Cyprus must reduce the burden of debt with foreign immigration

By Pavlos Loizou, Managing Director, WiRE FS

It is a paradox that currently only a handful of people in Cyprus are still concerned with the matter of NPLs. Maybe they believe NPLs do not present an issue anymore, since most of them are outside the banking system.

Since 2017, Cypriot banks have sold €4.5 billion of NPLs, while another €9 billion was moved in various other ways outside the banking system. In total, NPLs, in and out of banks, are estimated at €18-19 billion (even though there are no official data) and they are either managed by the banks themselves or by Credit Acquiring Companies or by Asset Management Companies.

Nonetheless, NPLs are still a burden that companies and households shoulder and selling them will not release that pressure, since it’s only reasonable that those who invested in them will want to have a good return. So, where are we heading? Probably towards more foreclosures (which are not particularly successfully anyway), more pressure on indebted companies, a rise in real estate supply, etc.

At the same time, the state’s attempt to intervene with the “Estia” scheme was a failure, as interest was minimal (around 50 per cent of those eligible applied and of those circa 10 per cent were approved).

It remains to be seen whether a second attempt by the state, this time through the purchase of banks’ NPLs through the state-owned KEDIPES, will have greater impact. Even so, the fact remains that the level of private debt is still significantly high, exceeding 114 per cent of GDP. In this climate, banks are struggling to give out new loans to viable companies and households. It’s like trying to square a circle, since they want to dispose of their large and costly liquidity, and on the other hand they don’t want to give out loans, which after a few years will become part of a new cycle of non-performing loans.

Is there a way to exit this vicious cycle? There is a way, even though at first glance it might not appear as purely a financial one. The solution is to increase the population of the country. It might sound paradoxical for a number of reasons, but increasing the population can reduce the percentage of private debt, since it will surely lead to an increase in the GDP, e.g. more consumption, increase in demand for housing, etc, and it will also increase the number of prospective clients for bank loans.

Given that Cyprus suffers from a low birth rate rate –1.32 children per thousand, as the occasional governmental incentives have not achieved their purpose, the only solution that remains is to attract (young) foreigners to permanently relocate to Cyprus. The steady arrival of a few thousands of foreigners of good financial standing for permanent stay in the country will have particularly beneficial effects on the whole economy.

This is something we experience daily as a company, trying to find office space for foreign groups that wish to set a base in Cyprus. The needs of their employees are manifold: office space and homes to purchase/ rent, food (supermarkets, restaurants, etc), entertainment, education for their children, transportation and so on. Foreigners who are not solely looking for new job opportunities, but for a safe and modern country to live and raise their families also offer similar benefits. Without the Cyprus Investment Program, we have now an opportunity to prove that we can attract qualified immigrants who will create real bonds with our country by investing and having an impact across the board.