COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Cyprus in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy
Date: 2021-06-02
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, EU employment policy, European Semester, coronavirus disease, economic recovery, epidemic, fiscal policy, investment policy, macroeconomics, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 2.6.2021  SWD(2021) 408 final  COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Cyprus              in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances  Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy {COM(2021) 500 final} - {SWD(2021) 401 final} - {SWD(2021) 402 final} - {SWD(2021) 403 final} - {SWD(2021) 404 final} - {SWD(2021) 405 final} - {SWD(2021) 406 final} - {SWD(2021) 407 final} - {SWD(2021) 409 final} - {SWD(2021) 410 final} - {SWD(2021) 411 final} - {SWD(2021) 412 final}  
 
 
CONTENTS 

Executive summary 

1.  Assessment of Macroeconomic Imbalances 

2.  Thematic Issue: External Imbalances 

3.  Thematic Issue: Household Debt 

4.  Thematic Issue: Non-financial Corporate Debt 

LIST OF TABLES 

Table 1.1: 

Assessment of Macroeconomic Imbalances Matrix - Cyprus 

Table 1.2: 

Selected economic and financial indicators, Cyprus 

Table 2.1: 

Selected external indicators, Cyprus 

Table 3.1: 

Household debt indicators, Cyprus 

Table 4.1: 

Non-financial corporations debt indicators, Cyprus 

LIST OF GRAPHS 

Graph 2.1: 

Thematic Graphs: External imbalances 

Graph 2.2: 

Thematic Graphs: External imbalances (cont.) 

Graph 3.1: 

Thematic Graphs: Household debt 

Graph 3.2: 

Thematic Graphs: Household debt (cont.) 

Graph 4.1: 

Thematic Graphs: Non-financial corporate debt 

Graph 4.2: 

Thematic Graphs: Non-financial corporate debt (cont.) 

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14 

19 

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11 

16 

22 

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EXECUTIVE SUMMARY 

The  2021  Alert  Mechanism  Report  concluded  that  an  in-depth  review  should  be  undertaken  for 
Cyprus  to  examine  further  the  persistence  of  imbalances  or  their  unwinding.  In  February  2020, 
under  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic  Imbalances  Procedure,  the 
Commission  identified  “excessive  macroeconomic  imbalances”  in  Cyprus.  These  excessive  imbalances 
related  to  a  very  high  share  of  non-performing  loans  that  burdens  the  financial  sector  and  high  private 
sector, government and external debt, in a context of moderate potential growth. The analysis shows that 
these vulnerabilities remain. It should be noted that the context of the assessment of vulnerabilities in this 
year’s in-depth review (IDR) for Cyprus is markedly different from last year. Also, the evolution of the 
COVID-19 pandemic, the strength of the recovery, and possible structural implications of the crisis are all 
still surrounded by high  uncertainty, requiring caution in the  assessment. In general, policy action over 
the past year focused on cushioning the impact of the COVID-19 shock and facilitating the recovery. This 
has  added  to  indebtedness  but  should  support  adjustment  in  the  medium-term.  Looking  forward,  the 
Recovery  and  Resilience  Plan  provides  an  opportunity  to  address  imbalances,  investment  and  reforms 
needs.  

Main observations and findings of this IDR analysis are: 

  This IDR is informed by the 2021 spring forecast, which expects a recovery in economic activity 
in Cyprus with the easing of the COVID-19 crisis. After the steep drop of 5.1% in 2020, real GDP 
is  projected  to  increase  by  3.1%  this  year  and  3.8%  next  year,  allowing  the  economy  to  recover  its 
pre-pandemic level in 2022.  

  External debt remains high and the current account deteriorated substantially. The negative net 
international  position  (NIIP)  worsened  from  -122%  of  GDP  in  2019  to  -141%  in  2020.  Excluding 
Special  Purpose  Entities  (SPEs),  it  stood  at  -52%  of  GDP  in  2020,  slightly  above  fundamental  and 
prudential benchmarks. The NIIP, both standard and excluding the SPEs, is likely to deteriorate going 
forward, due to large projected current account deficits of around 11% and 9% of GDP in 2021 and 
2022, respectively. A quicker recovery of international tourism than projected and a swifter return to 
the government’s pre-pandemic net lending position could help mitigate such developments. 

  The  high  public  debt  ratio  increased  significantly  in  2020,  but  is  expected  to  return  on  a 
declining path in 2021. While in 2019 the public debt ratio had declined to 94% of GDP, it went up 
to 118%  in 2020, due to the combined effect of the fall in economic activity and the measures taken 
to  address  the  COVID-19  pandemic  and  its  impact.  The  government  built  a  sizeable  cash  buffer 
throughout 2020, covering its increased financing needs and managing liquidity risks. The debt ratio is 
forecast to decline to 112% in 2021 and further to 107% in 2022, due to  GDP growth and the use of 
excess cash reserves accumulated since the beginning of the pandemic to cover financing needs. 

  The  COVID-19  crisis  interrupted  the  private  sector  deleveraging.  In  consolidated  terms,  the 
private debt-to-GDP ratio has been falling in the last years, from a peak of 352% of GDP in 2014 to 
259% of GDP at the end of 2019, which was still high even when excluding the debt of non-financial 
SPEs.  The  debt  ratios  of  both  households  and  non-financial  corporations  increased  in  2020,  mostly 
due  to  the  drop  in  GDP,  but  also  to  deferred  payments  under  a  loan  moratorium.  Provided  that 
repayments restart smoothly after the moratorium, deleveraging should resume.     

  Resolving the remaining non-performing loans (NPLs) continues to be challenging and ensuring 
an  effective  foreclosure  framework  remains  essential  for  further  progress  to  take  place.  NPLs 
remain high at 18% of gross loans as of the end of 2020, despite a substantial decline from close to 
45%  in  2015.  The  strategies  to  reduce  NPLs  currently  depend,  largely,  on  a  well-functioning 
foreclosure  framework.  Proposals  for  further  weakening  this  framework,  following  the  2020 
amendments  that  lengthen  procedures,  are  a  source  of  concern.  The  high  share  of  NPLs  (45%),  in 
arrears  for  five  years  or  more  underscores  the  need  for  additional  efforts  to  facilitate  legacy  asset 
disposal.  Moreover,  the  absence  of  an  efficient  and  reliable  system  for  transferring  and  issuing 
property rights also hinders foreclosure procedures and makes it difficult to value collaterals.  

1 

 
1.  ASSESSMENT OF MACROECONOMIC IMBALANCES 

Introduction  

In  February  2020,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalances  Procedure,  the  Commission  identified  “excessive  macroeconomic  imbalances”  in 
Cyprus. These excessive imbalances related to a  very  high share  of non-performing  loans that burdens 
the  financial  sector,  and  high  private  sector,  government,  and  external  debt,  in  a  context  of  moderate 
potential growth. The 2021 Alert Mechanism Report published in November 2020 concluded that a new 
in-depth  review  (IDR)  should  be  undertaken  for  Cyprus  with  a  view  to  assess  the  persistence  or 
unwinding of imbalances.  

The  context  of  the  assessment  of  vulnerabilities  this  year  is  markedly  different  from  last  year's 
IDRs, which took place before the COVID-19 pandemic. The evolution of the pandemic, the strength 
of the recovery, and possible structural implications of the crisis are still surrounded by high uncertainty 
requiring caution in the assessment. Policy action over the past year focused on cushioning the impact of 
the COVID-19 shock and on facilitating the recovery. While this supports adjustment in the medium-term 
through  stronger  fundamentals,  it  also  has  added  to  indebtedness.  Follow-up  to  country-specific 
recommendations  from  2019  and  2020,  including  those  that  are  MIP-relevant,  is  taking  place  in  the 
context of the assessment of the Recovery and Resilience Plans (RRPs). The analysis of policies in the 
present  report  was  finalised  before  the  formal  submission  of  RRPs  and  does  not  draw  on  information 
included  in  RRPs.  It  is  therefore  without  prejudice  to  the  Commission’s  assessment  of  RRPs,  which  is 
ongoing at the time of publication of this report. 

The assessment follows a similar structure  as the IDRs that were included in Country Reports in 
recent  annual  cycles.  This  chapter  presents  the  main  findings  for  the  assessment  of  imbalances,  also 
summarised in the MIP assessment matrix. The assessment is backed by selected thematic chapters that 
look  more  at  length  at  the  external  position  (chapter  2),  household  debt  (chapter  3)  and  corporate  debt 
(chapter 4). In addition, also assessments of structural issues made in previous IDRs and in the context of 
fiscal assessments are considered if relevant.  

