CYPRUS

After the 2013 banking crisis and the exit from the IMF bailout program in 2016, Cyprus’s banking sector made significant progress in restructuring its non-performing loans. A major milestone was the restructuring of Cyprus Cooperative Bank in 2018. From the peak in 2014, when it was at 48%, the share of NPLs came down to 27% of total loans in 2020. However, it remains among the highest in Europe and is likely to rise again in the course of the recession caused by the Covid-19 pandemic.  

Moreover, declining net interest margins and the need to accumulate provisions have further weighed on the profitability of the banking sector, which has been in the negative over several years. Risk-averse lending behavior will remain a limiting factor for credit supply, even beyond the post-crisis recovery. Sufficient credit supply will become increasingly important to sustain economic growth in the medium term as indebtedness creates significant financing needs for the private sector. On the positive side, we see that the loan supply for corporates and households has started to accelerate in 2018, at above 2% y/y for the corporates, for the first time in six years. Public sector debt has also been on a high level before the crisis already. In 2020, reflecting the government’s economic stimuli to fight the pandemic and its aftermath, the fiscal deficit will climb up over 5% of GDP, leading to a surge in public debt to around 110% of GDP from 95.5% in 2019. In the last few years, rating agencies have gradually raised Cyprus’s credit rating. We don’t except this trend to reverse.  The inclusion of Cypriot government bonds into the ECB's purchasing programs will keep financing costs low for the next few years, supporting debt sustainability. But relative to the Eurozone, Cyprus remains a weak link in terms of public finances.