Was the Cyprus Crisis Banking or Sovereign Debt?

The complexity of the Cyprus crisis makes answering the question of the title difficult, while the policy implications make the question important. However, the answer to this question unavoidably points the finger to those responsible, and as a result the quest for an answer is clouted by political considerations. In this paper we use a systematic analysis of the data to find answers. Relying on literature of Early Warning Systems we build a model to determine: (1) When did it become apparent that the Cyprus economy was headed for a crisis, and (2) Could the crisis have been averted if either public finances or banking sector balance sheets were managed differently? The results show, first, that there were indeed early warning signals for the crisis. These came as early as 2009-2010, much before the Cyprus sovereign was cutoff from international markets. Second, there were signals for a banking crisis starting in 2009-2010, and signals for a sovereign debt crisis starting in 2010-2011. Both sovereign and banks were headed for a crisis, independently of each other, although, of course confounding factors were also present.