S. debt ceiling. First, government continued without interruption to the U.S. economy, which could not afford a government shutdown. Second, in the present economy, the alternatives (reduce spending, increase taxes) would have had a greater negative economic impact. Reducing government spending or increasing taxes under duress in the short term would be very poor public policy and would have had a dramatic negative economic impact. Third, there was an unintended and unexpected impact: with the Standard and Poorís downgrade, which was due to the political circus in Washington, U.S. government bonds should have been perceived by the market as having greater risk, resulting in higher priced bonds. Because of a worldwide investor “flight to quality,” the opposite occurred, and bonds rallied. More risk, lower returns? Go figure. Some believe there would have been a greater downgrade if the debt level was not increased.

The long term impact is obvious: we have to pay for this some way in the future. There are three options: Continue Reading