Macroeconomic context 

Real GDP growth is forecast to rebound after the COVID-19 crisis, moderately in 2021 and more 
strongly in 2022 when real GDP is expected to surpass its 2019 level. The COVID-19 pandemic and 
the accompanying lockdown measures resulted in a sharp real GDP contraction in 2020 (5.1%), albeit less 
than  the  EU  average  (6.2%).  The  rising  infection  rate  at  the  end  of  2020  and  in  April  2021  led  to  the 
adoption of lockdown measures in Cyprus in the first half of 2021. The measures affected a smaller share 
of economic activity than in spring 2020, however, the hospitality industry has borne the brunt. A modest 
recovery  is  expected  in  2021,  with  3.1%  real  GDP  growth.  In  2022,  the  growth  rate  is  expected  to 
accelerate  to  3.8%,  as  prospects  for  the  tourism  sector  are  expected  to  further  improve.  The  current 
account deficit deteriorated in 2020 to 11.9% of GDP in 2020 from 6.3% in 2019, due to the plummeting 
receipts  from  travel  accompanied  by  a  lower  than  expected  decline  in  the  imports  of  services,  and  is 
expected to improve only slowly to around 9% of GDP by 2022. The impact of the COVID-19 pandemic 
on the labour market has been mitigated by temporary income support measures  (such as short-time work 
schemes),  with employment decreasing by only 0.6% in 2020 and the unemployment rate increasing to 
7.6%, from 7.1% in 2019. The labour market is expected to recover in 2021 and 2022 and unemployment 
to  gradually  decrease  to  7.2%  in  2022.  Inflation  is  expected  to  edge  up  to  1.7%  in  2021  due  to 
significantly higher oil prices, and to moderate to 1.1% in 2022.  

The economic recovery is expected  to be  mainly driven by domestic  demand and a small  positive 
contribution from net exports. Domestic demand increased by 0.7% in 2020 compared to 2019, helped 
by  policy  measures  adopted  to  contain  the  COVID-19  crisis.  Private  consumption  showed  signs  of  a 
moderate  recovery  in  the  first  half  of  2021  and  it  is  expected  to  further  grow  due  to  pent-up  demand. 

2 

 
1. Assessment of Macroeconomic Imbalances 

Public consumption is expected to continue to make a positive contribution to growth in 2021, as several 
support  measures  to  contain  the  crisis  continue  and  the  public  sector  pay-roll  is  expected  to  increase. 
Investment is  forecast to surpass its pre-crisis level in 2022 mainly on the  back of construction activity 
and the positive contribution of the Recovery and Resilience Plan, which will gradually have an impact as 
of the end of 2021 with the implementation of investments and reforms. Construction has so far escaped 
disruption  from  the  lockdown  measures  in  2021  and  the  planned  large-scale  infrastructure  projects 
continue.  The  abolition  of  the  citizenship-by-investment  scheme  in  November  2020  is  expected  to 
gradually  reduce  demand  for  high-end  residences  over  the  next  years,  but  new  lending  for  housing  has 
picked up since the third quarter of 2020, helped by the  mortgage subsidisation scheme  adopted by the 
government  for  first  residences.  Tourism  is  set  to  recover  only  moderately  in  2021,  as  the  COVID-19 
pandemic  continues  to  disrupt  air  travel  and  the  outlook  for  the  summer  season.  Uncertainty  and 
downside  risks  to  the  growth  outlook  remain  significant.  The  sizeable  pre-existing  private-  and  public 
sector  debt  levels  exacerbate  the  downside  risks.  On  the  positive  side,  the  swifter-than-expected 
vaccination campaigns in the EU could be a significant benefit for the tourism sector in Cyprus. 

Imbalances and their gravity  

The  country’s  net  international  investment  position  (NIIP),  particularly  concerning  net  external 
debt, remains a source of vulnerability. In 2020, the NIIP stood at around -141% of GDP — one of the 
largest  in  the  EU.  The  part  of  the  NIIP  that  excludes  foreign  direct  investment  and  equity  positions 
(NENDI), amounted to around -176% of GDP, reflecting large external debt liabilities. A sizeable portion 
of  the  Cypriot  external  assets  and  liabilities  can  be  attributed  to  special  purpose  entities  (SPEs). 
According to the Central Bank of Cyprus data, excluding SPEs’ positions, a different picture of external 
stocks emerges, with the NIIP equals to -52% of GDP end of 2020, only slightly above both fundamental 
and  prudential  benchmarks  and  below  the  scoreboard  threshold  of  -35%.  Yet,  gross  external  debt  of 
Cyprus  excluding  SPEs  remains  relatively  high  at  287%  of  GDP,  of  which  47%  of  GDP  are  related  to 
non-SPE  intercompany  debt  while  the  external  debt  of  general  government  amounts  to  99.7%  of  GDP. 
The  latter  largely  comprises  the  debt  to  international  financial  institutions  under  the  macroeconomic 
adjustment programme, and is less exposed to short-term risks (see section 2).  

The  large  current  account  deficit  is  not  conducive  to  external  rebalancing.  The  current  account 
deficit deteriorated from -6.3% of GDP in 2019 to -11.9% of GDP in 2020. This deterioration reflects to a 
significant extent the large decline in exports of services,  notably tourism, due to the COVID-19 crisis: 
international travel balance,  which equalled 6.6% of GDP in 2019, turned negative at  -0.9% of GDP in 
2020. At the same time, imports of goods and services were relatively cushioned from the negative shock 
to GDP, as the government’s support measures helped mitigating the decline in domestic demand. Prior to 
the pandemic, the cyclically-adjusted current account balance of Cyprus was close to the current account 
required to stabilise the NIIP excluding SPEs at a level just above the prudential benchmark (a required 
current  account  of  around  -1.8%  of  GDP).  Following  the  strong  deterioration  in  2020,  the  cyclically 
adjusted current account balance fell well below this required current account.  

The high public debt to GDP ratio increased significantly in 2020. While in 2019 Cyprus reduced its 
public debt ratio to 94% of GDP, the government debt ratio increased to 118% by end-2020 on the back 
of the COVID-19 pandemic and measures to protect the economy. The latest debt sustainability analysis 
confirms  that  the  country  faces  medium  risk  in  the  medium-term. (1)  Cyprus  has  enjoyed  a  supportive 
market environment when tapping the international markets and it continues to enjoy ‘investment grade’ 
ranking  by  three  major  rating  agencies.  The  government  built  a  sizeable  cash  buffer  throughout  2020, 
covering its increased financing needs and managing liquidity risks. 

Vulnerabilities relate to high corporate and households indebtedness, which have been exacerbated 
by the COVID-19 crisis. In consolidated terms, the private debt-to-GDP ratio has been falling in the last 
years from the peak of 352% in 2014, to reach 259% of GDP at the end of 2019. A year later, the ratio 
rose to 267%. As it stands, the private debt ratio is well above the prudential threshold (129% in 2020) 

(1)  See  Article  126(3)  report  (June  2021)  and  European  Commission  (2021),  Post-Programme  Surveillance  Report  –  Cyprus, 

Spring. The Debt Sustainability Monitor 2020 contains detailed methodological explanations.  

3 

 
                                                           
1. Assessment of Macroeconomic Imbalances 

and above the fundamental benchmark (249%), remaining among the highest in the EU. Household debt-
to-GDP stood at 89% at end of 2019, while in Q4 2020 it increased to 92%. For the same period, the NFC 
debt-to-GDP ratio was 170%, increasing to 179% at the end of Q4 2020. (2) The increase in the private 
debt ratios is mostly due to the drop in the GDP (see sections 3 and 4).     

Despite  the  COVID-19  pandemic,  the  non-performing  loans  in  the  banking  sector  were  reduced 
through  both  sales  and  write-offs.  At  the  end  of  December  2020,  the  total  stock  of  non-performing 
loans  held  by  the  banks  stood  at  EUR  5.1  billion  (17.7%  of  gross  loans),  down  from  EUR  9  billion 
(27.9%)  a  year  earlier. (3)  The  decline  was  mainly  the  result  of  sales  (EUR  2.0  billion)  and  write-offs 
(EUR  1.1  billion)  made  by  the  main  banks  (Bank  of  Cyprus  and  Hellenic  Bank). (4)  Non-performing 
loans were reduced for both non-financial corporations and households. For the household segment, the 
progress was achieved primarily through write-offs.  

