Cyprus central banker calls for vigilance

Cyprus central banker calls for vigilance

Constantinos Herodotou, governor of the Central Bank of Cyprus (CBC), has called for the preservation of fiscal space, as economic prospects are deteriorating due to Russia’s war in Ukraine.

Addressing an event held on Thursday titled “The Global Debt Trap – The Implications for Growth and Possible Solutions to Tackle It,” Herodotou also called for increased vigilance to avert private debt defaults that would lead to increased private debt levels.

Referring to Cyprus’ public debt, Herodotou said that following its downward trajectory after the 2012-2013 economic crisis, public debt spiked in 2018 and 2020 due to matters related to the Cyprus Cooperative Bank, and in 2020 due to the outbreak of the pandemic.

Noting that the ratio of Cyprus’ national debt to gross domestic product (GDP) dropped below 90% at the end of 2022 due to the reopening of the economy and the recovery that followed, Herodotou cautioned that “risks remain elevated due to Russia’s war in Ukraine and the deterioration in the global economic environment.”

“At the current juncture,” he said, “preserving fiscal space is crucial, as government intervention is important to support the digital and green transition, improve competitiveness and promote social cohesion.”

He noted that NextGenerationEU, which has allocated around 1.2 billion euros to Cyprus in grants and loans, can support these goals and will have a favorable impact on real growth, adding that the successful implementation of structural reforms and the green and digital agendas will be key for transforming the economy into a sustainable and more resilient one.

Turning to the private sector debt in Cyprus, Herodotou noted that default rates of loans with stricter loan origination guidelines following the 2013 crisis are quite low, adding however that “the domestic private debt levels are still burdened with legacy loans that are more difficult to tackle and require special attention.”

He also noted that Cyprus’ private to GDP fell to 236% in the second quarter of 2022 from its peak of 353% in the first quarter of 2015 but pointed out that despite this significant reduction, the domestic non-financial private debt ratio is still relatively high compared to an average ratio of 140% in the euro area. 

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