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analytically in Papaioannou et al. ( 2013).
The parameters and their interrelations of an
FCM system constitute veritable semantic terms of
the modelled system. Hence, they can be interpreted
by whoever builds the system in an explicit manner.
Additionally, the update rule describes the degree of
influence between different parameters of a cause –
effect system which basically comprises the
cornerstone of the Fuzzy Cognitive Maps.
Furthermore, in order to satisfy the limitation of
keeping the concept state values in the range of [0,
1] (Stylios and Groumpos, 2004) the update rule
uses a transformation squashing function (e.g.
logistic function) which basically squashes each new
concept state value into the desired limited range.
However, the use of the transformation function
cannot be explained using semantics from FCM
background theory and hence it cannot be
interpreted. The idea behind the FCM technology is
the modelling of how real cause-effect systems
work. All FCM modelling elements can be described
using causality semantics, except the update
function. For avoiding any squashing functions
when updating the parameters’ state value in every
running iterations of the FCM system, a novel
update rule is used which is described in a later
section of this paper.
Our work takes FCM modelling technology a
step forward since both the FCM construction
methodology and the novel update function rule are
implemented and applied to a real life, strongly
intricate system describing the interacting concepts
of the Cyprus banking system and economy.
It is well known, that in 2008 a new global
financial crisis emerged. This crisis was transmitted
to the European economies and especially the
weakest of them in the southern European belt,
evolving into “national debt crises”. Greece was the
first country which had to deal with the possibility of
a national bankruptcy in 2009. As a result of the
continuous and strong increase in Greek government
debt levels, Greece’s sovereign debt was
downgraded by the International Credit Rating
Agencies to junk status in April 2010. There was a
fear that other countries could be affected by the
Greek economic crisis. This forced Europe to take
important and decisive corrective actions under the
pressure of time. In May of 2010, the Troika which
is a tripartite committee constituted by the European
Commission, the International Monetary Fund
(IMF) and the European Central Bank, agreed to
give Greece a three-year €110 billion loan. As part
of the deal with Troika, the Greek government
implemented a series of austerity measures. These,
led Greece to an even deeper recession. As a result,
in February of 2012, Troika decided to provide
Greece a second bailout package accompanied with
a restructuring agreement by enforcing losses on the
private sector holders of Greek sovereign debt, a
process known as “private sector involvement”
(PSI). The debt restructuring deal declared that
private holders of Greek government bonds had to
accept a 53.5% so-called “haircut” to their nominal
values. Eventually, in March 2012, the bond swap
was implemented with an approximately 75%
effective write-off.
The Cypriot and Greek economies are strongly
related and connected. As a consequence the Greek
PSI agreement had serious repercussions to the
Cyprus economy. More specifically, the Cypriot
banking system was strongly impacted by the Greek
PSI, since it was highly exposed to the Greek
government bonds. Cypriot banks lost the equivalent
of 20% of Cyprus GDP in this unfortunate
investment. At the same time the Cyprus economy
was dealing with other serious economic problems
such as a stagnating economy and an increasing
fiscal deficit.
Added to this, the revelation of such
unsuccessful and injurious investments on the Greek
government bonds led people to lose their faith in
the Cypriot banking sector. The future of the Cypriot
economy and especially its banking system seemed
uncertain.
In this work, an attempt has been made to model
the dynamics of the above problem and general
situation using the technology of fuzzy cognitive
maps. That is, once we manage to produce an FCM
model of the situation, to study the long term
impacts the banking system as a result of the Greek
PSI in combination with the decline in confidence
towards the Cypriot banking system.
For the purposes of this work, four basic
scenarios were implemented and tested. Namely,
introducing to the system a 75% Greek PSI and
decreasing the level of confidence of people to the
Cypriot banking system by 25%, 50% and 75%.
2 THE FCM MODEL
Dynamical systems and in particular political–
economic–social systems which are characterized by
causality tend to reach steady states. A change to the
initial state vector describing such a system
stimulates a series of subsequent influencing
changes to the parameters of the system which
eventually settles to stable state vector. For real life
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