Panayiotis Rougalas
Yesterday, I had a conversation with someone who truly understands banking—probably more knowledgeable than many who think they do. In his view, there are indeed risks looming over the banks and the economy, such as those related to real estate, wars, rising costs, inflation, loan defaults, and especially the low wages in the private sector compared to the significantly higher wages in the public sector.
I read him a portion of the Central Bank of Cyprus' financial stability report, and it seemed he had this in mind: "The fact that real household incomes remain slightly below pre-energy crisis levels (mid-2021), along with the increased leverage of non-financial businesses, combined with already high debt levels, hinders the ability of vulnerable households and businesses to repay loans. As a result, the full impact of rising prices and interest rates on the private non-financial sector’s ability to service its debt may not yet be fully reflected in the loan portfolios of credit institutions," the CBC noted.
Cypriot banks do lend, but if you look at where that lending is going, you’ll notice that a substantial amount is directed outside of Cyprus.
But no! In his free time, he pores over the financial results of Cypriot banks. What he noticed is that since 2023, a significant portion of loans have been channeled outside of Cyprus. I asked him, “What do you mean?”
He continued. Cypriot banks do lend, but if you look at where that lending is going, you’ll notice that a substantial amount is directed outside of Cyprus. Cypriot banks, he said, have so much liquidity that with the current interest rates, they’re benefiting because they’re being paid for it, but they don’t really know where to channel it. As an example, he pointed to a Cypriot bank that, in 2022, had allocated two-thirds of its loans within Cyprus and one-third abroad. By 2023, this had reversed—two-thirds of its loans went outside of Cyprus, with only one-third staying in the country.
His fears center around the moment of loan default—the worst-case scenario. The borrower who took out a loan for something outside of the country, as he explained, will be the first to default when things go wrong. “An investor who doesn’t live in Cyprus and got money from a Cypriot bank for a project abroad isn’t likely to rush to settle the debt,” he said. “Good luck chasing down someone in another country to recover a loan given for a foreign project,” he concluded.
This is one of two emerging risks he highlighted for the Cypriot economy and its banks, which no one seems to be talking about yet. In his opinion, local regulators should step in and hold the banks accountable for channeling Cypriot liquidity abroad without implementing a new form of oversight, safety buffers, or specific limits.
