IMFS Working Paper on the role of the central banks during the bailout for Cyprus

Recently, newspaper articles about the minutes of the European Central Bank before the Cyprus bailout have made clear again how controversial the short-term loans were among central bankers. In a new Working Paper, IMFS Research Fellow Athanasios Orphanides analyzes how the ECB and the Cypriot central bank "created a grey area" for the decision and looks at the consequences.

According to an article of the "New York Times", the ECB approved the so-called emergency liquidity assistance, or ELA, for the Cyprus Popular Bank although depositors were withdrawing their savings in large numbers and some members of the ECB Governing Council opposed. Orphanides, who served as governor of the Central Bank of Cyprus and, thus, as member of the Governing Council of the ECB between 2008 and 2012, explains how "political considerations associated with the February 2013 elections in Cyprus appear to have determined the continuation of the ELA provision".
Orphanides reproaches the ECB and the Central Bank of Cyprus for effectively "transforming a manageable problem in one institution into an unmanageable catastrophe for the economy of the country". With their decision, the ECB and Cypriot central bank vastly increased the cost subsequently imposed on the people of Cyprus, Orphanides argues. Thereby, the author illustrates that rules and boundaries are not sufficient "to guard us against human failings".

IMFS Working Paper 84
Athanasios Orphanides
"Are Rules and Boundaries Sufficient to Limit Harmful Central Bank Discretion? Lessons from Europe"
(PDF, 290 KB)