At a time of heightened international uncertainty, Cyprus is facing a new round of risks that threaten to reignite old economic wounds. The ongoing war in the Middle East, with its effects spilling over into energy markets, trade and tourism, is creating a fragile environment in which the issue of divestments is re-emerging with increased intensity in the public debate.
The debate is not new. In recent years, Cyprus has traveled a difficult path to deal with non-performing loans (NPLs), recording significant progress through their gradual reduction. However, this progress was based on a specific institutional framework for divestments, which, despite social backlash, is seen by many as a key pillar for maintaining financial stability.
Today, the new geopolitical developments bring back the question, can the economy withstand new interventions or relaxation of the framework?
External vibrations
The war in the Middle East has already begun to affect key sectors of the Cypriot economy. Rising energy prices, disruptions in supply chains and uncertainty in tourism make up a backdrop reminiscent of previous crises.
Cyprus, as a small and open economy, is particularly vulnerable to external shocks. Tourism, one of the key pillars of growth, may come under pressure, especially if geopolitical tension is prolonged or expanded. At the same time, increased energy costs are passed on to businesses and households, limiting available liquidity.
Against this backdrop, the divestment framework takes on a new central importance. Supporters of its retention point out that any weakening of it could undermine the payments culture and create moral hazard, sending the wrong signals to the market.
The experience of the previous decade shows that the delay in dealing with NCDs has had a significant cost to the economy. Banks have been saddled with high levels of bad loans for years, limiting their ability to finance growth.
On the contrary, the strengthening of the divestment framework contributed to the gradual consolidation of balance sheets and the restoration of confidence. Collateral recovery has been a key tool for managing NPLs and stabilizing the banking system.
What the market data shows
Indicative of the progress but also of the challenges that remain are the figures cited by market sources. Of the initial balance of approximately €20 billion transferred to credit buy-out companies, solutions have already been found for approximately €11 billion in loans.
Of these, 9.5 billion euros concern recoveries through consensual solutions, which underlines that the cooperation of borrowers and administrators can pay off. In fact, in a percentage of 60% to 65%, these loans were settled by paying cash, an element that demonstrates the existence of liquidity in a portion of borrowers.
At the same time, the balance of NPLs appears in the data published by the Central Bank almost unchanged. This is attributed, according to the same sources, to the continued interest on loans that remain in arrears without payments, creating a distorted picture of the overall figures.
Market experience also shows that many borrowers only mobilize when auction day approaches. This fact reinforces the view that the existence of a functional and credible divestiture framework acts as a catalyst for achieving solutions.
At the same time, there are also cases of strategic defaulters, with market players speaking of borrowers who “hide” behind the procedures, systematically delaying the servicing of their obligations.
Social pressures
Despite the strictest reading of the market, it is recognized that there are also borderline, particularly difficult cases. These are borrowers who, for various reasons, did not join existing support plans, such as “Estia” or “Rent for Installment”.
For these cases, a wider consensus is emerging that there should be targeted intervention, including them in plans that take into account their true financial potential.
The role of the state emerges as decisive, which is called upon, through its social policy, to ensure the housing of those who cannot maintain their existing residence. This need becomes even more imperative in an environment of heightened geopolitical risks and economic uncertainty.
The combination of external pressures and internal weaknesses creates a complex scenario. High private debt and the sensitivity of the economy to external factors remain key challenges.
The reality, as market players point out, is that there is no “invisible hand” that will erase old liabilities. Managing private debt requires a combination of responsibility from borrowers, effective tools from the market and targeted policies from the state.
In this context, the maintenance of the existing divestment framework emerges as a crucial element to avoid new imbalances. Any changes, the same circles emphasize, should be careful and not undermine the progress achieved in recent years.
The next day’s bet
Cyprus is called upon to strike a delicate balance. On the one hand, the need to protect the vulnerable and maintain social cohesion. On the other hand, the obligation to safeguard financial stability.
The war in the Middle East acts as a catalyst for developments, reminding us that external risks can quickly turn into internal pressures. The answer, as experience shows, does not lie in horizontal interventions, but in targeted solutions that address real needs.
The bet is clear, to avoid a new generation of non-performing loans, without disturbing the fragile balance of the economy. And in this path, the divestment framework remains – despite the reactions – one of the basic policy tools.