Evolution, prospects and policy responses 

Cyprus’  net  international  investment  position  is  becoming  more  negative  as  the  current  account 
deficit is deteriorating. The negative net international position worsened from -122% of GDP at the end 
of 2019 to -141% in 2020. An increase in external government debt by about 22 percentage points (year-
on-year) contributed to the widening of the defaultable part of the NIIP, from -159% in 2019 to -176% in 
2020. The NIIP, both standard and excluding the SPEs, is likely to deteriorate quickly going forward, due 
to large projected current account deficits of around 11% of GDP in 2021 and 9% in 2022 (section 2). A 
quicker  recovery  of  international  tourism  than  projected  could  help  mitigate  such  developments.  In 
addition,  consistent  with  the  phasing  out  of  the  government  support  measures  once  the  COVID-19 
pandemic had receded, the general government net borrowing position is projected to improve gradually. 
A potentially swifter return to government’s pre-pandemic net lending position would also contribute to 
improved external balance dynamics.  

The  government  debt-to-GDP  ratio  is  forecast to  resume  its  declining  path  in  2021. Public  debt  is 
projected  to  gradually  decline  to  112%  in  2021,  and  to  107%  in  2022.  Output  growth  and  the  use  of 
excess  cash  reserves  (accumulated  since  the  beginning  of  the  COVID-19  pandemic)  to  cover  financing 
needs are the key factors behind the decrease in the public debt ratio. The fiscal outlook is surrounded by 
downside risks, whereby the main one relates to the future evolution of the COVID-19 pandemic and its 
adverse effects on the recovery. (5) 

The  increase  in  the  private  debt  ratio  in  2020  halts  its  decreasing  trend.  Going  forward, 
deleveraging depends on the strength of the economic recovery. After a strong deleveraging since its 
macroeconomic adjustment programme, the private debt-to-GDP increased in 2020, mainly reflecting the 
fall in GDP in light of the COVID-19 crisis. Past debt reduction has been supported by both nominal GDP 
growth and nominal debt stock declines (driven by write-offs of bad loans, cash repayments and debt-to-
asset swaps). In 2020, lending to households was positive, but lending to non-financial corporations was 
slightly negative (sections 3 and 4). Overall, private sector credit flows (as % of GDP) accelerated from 
2.4%  in  2019  to  5.4%  in  2020,  which  is  still  well  below  levels  in  previous  years.  About  50%  of 
performing loans benefited from the first loan payment moratorium - representing the highest share in the 
EU.  While  early  signs  following  the  lifting  of  the  2020  moratorium  were  encouraging,  the  outlook  is 
uncertain  with  respect  to  the  new  inflows  of  non-performing  loans.  Prolonged  financial  problems  for 
firms and households could pose threats to their debt repayments. If the capacity of households and firms 
to  absorb  losses  becomes  insufficient,  non-performing  or  forborne  loans  and  defaults  will  increase.  As 
such,  finalizing  the  organizational  structure  of  the  new  Department  of  Insolvency,  digitalizing  its  tools 
and promoting the insolvency proceedings are important measures that Cyprus should accelerate. 

(2)  The NFC figures include the debt of special-purpose entities. 
(3)  The  NPL  ratios  (i.e.  ratios  of  NPL  stock  to  total  gross  loans)  are  based  on  the  data  and  scope  used  by  the  Central  Bank  of 
Cyprus.  In  particular,  no  account  is  taken  of  banks’  exposures  to  central  banks  and  credit  institutions,  or  their  overseas 
operations  (branches  and  subsidiaries  located  abroad).  Source:  Aggregate  Cyprus  banking  sector  data  (non-performing  loans 
data), https://www.centralbank.cy/en/licensing-supervision/banks/aggregate-cyprus-banking-sector-data 

(4)  Hellenic Bank reduced its NPL stock mainly through write-offs. 
(5)  Se also European Commission (2021), Post-Programme Surveillance Report – Cyprus, Spring. 

4 

                                                           
1. Assessment of Macroeconomic Imbalances 

Resolving  the  remaining  non-performing  loans  continues  to  be  challenging.  Preserving  the 
foreclosure framework is essential for making further progress. Most of the non-performing loans held by 
the banks are classified as ‘terminated’ (i.e. no feasible negotiation options remaining). In addition, a high 
share of non-performing loans (45%), have been in arrears for five years or more. Due to its low take-up, 
the ESTIA scheme (6) is expected to help address a perimeter of only about EUR 170 million of NPLs. As 
such,  it  did  not  materialise  as  the  tool  the  authorities  were  envisioning  for  significantly  reducing  non-
performing loans in the economy. Although several factors might have contributed to the low take-up of 
the scheme, a key driver appears to be debtors’ reluctance to reveal their net-wealth position, as well as 
expectations  of  a  more  generous  scheme  or  reliance  on  a  less  stringent  approach  to  collateral 
enforcement.  Furthermore,  new  discussions  have  resurfaced  on  legislative  amendments  potentially 
weakening further the foreclosure framework. Such proposals are a source of concern as it is important to 
preserve  the  foreclosure  framework  in  order  to  make  further  headway  with  non-performing  loans 
workouts,  asset  sales  and  improving  payment  discipline.  In  addition,  about  50%  of  performing  loans 
benefited  from the  first loan  payment  moratorium  in 2020 (the  highest take-up in the EU). While early 
signs  were  encouraging  following  the  lifting  of  the  2020  moratorium,  the  outlook  is  uncertain  with 
respect  to  the  new  inflows  of  NPLs.  Moreover,  the  absence  of  an  efficient  and  reliable  system  for 
transferring  and  issuing  property  rights  hinders  foreclosure  procedures  and  makes  it  difficult  to  value 
collaterals.     

Overall assessment  

Despite  progress in previous years, Cyprus continues to face significant  vulnerabilities relating to 
external, public and private debt – which have been exacerbated by the COVID-19 pandemic. The 
impact  of  the  COVID-19  crisis  on  the  tourism  sector  played  an  important  role  in  the  GDP  decline  and 
deterioration of the current account and will continue to dampen growth and services net exports looking 
forward. The current account deficit has widened sharply in 2020 and is expected to remain at around this 
level  in  2021  and  2022.  The  large  and  negative  NIIP  deteriorated  further  in  2020.  The  public  debt 
increased by more than 20 percentage points in 2020 as the government borrowed extensively in order to 
cover  the  increased  financing  needs  and  for  securing  cash  reserves  for  handling  adverse  scenarios. 
Nevertheless, it is forecast to start declining already this year. While still excessive before the COVID-19 
pandemic,  the  private  debt  was  on  a  declining  trend.  In  the  aftermath  of  COVID-19  shock,  both 
households  and  non-financial  corporations  experienced  increased  debt  ratios.  Vulnerabilities  associated 
with  non-performing loans persist,  but stocks  held by the  banks declined in 2020 mostly through sales. 
However, despite the off-loading from the banking sector, the bad loans still remain in the economy and 
need to be resolved. Following the lifting of the loan payment moratorium, early performance signs have 
been positive, but more time is needed for a clearer view on new non-performing loan flows. 

Measures  are  still  needed  to  foster  competitiveness  and  diversify  investments  towards  more 
productivity-enhancing sectors and the environment, thus ensuring sustainable growth in the long 
term  and  rebalancing  the  current  account.  Stable  and  well-functioning  foreclosure  and  insolvency 
frameworks  remain  essential  for  the  reduction  of  non-performing  loans  and  debt  work-outs.  Resolving 
remaining issues of the state-owned asset management company and overcoming functional shortcomings 
of credit acquiring companies and servicers when dealing with credit facilities are important as well (for 
reducing the bad loans outside the banking sector). Furthermore, steadfast efforts are needed to improve 
the  system  for  issuing  and  transferring  property  titles,  the  handling  of  the  non-performing  loans  in  the 
courts and the enforcement of judgements. 

(6)  The ESTIA scheme provides debt reduction subsidies for eligible borrowers with NPLs backed by primary residences. Under 
the  scheme,  the  government  pays  a  subsidy  to  lower  the  debt  servicing  costs,  including  interest  charges,  of  all  eligible 
performing borrowers by one third. 

