The 2013 bail-in and the first use of capital controls in the euro area

Cyprus's banking and output charts show an extraordinary break in 2013, when an oversized banking sector, with assets worth several times the island's GDP and heavily exposed to a defaulted Greek sovereign-debt restructuring, collapsed under its own weight. Under a March 2013 agreement with the European Commission, ECB, and IMF, Cyprus received a 10 billion euro bailout on the unprecedented condition that uninsured depositors, not just shareholders and bondholders, absorb losses: Cyprus Popular Bank, known as Laiki, was wound down entirely and uninsured depositors at Bank of Cyprus took a haircut of around 47.5% of balances above 100,000 euros, converted into equity. The Central Bank of Cyprus, under Governor Panicos Demetriades, imposed the euro area's first-ever capital controls to prevent a bank run, restrictions that were not fully lifted until April 2015. Demetriades, discussing the creation of a separate asset-management vehicle for distressed loans in an August 2013 address, acknowledged the scale of the clean-up still needed in the banking sector's wake. The economy contracted by about 5.9% in 2013 and continued shrinking into 2014, with unemployment peaking near 16%, before tourism and professional services drove a strong recovery from 2015 onward.