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20 May, 2024
 
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135% debt reduction sparks hope for economy

Is Cyprus' divestment framework failing?

Panayiotis Rougalas

Panayiotis Rougalas

According to the latest data from the Central Bank of Cyprus, the private debt-to-GDP ratio has shown a significant decrease from its peak at the end of the first quarter in 2015 to the end of March 2023. This ratio dropped by 135 percentage points, reaching 218% from its previous high of 353%. This is undoubtedly a positive development, though the explanation provided by the CBC leaves much to be desired.

The CBC attributes this overall decrease primarily to two factors: nominal GDP growth (the denominator effect) and loan write-offs. In essence, without positive economic growth, reducing private debt would be challenging, if not impossible, even with loan write-offs alone.

Loan write-offs played a crucial role in managing the large volume of non-performing loans (NPLs) in commercial banks' portfolios during this period. Some loan management companies, such as Pimco's Themis in Cyprus, have continued this practice. For example, Themis, which has acquired significant NPL packages, has completed 200 million euros in restructurings and agreed to write-offs totaling 50 million euros under specific conditions. While data for other companies like Apollo, Gordian, Dovalue, and Altamira may not be available, it's likely that they also engage in similar write-off practices.

Despite the decrease, private debt in Cyprus remains high compared to other Eurozone countries, primarily due to the inclusion of a substantial proportion of legacy loans, granted prior to the 2013 financial crisis and subsequently transferred or sold to loan repurchase companies. This underscores that the policies implemented so far have not effectively reduced private debt. Neither divestment solutions nor initiatives like the Estia project yielded the expected results.

The CBC anticipates that private debt in Cyprus will continue to decline in the coming years as long as nominal GDP growth continues. They stress the importance of reducing the private debt-to-GDP ratio below the European Commission's 133% threshold, especially with the consolidation of debt held by loan management companies. This consolidation involves implementing debt restructuring and recovery solutions and ensuring the practicality of legislation governing the sale of mortgage properties, which aligns with the purpose of divestments – reducing the burden of problematic long-term loan portfolios on the Cypriot economy.

The European Commission has expressed its concerns about private debt in Cyprus, citing that around 34% of household debt is related to inherited non-performing loans held by credit buyback companies. These loans can affect the overall pace of private debt reduction. Additionally, the resolution of NPLs involving residential mortgage properties faces challenges due to recent suspensions of divestment processes.

As of December 2022, loan repurchase companies held approximately 19.7 billion euros in non-performing loans, while banks held around 2.3 billion euros. The pandemic and the subsequent suspensions of divestment processes have slowed down NPL resolution, but it's expected to pick up in the future, provided a functional divestment framework is in place. However, the recent suspension and legislative regulations have cast doubts on the effectiveness of this procedure in practice.

[This article was translated from its Greek original]

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Cyprus  |  economy  |  CBC  |  bank  |  debt  |  GDP

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