5 

 
 
 
                                                           
Table 1.1: 

Assessment of Macroeconomic Imbalances Matrix - Cyprus 

1. Assessment of Macroeconomic Imbalances 

(Continued on the next page) 

6 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) External position The net international investment position remains very negative. It stood at -141% of GDP in 2020 from -122% in 2019. Adjusting for special purpose entities (SPEs), which are often without links to the Cypriot economy, according to Cyprus Central Bank’s data, the net international investment position amounted to -52% of GDP. Gross external debt of Cyprus remains high at 287% of GDP excluding SPEs, of which 47% of GDP are related to non-SPE intercompany debt and 99.7% of GDP to debt of the general government. The current account is in substantial deficit, at -11.9% of GDP in 2020 (section 2).  The net international investment position is widening mainly as a result of a deteriorated current account and a decrease in GDP, both related to the pandemic. Decreased exports of tourism services due to the Covid-19 crisis and strong domestic demand for imports are projected to keep the current account in substantial deficit, despite some gradual improvement expected in 2021 and 2022, to 11% of GDP and 8.9%, respectively.  Post-pandemic phasing out of the government support measures is expected to improve the general government net borrowing position and thus contribute to an improvement in overall external position. (section 2). Domestic savings increased in 2020, due to forced savings by the crisis, but remain relatively low, particularly for the household sector.   The Covid-19 crisis has had a severe impact on the tourism sector and it will take some time to go back to or surpass the pre-crisis levels.    A tourism strategy is set to be implemented with the aim of further extending the season and improving the quality of tourism services. However, its medium-term impact remains to be seen. Diversification of the export products of Cyprus would also help to improve the sustainability of the current account.  Public debt Public debt increased by more than 20 percentage points, to 118% of GDP in 2020.    Cyprus’ debt-to-GDP ratio is expected to return to a declining path in 2021, and fall to around 107% by the end of 2022 (based on the Commission’s Spring Forecast). The decline comes on the back of GDP growth and usage of cash reserves (accumulated through extensive borrowings undertaken in 2020).  The general government deficit is expected to narrow to 5.1% of GDP in 2021, down from 5.7% in 2020. Additional support measures undertaken to mitigate the effects of the pandemic, supporting employment and businesses, should amount to around 3.5% of GDP in 2021. The deficit is forecast to narrow further to 2% of GDP in 2022 on the back of the continuing recovery of the economy and withdrawal of support measures.  Private debt Standing at 273% of GDP in Q4 2020, private sector debt remains one of the highest in the EU.  The level of debt is above both prudential and fundamental benchmarks (sections 3 and 4).  A large proportion of private debt stock is non-performing (see 'Financial sector' below).  The private sector debt-to-GDP ratio increased, largely because GDP fell in 2020 due to the COVID-19 crisis. Under the March-December 2020 moratorium, loan payments were deferred.  Borrowers’ participation in insolvency processes should facilitate debt-workouts, but, so far, there has been limited progress with insolvency proceedings. Examinership and personal insolvency arrangements continue to be scarcely used.   A New Department of Insolvency was established in 2020 but several steps still need to be undertaken to make it effective. The transposition of the Directive 2019/1023 on preventive restructuring frameworks into Cypriot law is considerably delayed. Debt repayment discipline is still weak and justice reform, which would improve the handling of the NPLs in courts and the enforcement of judgements, remains pending. A quick and transparent system for issuing and transferring property titles that would enable liquidation of collaterals is also pending.    
 
   
 
Table (continued) 

1. Assessment of Macroeconomic Imbalances 

Source: European Commission 

7 

Financial sector Cyprus continues to have one of the highest ratios of non-performing loans (NPL) in the EU. The NPL ratio was at 17.7% at end 2020 (considering only the non-financial private sector). Both households and non-financial corporations have large shares of NPLs (sections 3 and 4).  In addition, a non-negligible share of NPLs lies outside the banking system, held by credit-acquiring companies, including the state-owned asset management company, KEDIPES.   Progress in reducing NPLs in the banking sector continued in 2020, despite the pandemic. Portfolio sales and write-offs were the key drivers behind the sizeable decline in the stocks of bad loans. NPLs declined for both non-financial corporations and households.  The remaining stock of NPLs is dominated by terminated accounts, and furthermore, a high share of NPLs (45%), have been in arrears for five years or more. During 2020, creditors voluntarily suspended foreclosures between March and August, but activity resumed thereafter. Foreclosures of primary residences and primary business commercial real estate, have been further suspended from December 2020 to end-July 2021. The foreclosure framework was strengthened in 2018, but in 2019 new amendments were brought in, which backtracked on key elements of the previous year’s reform. The 2019 amendments were confirmed by the Supreme Court in 2020. Recent attempts to weaken the framework generate legal uncertainty. Furthermore, these proposals are worrying as they would threaten NPL resolution and payment discipline.   The government implemented the ESTIA scheme, which has however fallen short of its purpose (reducing NPLs) due to its low take-up. Nevertheless, the scheme indicates the existence of strategic defaulters. While KEDIPES progressed on the loan servicing agreement, efforts need to be sustained in resolving remaining issues such as revising the business plan, reducing staff, and data-cleansing information on loans. The supervision of credit acquiring companies (CAC) has been strengthened. The authorities also prepared a package of bills on improving the working environment for credit acquirers and credit servicers (for example by granting them access to the land registry).      It is essential to accelerate reforms that would improve the handling of NPL cases by the courts.  Main takeaways  Cyprus has for long been marked by significant vulnerabilities such as large stocks of external liabilities, elevated public and private debt, and still high levels of non-performing loans, alongside a very negative current account deficit.   In view of the pandemic and ensuing recession, these vulnerabilities have augmented. The current account deficit deteriorated significantly to double-digit territory, due to the Covid-19 crisis, a development which does not bode well with the large negative NIIP. In general, debt burdens have increased. Government debt increased significantly as Cyprus has issued several bonds since the beginning of the pandemic, in response to the increased financing needs. Household and corporate debt increased also as GDP declined and loan payments have been deferred under the moratoria. In contrast, the NPLs stock held by banks has declined on the back of sales and write-offs in 2020, but may edge up going forward especially as the moratorium expires.  Measures are still needed to foster competitiveness and diversify investments towards more productivity-enhancing sectors and the environment, thus ensuring sustainable growth in the long term and rebalancing the current account. Stable and well-functioning foreclosure and insolvency frameworks remain essential for the reduction of non-performing loans and debt work-outs. Resolving remaining issues of the state-owned asset management company and overcoming functional shortcomings of credit acquiring companies and servicers when dealing with credit facilities are important as well (for reducing the bad loans outside the banking sector). Furthermore, steadfast efforts are needed to improve the system for issuing and transferring property titles, the handling of the non-performing loans in the courts.   
 
   
 
Table 1.2: 

Selected economic and financial indicators, Cyprus 

1. Assessment of Macroeconomic Imbalances 

(1) NIIP excluding direct investment and portfolio equity shares         
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches.         
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation         
(4) Defined as the income tax on gross wage earnings plus the employee's social security contributions less universal cash 
benefits, expressed as a percentage of gross wage earnings         

Source: Eurostat and ECB as of 2021-05-05, where available; European Commission for forecast figures (Spring forecast 2021)         

8 

2004-072008-122013-182019202020212022Real GDP (y-o-y)4.90.10.33.1-5.13.13.8Potential growth (y-o-y)3.82.10.11.91.61.71.7Private consumption (y-o-y)6.20.41.71.8-3.91.12.3Public consumption (y-o-y)2.72.4-1.215.113.14.0-1.6Gross fixed capital formation (y-o-y)10.0-8.14.72.0-2.03.84.8Exports of goods and services (y-o-y)3.51.47.0-0.4-12.45.37.6Imports of goods and services (y-o-y) 5.9-0.16.52.0-4.23.74.8Contribution to GDP growth:Domestic demand (y-o-y)6.5-1.1-0.23.8-0.72.32.1Inventories (y-o-y)-0.20.4-0.11.01.40.00.0Net exports (y-o-y)-1.40.50.5-1.7-5.80.81.7Contribution to potential GDP growth:Total Labour (hours) (y-o-y)1.30.90.00.90.80.80.6Capital accumulation (y-o-y)2.01.40.41.00.80.90.9Total factor productivity (y-o-y)0.4-0.3-0.30.00.00.10.1Output gap4.00.4-2.95.4-1.9-0.90.7Unemployment rate4.67.012.97.17.67.57.2GDP deflator (y-o-y)3.02.0-0.20.9-1.51.41.2Harmonised index of consumer prices (HICP, y-o-y)2.12.70.30.5-1.11.71.1Nominal compensation per employee (y-o-y)3.72.7-1.01.9-3.21.61.8Labour productivity (real, person employed, y-o-y)1.4-0.1-0.20.0-4.6..Unit labour costs (ULC, whole economy, y-o-y)2.32.8-1.81.91.5-0.9-1.0Real unit labour costs (y-o-y)-0.70.7-1.61.03.0-2.3-2.2Real effective exchange rate (ULC, y-o-y)0.50.6-2.0-1.7...Real effective exchange rate (HICP, y-o-y)-0.1-0.4-0.7-2.20.60.7-0.9Net savings rate of households (net saving as percentage of net disposable income)1.4-0.5-6.8-3.4...Private credit flow, consolidated (% of GDP)29.418.51.52.7...Private sector debt, consolidated (% of GDP)244.5308.6321.7259.1...of which household debt, consolidated (% of GDP)88.5117.1116.089.5...of which non-financial corporate debt, consolidated (% of GDP)155.9191.5205.7169.7...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).8.929.815.4...Corporations, net lending (+) or net borrowing (-) (% of GDP)-9.82.36.4-0.81.62.01.6Corporations, gross operating surplus (% of GDP)23.720.021.220.422.923.222.3Households, net lending (+) or net borrowing (-) (% of GDP)-7.7-5.5-5.5-6.9-7.5-7.8-8.5Deflated house price index (y-o-y)6.8-4.90.72.60.7..Residential investment (% of GDP)10.98.24.97.97.8..Current account balance (% of GDP), balance of payments-6.2-7.7-3.7-6.3-11.9-11.2-9.0Trade balance (% of GDP), balance of payments-2.2-6.40.9-1.1-6.2..Terms of trade of goods and services (y-o-y)-0.5-0.4-0.1-1.21.6-0.70.1Capital account balance (% of GDP)0.10.30.60.10.1..Net international investment position (% of GDP)-68.2-123.6-146.3-122.3-141.3..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1).-69.2-186.2-159.5-175.7..IIP liabilities excluding non-defaultable instruments (% of GDP) (1).622.7601.0505.3545.0..Export performance vs. advanced countries (% change over 5 years)-13.8-7.52.911.616.2..Export market share, goods and services (y-o-y)-5.8-4.22.0-4.20.2-2.42.2Net FDI flows (% of GDP).9.113.4-23.8-9.7..General government balance (% of GDP)-0.9-4.1-4.01.5-5.7-5.1-2.0Structural budget balance (% of GDP)..1.60.0-4.7-4.7-2.4General government gross debt (% of GDP)60.460.5101.494.0118.2112.2106.6Tax-to-GDP ratio (%) (3)32.232.333.035.535.436.435.9Tax rate for a single person earning the average wage (%) (4)...10.29.8..Tax rate for a single person earning 50% of the average wage (%) (4)...8.38.3.. 
      
