The Rise and Dominance of Zombie Banks in Cyprus


Government-led Cypriot politicians welcome banks with any means at their disposal, to the detriment of the economy and the taxpayer

By Savvakis C. Savvides

In a country like Cyprus, where real private debt is more than three times the country’s GDP, it is difficult for households and businesses to make ends meet, let alone repay their existing loans. However, the only achievable objective for banks is to seek to maximize their return using the recourse available to them. This results in the use of all possible means to capture the collateral and guarantees of existing bad debts. In addition, they seek the support of taxpayers with special regimes through the government and lobby to promote legislation that facilitates this process of wealth extraction. That’s the definition of a zombie bank.

What is the zombie bank

The term “zombie bank” was first used by Edward Kane in 1989 to explain the dangers of tolerating large numbers of insolvent savings and loan associations. A zombie bank is a bank that cannot make performing loans and needs the support of the taxpayer to survive while engaging in asset stripping by selling the loans on its balance sheet. For this reason, the Icelandic government took control of all existing banks in 2008. In Cyprus, the government has taken the position that we must “save the banks at all costs because there is no economy without the banks “. Iceland came out of recession in three to four years while Cyprus struggles and goes from bad to worse.

Cypriot economy in dire straits

There are many reasons for resorting to zombie banking practices, but in Cyprus, following the 2013 financial crisis, a bank found itself between a rock and a hard place because it could not provide a sufficient amount of new viable loans with an adequate repayment capacity within a time-indebted economy. Specifically:

  1. there are only a few potential borrowers left who can be deemed creditworthy and
  2. there is only weak domestic demand to allow new investment opportunities.

Under conditions of excessive private indebtedness, such as those in Cyprus, there are very few potential borrowers who remain solvent for further loans to be made. In addition, because a large part of the income must be funneled into repayments, domestic demand suffers, making investment opportunities few and far between. In short, this is the problem at the very heart of the Cypriot economy. As a result, a bank is unable to re-inject into the economy in the form of new viable loans the savings collected on repayments which inevitably end up in excess liquidity which has been kept in the form of cash balances generating mostly interest. negative in central banks.

Excess deposits translate into nonperforming loans or expensive unused cash

The problem of excess liquidity

Excessive and questionable foreign deposits amassed by banks during the happy years for some in Cyprus (such as lawyers, accountants, developers and politicians) resulted in collateral loans in the form of mostly nonperforming debt.

Unfortunately, this situation and the disappearance of the debt of the country’s economic agents also inevitably lead to a recession. Sustainable development results from the productive use of financial and other resources to create real wealth. In Cyprus, the very rapid growth of private debt and the increasingly excessive use of financial resources have largely contributed to catastrophic events, such as the financial crisis which culminated with the infamous 2013 bailout and recession. that followed. Numerous studies for advanced economies show that rapid growth in private debt ultimately leads to a marked slowdown in economic growth as diminishing returns set in due to the use of abundant finance. Most notably, Richard Koo coined the term “balance sheet recession” to describe the recession that inevitably results from ignorance, as we do now in Cyprus, of the problem of excessive private debt in an economy.

Private debt leads to balance sheet recession

Private debt weakens the two essential conditions for the sustainable growth and development of an economy. The need for its economic agents to have healthy balance sheets and to have conditions conducive to viable investment opportunities in the real economy. This can create a perfect storm that Koo says results in a long and possibly deep balance sheet recession like the one Japan has experienced in recent decades.

The consequence of ignoring private debt and facilitating the narrowly perceived needs of predatory investors is to create zombie banks like the ones Cyprus ended up having. Since these financial institutions are doomed to operate in an over-indebted economy, their main and practically sole purpose of existence becomes that of extracting as much as possible of the collateral and guarantees they hold in their books. They have therefore gone from being a provider of productive financing to that of a quasi-asset management company or, at best, an intermediary for such companies. It should come as no surprise then that this process ultimately results in a huge transfer of wealth from the general public to those who end up buying back the loans from these failing banks.

Wealth transfer rather than wealth creation

The object of the wealth transfer are the collateral and guarantees that were acquired during the uncontrolled process of lending collateral, mainly in the years leading up to the financial crisis of 2013, when Cypriot banks were using the billions of ‘imported’ deposits. to grant mostly unnecessary loans. The measure of success for CEOs of these banks has therefore become the efficiency with which bank balance sheets are used for the benefit of current sponsors and major shareholders, rather than what it is in the long run for lenders and the economy as a whole. They are now even taking negative interest on deposits that they have the audacity to call “parking fees”. As if a computer entrance were a real estate space that was used to “park” your money!

With the projected banner and the motto put forward by the government that “without banks, there is no economy”, politicians accommodate bankers with any means at their disposal. Of course, the truth is exactly the opposite. Without viable economic conditions (a situation in which the net worth of people’s balance sheets is not diminished by debt), private banks have no other role than to tear up the bank’s balance sheet. This is why in such circumstances the government should step in to put things in order and protect the public interest against such predatory banking practices (eg in Iceland in 2008 and in England with the Royal Bank of Scotland).

Instead, in Cyprus, the government orders legislation to meet the needs of bankers and their associates and even subjects the taxpayer to guarantee other loans and thus foot the bill for a debt that is even more unnecessary than the bankers. banks would not have approved without the government’s pledges. Therefore, rather than supporting the creation of wealth by financing productive projects in the real economy and with the help of the elected government of the country, these “vulture investors” have taken full control of this parasitic attempt to extract money. wealth to the detriment of the population and the economy. country agents. And the government is happy to oblige.


  1. Kane, Edward J. (1989). The S&L Insurance Disorder: How Did It Happen ?. Washington, DC: Urban Institute Press. ISBN 978-0-87766-468-0.
  2. Mian, Atif. and Soufi, Arif (2014), House of Debt: how they (and you) caused the great recession, and how we can Prevent it from happening again. University of Chicago Press. Kindle Edition.
  3. Koo, Richard C (2015) The exit from the balance sheet recession and theE. Trap, Wiley.
  4. Manison, Leslie and Savvides, Savvakis (2017) “Neglect of private debt at the risk of the economy”, World Economic Review, 18, n ° 1, January-March 2017.
  5. Hudson, Michael (2012) “The Road to Debt Deflation, Debt Peonage, and Neo-feodalism”, Working Paper No. 708, Levy Economics Institute of Bard College.
  6. Wave, Richard (2014) The next economic crisis: why it is happening andHow to avoid it, University of Pennsylvania Press.
  7. Savvides, Savvakis (2016) Overcoming private debt (unlocking the real economy burdened with loans in Cyprus), The Private Equity Journal,Autumn, Vol. 19, n ° 4: pp. 51-59.
  8. Wave, Richard (2014) Public debt is not the problem – private debt is,, September 9, 2014.

Savvakis C. Savvides is an economist, specializing in economic development and project financing. He is a former senior executive of the Development Bank of Cyprus and has been a regular guest lecturer at Harvard University and currently Queen’s University. Author’s page:


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