Private debt declines by 135% in Cyprus

The private debt-to-GDP ratio in Cyprus has shown a significant decrease from its peak at the end of the first quarter in 2015 to the end of March 2023, according to the latest data from the Central Bank of Cyprus.

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 nonperforming 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 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.