 
 
 
2.  THEMATIC ISSUE: EXTERNAL IMBALANCES 

Output, demand and sectoral net lending/borrowing 

The steep decline in real output in 2020 led to widening of the trade deficit during the COVID-19 
pandemic. After six years of roughly matched output and demand (Graph 21.(a)), the COVID-19 shock 
caused a contraction of real output, while domestic demand (including inventories) expanded somewhat 
in  real  terms.  As  for  the  segments  of  domestic  demand,  gross  fixed  capital  formation  and  private 
consumption declined, while public consumption increased. Exports fell more strongly than imports. The 
trade  deficit  that  widened  substantially  in  2020  is  projected  to  slowly  and  gradually  narrow  over  the 
forecast horizon.  

The fiscal deficit in response to the recession last year was the main contributor to the worsening of 
the aggregate net lending/borrowing position. The general government is estimated to have switched 
from a small positive position in 2019 to considerable net borrowing, related to the COVID-19 shock and 
in support of domestic demand (Graph 2.1(b)). This more than offset the improvement in private-sector 
net  borrowing  position  relative  to  2019. (7)  Notably,  household  net  lending/borrowing  remained  in 
negative territory. Overall, the net lending/borrowing position of the total economy is projected to have 
deteriorated  by  more  than  5  percentage  points  of  GDP.  Both  the  government’s  position  and  the  total 
economy’s net borrowing is expected to improve gradually over the forecast horizon, albeit only slowly.  

External flows dynamics 

The  current  account  deficit,  which  consistently  exceeds  the  trade  deficit  due  to  income  flows,  has 
further  deteriorated  in  2020,  in  line  with  the  negative  trade  developments.  Before  the  COVID-19 
shock, the trade balance reflected large surpluses in services trade, mainly travel, transport and financial 
services, that broadly covered the goods trade deficit. The co-movement of the current account and trade 
balances over the recent years (Graph 2.1.(c)), reflects the general stability of the income account deficits 
which  averaged  around  5  pp  of  GDP  during  recent  years.  Correspondingly,  since  2016,  the  current 
account has remained significantly below the trade balance. While the headline current account balance 
thus had persisted below the levels explained by economic fundamentals (the ‘current account norm’), it 
had  managed  to  reach  the  current  account  norm  in  cyclically  adjusted  terms  in  2018  and  2019  (Table 
1). (8) Going forward, the current account is forecast to improve only slowly over the next two years, thus 
remaining  below  the  current  account  norm  and  other  relevant  benchmarks,  both  in  headline  and 
cyclically-adjusted terms (Table 2.1).  

A  deterioration  of  trade  and  current  account  balances  can  largely  be  attributed  to  the  strong 
tourism  decline  in  2020.  The  tourism  slump  erased  the  large  travel  surplus,  equal  to  6.6%  of  GDP  in 
2019,  and  caused  a  small  deficit  in  travel  balance  of  -0.9%  of  GDP  in  2020. This  reflected  the  travel 
restrictions introduced in March 2020 to prevent the spread of the COVID-19 pandemic, which included 
an entry ban to Cyprus for tourists up to 8 June 2020, as well as continued difficulties for tourists from the 
UK,  Russia  and  other  non-EU  countries,  which  constitute  an  important  revenue  source  for  the 
economy. (9) Overall 2020 foreign tourist arrivals to Cyprus declined by 84% compared to 2019, which is 
roughly equal to a fall in number of nights spent by foreign tourists of 83%. (10)  The declining services 

(7)  The  consistently  negative  net  lending  position  of  the  households  sector  is  due  to  a  very  low  savings  rate  (reflecting  high 

consumption) and considerable residential construction investment. 

(8)  Current account norm is the current account balance that can be explained by fundamentals. It is based on the empirical setup 
similar to IMF’s EBA. Fundamentals are slow-moving variables including: demographics, relative income, natural resources, 
manufacturing intensity, and reserve currency status. See Coutinho et al. (2018) "Methodologies for the assessment of current 
account benchmarks", European Economy, Discussion Paper 86/2018, for the description of the methodology. 

(9)  The travel restrictions were gradually eased after this date for tourists from specific countries, depending on the epidemiological 

situation in these countries. 

(10)  Tourists are visitors who stay in Cyprus for at least one night. Source: CYSTAT, Press release 18 January 2021 for arrivals and 

Eurostat for nights spent. This compares to a decline in nights spent of around 71% for the EU27. 

9 

 
                                                           
2. Thematic Issue: External Imbalances 

trade  surplus  has  only  been  partly  offset  by  the  slightly  lower  deficit  in  trade  of  goods. (11)  Lower 
commodity prices contributed to some extent through their impact on the energy trade deficit.  

Developments in external stock positions 

The large negative net international investment position did not improve further in 2020. From its 
trough of -164% of GDP in 2014, the net international investment position (NIIP) had improved to -122% 
by  the  end  of  2019  (Graph  2.1.(d)),  mainly  driven  by  the  nominal  GDP  growth  and  positive  valuation 
changes,  and  despite  the  persistent  current  account  deficit.  In  2020,  the  NIIP  deteriorated  to  -141%  of 
GDP, driven by both, current account deficit and negative nominal GDP growth. As regards external net 
debt components, the NIIP excluding non-defaultable instruments (NENDI) is even  more negative than 
the NIIP, at -174% in 2020. Both the NIIP and NENDI remain far below the fundamental and prudential 
NIIP benchmarks, which are estimated at -53% and -55% of GDP in 2020, respectively. (12) Any recorded 
and  forecast  external  balances  so  far  remain  significantly  below  the  current  account  and  trade balances 
required to reach the prudential NIIP benchmark within ten years.  

The focus on the net external position masks huge gross amounts of external assets and liabilities. 
These  are  displayed  in  Graph  2.2.(a),  at  around  twenty-fivefold  of  GDP  in  2020,  down  from  nearly 
thirtyfold of GDP in 2015 (for total liabilities). The gross positions consisted to the largest extent of direct 
investment, which equalled 83% and 77% of total assets and liabilities, respectively. Overall, the Cyprus 
external  balance  is  characterized  by  strong  exposures  towards  and  from  economies  outside  the  EU, 
notably  Russia,  as  well  as  an  aggregate  of  territories  characterized  as  ‘Offshore’  by  Eurostat  (Graph 
2.2.(b)). 

Role of special purpose entities 

A large portion of the Cypriot external stock position can be attributed to special purpose entities. 
Overall,  the  special  purpose  entities  (SPEs)  account  for  96%  of  direct  investment  assets  and  90%  of 
liabilities, and for around 71% of (non-inter-company) loan liabilities, which equals 230% of GDP. It is in 
particular  the  financial  SPEs  which  account  for  the  bulk  of  external  assets  and  liabilities.  Their  large 
positive  net  position  in  direct  investment  and  other  equity  is  counterbalanced  by  a  large  negative  net 
position  in  portfolio  securities  and  other  investment  (defaultable  instruments),  leaving  the  NIIP  almost 
unaffected,  but  substantially  deteriorating  the  NENDI.  The  link  of  financial  SPEs  to  the  domestic 
economy  in  terms  of  value  added  and  employment  is  difficult  to  determine  as  they  do  contract  local 
financial and professional business services for their operations.  

The ship-owning non-financial SPEs has a significant impact on the NIIP. They have mainly external 
financial liabilities, partly in the form of FDI loans and partly in the form of other loans, while their assets 
consist  mostly  of  ships  registered  in  Cyprus.  Such  ships  constitute  non-financial  assets  and  do  not 
contribute to the IIP. The links of such shipping holding and  management corporations to the domestic 
economy  remain  limited,  but  they  negatively  and  significantly  affect  the  NIIP  (by  more  than  80 
percentage points of GDP). (13)  

Excluding the positions of the special purpose entities, a considerably different picture of external 
stocks emerges, yet gross external debt remains relatively high. The NIIP excluding SPEs amounted 
to  -52%  of  GDP  end  of  2020,  and  thus  stood  above  but  close  to  both,  fundamental  and  prudential 
benchmarks.  Moreover,  the  improvement  in  the  total  NIIP  observed  since  2014  has  entirely  due  to 
improvements in the NIIP excluding the SPEs (Graph 2.2.(c)). The net foreign direct investment position 
of the economy changes dramatically if SPEs are excluded, and amounts to  -118% of GDP in 2020, of 

(11)  The statistics on international trade in goods actually suggest a small deterioration of balance of trade in goods in 2020, driven 
by a decline in exports that slightly exceeded the fall in imports. While share of imports of capital and intermediary goods in 
GDP have declined, those of consumer goods actually increased in 2020. 

(12)  The country-specific prudential benchmark denotes the NIIP level beyond which the probability of an international economic 
and financial crisis becomes higher. The NIIP level explained by fundamentals represents the NIIP that would result if a country 
had run its current account in line with fundamentals since 1995. For details see Turrini and Zeugner (2019), "Benchmarks for 
Net International Investment Positions", European Economy, Discussion Paper 097/2019. 

(13)  Their impact on NENDI is much smaller, as around 44% of their liabilities are FDI loans (in Q3 2020). 

10 

                                                           
2. Thematic Issue: External Imbalances 

which a large portion is investment in the real estate. (14) The general government NIIP is negative at  -
95.6% of GDP, consisting mostly of long-term debt securities and loans from ESM. At the same time, the 
central  bank’s  net  position  amounted  to  70%  of  GDP  (74%  including  reserves),  comprising  largely 
Target2 claims and long-term debt securities. The private sector including MFIs but excluding SPEs, thus, 
has a considerable positive NENDI. Gross external debt in 2020 amounted to 287% of GDP, excluding 
SPEs, of  which 47% of GDP related to other direct investment.  From the remaining 240%, the amount 
equal to 99.7% of GDP relates to debt of the general government.  

Outlook 

There are still substantial risks related to the external sector flows and stocks. One should note that 
although the SPEs have  weak links to the  host economy, they are also not completely disconnected, as 
their presence creates economic activity in the related sectors (around 5% of GDP for ship-owning SPEs 
and  unknown  for  financial  SPEs),  including  transactions  with  the  Cypriot  monetary  and  financial 
institutions, so that the Cypriot economy would not be fully insulated from potential difficulties in SPEs’ 
business  activities.  In  addition,  recently  large  current  account  deficits,  which  widened  in  2020  and  are 
projected to remain deeply negative over the  forecast period, may quickly  lead to the  worsening of the 
NIIP also excluding the SPEs. The current account balance required to maintain the NIIP excluding SPEs 
close  to  prudential  is  estimated  at  around  -1.8%  of  GDP,  substantially  above  current  and  forecast 
balances.  While  the  SPEs’  activity,  in  particular  that  of  the  non-financial  SPEs,  may  impact  also  the 
current  account, (15)  the  effect  has  mostly  been  small  (within  +/-  1  pp  of  GDP)  in  recent  years. 
Exceptionally, in 2016 and 2017, the SPEs contributed negatively to the current account balance by more 
than  3%  of  GDP  (source:  Cypriot  Central  Bank),  amid  higher  net  registration  of  ships  and  aircrafts 
(source: CYSTAT). 

The  NIIP  position  is  likely  to  deteriorate  going  forward,  due  to  large  projected  current  account 
deficits. Graph 2.2.(d) presents the NIIP projections until  2030, both for the overall NIIP and the NIIP 
excluding the SPEs. The baseline projections rely on the Autumn 2021 ECFIN forecasts up to 2022 and 
T+10 forecast for the later years, while the scenarios assume improvements in trade and current account 
balances  in  2023  and  beyond,  relative  to  the  baseline.  For  the  projections  without  SPEs’  positions,  the 
projected current accounts have been adjusted for the impact of SPEs. Still, the NIIP trajectory is strongly 
negative and moving far beyond the prudential level. 

(14)  This  has  largely  been  related  to  the  “Citizenship  for  investment”  (CIP  programme,  which  resulted  in naturalisation  of  2.855 
investors between 2013 and 2019, and was related to transactions amounting to 9.7 billion EUR, out of which 6.4 billion was 
related to real estate sector (source: Study on the Cyprus Investment Programme – Impact on the Economy, September 2020). 
(15)  Export  and  import  statistics  may  be  distorted  through  the  registration  and  de-registration  of  ships.  In  years  where  net 
registrations  of  ships  (imports-exports)  cover  the  depreciation  in the  shipping  stock there  would  be  no  impact  on  the  current 
account. 

11 

                                                           
Table 2.1: 

Selected external indicators, Cyprus 

2. Thematic Issue: External Imbalances 

NA=National Accounts, BoP=Balance of Payments, CA=Current Account, NENDI= NIIP excluding non-defaultable 
instruments,TB= Trade Balance.  
(1) Flow data refer to national account concept, unless indicated otherwise.  
(2) Cyclically adjusted CA is the CA adjusted for the domestic and foreign output gaps, taking into account trade openness.  
(3) The average CA needed in order to stabilise the NIIP in 20 years is based on T+10 Ecfin projections.  
(4) Current account norm is the current account balance that can be explained by fundamentals. It is based on the 
empirical setup similar to IMF’s EBA. Fundamentals are slow-moving variables including: demographics, relative income, 
natural resources, manufacturing intensity and reserve currency status. See Coutinho et al. (2018) "Methodologies for the 
assessment of current account benchmarks", European Economy, Discussion Paper 86/2018, for the description of the 
methodology. 
(5) The country-specific prudential benchmark denotes the NIIP level beyond which the probability of an international 
economic and financial crisis becomes higher. The NIIP level explained by fundamentals (‘NIIP norm’) represents the NIIP that 
would result if a country had run its current account in line with fundamentals since 1995. For details see Turrini and Zeugner 
(2019), "Benchmarks for Net International Investment Positions", European Economy, Discussion Paper 097/2019. 

Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations 

12 

2003-072008-122013-172018201920202021f2022fFlows (1)Source:CA balance as % of GDP, NA(b)-15.8-7.7-3.1|-3.9-6.3-11.8-11.0-8.9CA balance as % of GDP, BoP(a)-5.2-7.7-3.1|-3.9-6.3-11.9-11.2-9.0Cyclically adj. CA balance as % of GDP (2)(c)-13.8-5.6-5.7|0.8-1.1-8.2-9.0-7.3CA req. to stabilize NIIP above -35% (3)(c)0.32.32.0|1.71.81.71.21.4CA explained by fundamentals (CA norm) (4)(c)-2.2-2.9-2.2|-2.0-2.1-2.1-2.3-2.3Trade bal. G&S, % of GDP, NA(b)-1.4-6.41.3|1.5-1.1-6.2-5.6-3.8Capital account bal. as % of GDP, NA(b)0.5-0.1-2.8|0.60.10.10.10.1StocksNENDI as % of GDP(a)50-69-209|-184-159-176of which: net portfolio debt(a)27126-10|-20-13-32of which: net mutual fund shares(a)22|338of which: net other investment(a)-94-201-206|-177-159-161NIIP as % of GDP(a)-68-124-149|-126-122-141-146-148Prudential NIIP/NENDI benchmark (5)(c)-66-62-52|-57-57-55-56-56Fundamentally expl. NIIP benchmark (NIIP norm) (5)(c)-23-28-47|-46-49-53-50-50 
  
 
 
 
Graph 2.1: 

Thematic Graphs: External imbalances 

2. Thematic Issue: External Imbalances 

Source: European Commission Services 

13 

-20-15-10-505101508091011121314151617181920*21*22*% of GDP(b) Net lending/borrowing by sector CorporationsGeneral governmentHouseholds and NPISHTotal economySource:Ameco-350-300-250-200-150-100-5005010015020025008091011121314151617181920% of GDP(d) Decomposition of NIIP by instrument Reserve assetsNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet financial derivatives and employee stock optionsNet Int'l investment position (NIIP)NENDI (NIIP excluding non-defaultable instruments)Source: Eurostat1516171819202122231112131415161718192021*Constant 2015 EUR bn(a) Demand, output and trade balanceTrade balanceAgg. demandOutput (GDP)Source: Ameco-35-30-25-20-15-10-505101520253013141516171819202122% of GDP(c ) Current account decompositionGoods, fcstServices, fcstGoods excl energyEnergy balanceServices excl travelTravel balancePrimary inc balanceSecondary inc balanceCurrent account balanceNet lending/borrowingSource: Eurostatand Ameco          
 
Graph 2.2: 

Thematic Graphs: External imbalances (cont.) 

2. Thematic Issue: External Imbalances 

Source: European Commission Services 

14 

05001000150020002500300035000708091011121314151617181920% of GDP(a) IIP gross assets (A) and liabilities (L)Other inv liabOther inv assetsPortfolio inv, debt liabPortfolio inv, debt assetsDirect inv, liabDirect inv, assetsFinanc deriv liabFinanc deriv assetsPortfolio inv, equity liabPortfolio inv, equity assetsReserve assetsSource: Eurostat-200-180-160-140-120-100-80-60-40-200192021*22*23*24*25*26*27*28*29*30*(d) NIIP scenariosNIIP baselineNIIP baseline excl SPEsScenarioScenario excl SPEsSource: ECFIN staff calculations. Illustrative scenarios include assumption on higher trade balance after 2022 than in the baseline-200-150-100-5005010015014Q114Q315Q115Q316Q116Q317Q117Q318Q118Q319Q119Q320Q120Q3% of GDP (last four quarters)(c) NIIP without SPEsNIIPNIIP excluding SPEsNet direct investmentNet direct inv excl SPEs050010001500200025003000ALALALALALALALALALALALALAL07080910111213141516171819% GDP(b) External assets and liabilities by partnerEAOFFSHORERURest of EU27RoW/residual          
3.  THEMATIC ISSUE: HOUSEHOLD DEBT 

Situation entering the COVID-19 crisis 

Household  indebtedness  in  Cyprus  has  declined  since  the  banking  crisis,  however  deleveraging 
needs remain.  The  household debt ratio in 2019, at 89% of GDP,  was close  to its  fundamentals-based 
benchmark,  but  is  still  significantly  above  the  prudential  benchmark  (Table  3.1  and  Graph  3.1(b)). (16)  
Deleveraging  has  progressed  up  to  2019,  mostly  supported  by  cyclical  GDP  growth,  but  also  by  other 
changes in debt stock (e.g. write-offs of non-performing loans, debt-to-asset swaps and cash repayments). 
Households  are  primarily  indebted  to  the  banks,  nevertheless  in  recent  years  the  composition  of  the 
liabilities  changed.  The  stock  of  household  debt  to  the  banking  sector  declined  substantially  (Graphs 
3.1(a) and 3.2(a)), mainly on account of the transfer of bad loans from Cyprus Cooperative Bank to the 
state-owned asset management company (KEDIPES), taking place in 2018.  

While indebtedness is high, on aggregate the household sector holds a significant stock of financial 
assets, primarily in the form of deposits. The ratio of debt to total financial assets was close to 40% in 
2019  (Table  3.1)  and  households  hold  a  significant  share  of  deposits  (Graphs  3.1(f)).  On  aggregate 
households  have a positive  net financial asset position. In  the third  wave (2017) of the ECB household 
finance  and  consumption  survey,  about  6%  of  households  with  mortgage  debt  showed  negative  net 
wealth. (17)   

Despite the relatively comfortable net wealth position, the ratio of household non-performing loans 
remains high, indicating a significant degree of strategic default and low contract enforcement. The 
ratio of household non-performing loans in the banking sector remained at close to 35% in 2019, despite a 
significant  decline  since  peak  (Graph  3.1(d)).  To  address  the  problem  the  authorities  launched  in 
September  2019  a  restructuring  and  subsidy  scheme,  ESTIA,  aiming  to  tackle  NPLs  collateralized  by 
primary residences. (18) However, despite the subsidies offered to eligible borrowers, the scheme proved 
unsuccessful – as completed applications fell short of expectations. (19) One of the reasons hypothesized 
for the very low uptake is the reluctance to disclose financial positions. (20)  

A large share of loans to households are collateralized mortgage loans, with collateral values having 
recovered less than half way relative to the 2008 peak. One of the motivations for strategic default is 
the  fact  that  a  significant  percentage  of  mortgage  loans  are  likely  to  be  “underwater”,  i.e.  below  the 
current market value of the residence. Prices have slowly started to recover since 2018, but are still less 
than half-way from peak, and this limits the attractiveness of collateral disposal (Graph 3.2(f) ). 

Credit developments and repayment capacity 

Net  bank  lending  to  households  has  been  contained  but  positive  in  2020,  supported  by  interest 
subsidization  of  mortgage  lending  and  a  moratorium  on  loan  payments.  Pure  new  credit  to 

(16)  Fundamentals-based  benchmarks  are  influenced  by  the  initial  stock  of  debt  (1995  in  this  case),  which  was  already  high  in 
Cyprus (above prudential). For details on the methodologies, see Bricongne, J. C., Coutinho, L., Turrini, A., Zeugner, S. (2019), 
“Is Private Debt Excessive?”, Open Economies Review, 1-42 and European Commission (2018), “Fundamentals-based private 
debt benchmarks: enhanced sample and robustness checks”, note to LIME June. 

(17)https://www.ecb.europa.eu/home/pdf/research/hfcn/HFCS_Statistical_Tables_Wave_2017.zip?abe541bc76c621a3485e9ae0884c

7d68, Table F3. 

(18)  ESTIA  targeted  non-performing  loans  below  certain  thresholds  for  income  and  wealth,  with  loans  collateralized  by  primary 

residence. 

(19)  Original estimations projected that more than EUR 3 billion of non-performing (gross book value as of 30 September 2017) 
would be eligible under the Scheme (see Commission Decision of 03.12.2018 in State aid case SA.49554 (2018/N) – Cyprus – 
Cyprus scheme for non-performing loans collateralized with primary residences (ESTIA). However, after implementation, the 
scheme covers about EUR 170 million of NPLs. 

(20)  This rational is illustrated by the fact that half of the rejected applications were rejected on the grounds of breaching wealth or 
income thresholds.  Furthermore, only 17% of completed applications were approved and 14% were considered non-viable. The 
authorities  are  considering  a  complementary  scheme  to  help  the  non-viable  borrowers  retain  their  primary  residence,  with  a 
different burden sharing between borrower, creditor and government. 

15 

 
                                                           
3. Thematic Issue: Household Debt 

households in 2020 declined by roughly 10% relative to 2019 (21), but net credit transactions have been 
overall positive but moderate (Graph 3.2(c)), also on account of a relative large take up of the moratorium 
on  loan  payments  (suspended  credit  facilities  under  the  first  moratorium,  which  expired  in  December 
2020,  represented  about  46%  of  household  loans).  The  cost  of  borrowing  for  households  has  remained 
broadly  stable  in  2020  and  has  been  contained  by  interest  subsidization  of  mortgage  loans  (Graph 
3.2(b)). (22)   

Household debt-to-GDP ratio is estimated to increase in 2020, owning mostly to the cyclical drop in 
GDP, which could afford a relatively rapid correction as the recovery sets in. The ratio of household 
debt to GDP is expected to increase to 95% in 2020, from 89% in 2019 (Table 3.1). Most of the increase 
is attributed to the cyclical drop in growth and negative inflation in 2020 (Graph3.1(c)). Other changes in 
debt,  including  write-offs,  have  continued  to  contribute  to  deleveraging  in  2020.  The  negative  effects 
from growth are expected to wear-off as the economy recovers, provided that the COVID-19 pandemic 
leaves no significant scars in the economy and new inflows of non-performing loans are contained.  

Household  gross  disposable  income  declined  in  2020,  however  private  consumption  was  rather 
resilient.  Household  incomes  in  2020,  which  have  been  supported  by  a  range  of  government  measures 
(such as short-time work schemes) are forecast to decline by 4.7% in 2020. The household savings rate is 
expected to have somewhat increase  in 2020, but to remain  well below the EU average (Graph  3.1(e)). 
Household deposits have increased in 2020 (Graph 3.2(d)).  

Housing  investment  declined  in  2020,  leading  to  a  small  and  temporary  improvement  in  the 
negative households’ net lending position. Dwellings gross fixed capital formation declined by 7.9% in 
2020, implying a reduction in household investment. This contributed to a small improvement in the net 
lending position of households, which however remains negative (see section 2). 

Non-performing loans 

There has been progress in reducing the relatively large stock of household non-performing loans 
in  the  banking  sector,  but  the  progress  has  been  slower  than  for  non-financial  corporations. 
Household non-performing loans in the banking sector declined from 55% of total loans in 2015 to 27% 
in 2020Q3, according to ECB data and definitions (Graph 3.1(d)). A significant share of the decline was 
achieved  with  the  transfer  of  non-performing  loans  from  the  Cooperative  Central  Bank  (which  stopped 
operations) to the national asset management company KEDIPEs, while the remainder has been achieved 
through a combination of debt-write-offs, sale of collateral and loan sales.  

A moratorium on loan payments has helped contain new non-performing loans in 2020 and so far 
there is no evidence that arrears may increase significantly in 2021, although the available data is 
preliminary. The first moratorium on loan payments, which started in March 2020, had a high take up by 
households,  namely  of  about  50%  of  performing  loans.  In  parallel,  household  deposits  have  increased 
indicating  that  households  accumulated  some  savings  in  the  form  of  deposits  allowing  for  future 
payments.  As  the  maximum  duration  for  the  suspension  of  payments  is  9  months  for  each  loan, 
suspensions expire in January 2021 for most loans. From the universe of household credit facilities with 
payments due in early 2021, 7% registered arrears.  A  second,  more targeted,  moratorium  will run  until 
end-March 2021 but its take up is limited. 

A progressive tightening of credit conditions for households has been observed through 2020 and 
into 2021. According to the ECB bank landing survey, credit conditions for households have tightened in 
Cyprus on account of higher  risk perceptions and  lower risk tolerance by banks (Graph  3.2(e)). So far, 
unemployment  has  been  contained  by  government  support  measures  and  increased  only  moderately  to 
7.6%  of  the  labour  force  in  2020,  significantly  below  what  macro  conditions  might  have  implied,  but 
further deterioration could impact negatively on risk perceptions. 

Cyprus  underwent  a  significant  overhaul  of  personal  insolvency  and  foreclosure  procedures  in 
recent  years,  but  weaknesses  remain  and  even  increased  in  the  case  of  foreclosures.  Cyprus 

(21) Central Bank of Cyprus Monetary and Financial Statistics https://www.centralbank.cy/images/media/xls/2ndMFSApril2021eng.xls.  
(22)  http://mof.gov.cy/assets/modules/wnp/articles/202102/841/docs/190221_finalscheme_epiepit_neastagdan.pdf 

16 

                                                           
3. Thematic Issue: Household Debt 

introduced  in  2016  specific  procedures  to  address  personal  insolvency,  including  a  personal  insolvency 
arrangement  (PIA)  and  debt  relief  order  for  smaller  debts  (DRO).  The  use  of  these  procedures  is  still 
limited but increasing. (23) The low take up is likely related to reluctance to disclose  financial positions 
and with deficiencies in contract enforcement. Although the foreclosure legislation has been reinforced in 
2018, it has been subsequently weakened in 2020, allowing for extended deadlines and more grounds for 
appeal. Foreclosures have been used by creditors to resolve non-performing loans, but predominantly to 
dispose of farmland and other land, while its use for residential property has been more limited.  During 
2020  creditors  voluntarily  suspended  foreclosures  between  March  and  August,  but  activity  resumed 
thereafter.  Foreclosures  of  primary  residences  and  primary  business  commercial  real  estate  have  been 
further suspended from December 2020 to end-July 2021.  

Table 3.1: 

Household debt indicators, Cyprus 

(f) European Commission forecast 
(1) Benchmarks for flows (% of GDP) are estimated on the basis of non-consolidated flows.  
(2) Gross non-performing bank loans and advances to Households and non profit institutions serving households (% of total 
gross bank loans and advances to Households and non profit institutions serving households).  
(3)  Quarterly data is annualized. 

Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

(23)  For PIA, 291 applications were received since its inception in 2015 to August 2020, 96 of which were dismissed either by the 
department  of  insolvency  or  by  the  insolvency  practitioner.  The  total  number  of  applications  increased  to  387  by  end-Aoril 
2021. For DRO there have been 1643 applications in total from 2015 to end-April 2021 (Department of Insolvency of Cyprus 
Statistics http://www.meci.gov.cy/meci/insolvency.nsf/page08_gr/page08_gr?OpenDocument ) 

17 

2003-072008-122013-17201920202021f|20Q220Q320Q4SourceStocksDebt, consolidated (% of GDP)(a,d)851171188995|929394Debt, consolidated (% of potential GDP)(a,b,d)881171149493|939392Prudential threshold (% of GDP)(1)(c)414140484646|Fundamental benchmark (% of GDP)(1)(c)697897919997|Debt (% of gross disposable income)(a,b,d)130170176136140|138139140Interest paid (% of gross disposable income) (3)(a,b)1.42.02.02.0|Debt (% of gross financial assets)(a,d)36.345.947.640.5|37.436.936.3Share of variable rate loans for house purchase (%)(d)75.193.393.592.2|Domestic  loans in forex (% of dom. loans)(d)2.64.03.23.02.2|FlowsCredit flows (transactions, % of GDP) (4)(a)12.57.6-1.7-0.50.20.1|2.73.10.2Benchmark for flows (% of GDP)(c)5.15.12.32.93.13.1|Savings rate (% gross disposable income)(b)6.05.40.33.13.83.3|Investment rate (% gross disposable income)(b)17.814.09.814.013.113.2|p.m. Bank HH NPLs (% of HH loans)(2)(d)50.4| 
         
 
 
 
                                                           
Graph 3.1: 

Thematic Graphs: Household debt 

3. Thematic Issue: Household Debt 

Source: European Commission Services 

18 

020406080100120140% of GDP(a) Household debt liabilities by creditorLong-term bank loansshort-term bank loansloans by OFIsOther domestic debt liab.Foreigntotal consolidatedSource: Calculations based on Eurostat and ECB0204060801001201409899000102030405060708091011121314151617181920% of GDP(b) Household debt and benchmarksHousehold debt, %GDPFundamentals-based benchmark, household debtPrudential benchmark, household debtSource: Eurostat and European Commission-15-10-5051015200708091011121314151617181920y-o-y % change(c) Decomposition of household debt flowsCredit flowReal growthInflationOther changesD/GDP, changeSource: Eurostat and Ameco-8-6-4-20246810-50510152025040608101214161820'22'y-o-y                  % change%(e) Household saving rateGross household saving rate Euro Area 19 (lhs)Gross household saving rate Cyprus (lhs)Real adj. gross disposable income Cyprus (y-o-y %) (rhs)Source: Eurostat-200-150-100-500501001502002503000405060708091011121314151617181920*% of GDP(f) Household balance sheetsA, debt securities (F3)L, debt securities (F3)A, loans (F4)L, loans (F4)A, equity and inv. fund shares (F5)L, equity and inv. fund shares (F5)A, insurance, pensions & s.g. (F6)L, insurance, pensions & s.g. (F6)A, other accounts (F8)L, other accounts (F8)A, currency and deposits (F2)A, fin. deriv. & empl. stock op. (F7)L, fin. deriv. & empl. stock op. (F7)Net financial assetsSource: Eurostat010203040506017Q117Q217Q317Q418Q118Q218Q318Q419Q119Q219Q319Q420Q120Q220Q3(d) Households non-performing loans% of household loans and advancesSource: Non-performing loans and advances, ECB consolidated banking data.  
 
Graph 3.2: 

Thematic Graphs: Household debt (cont.) 

3. Thematic Issue: Household Debt 

Source: European Commission Services 

19 

0102030405060708006070809101112131415161718192021*% of GDP(a) Bank loans to households by typeLoans for house purchaseLoans for consumptionLoans for house purchase, EALoans for consumption, EASource: ECB BSI012345672007-062007-122008-062008-122009-062009-122010-062010-122011-062011-122012-062012-122013-062013-122014-062014-122015-062015-122016-062016-122017-062017-122018-062018-122019-062019-122020-062020-12Cost of borrowing -ECB index(b) Households cost of borrowing           Cost of borrowing for households for house purchase - CYCost of borrowing for households for house purchase - Euro AreaSource: ECB MIR-30-20-100102030405006Q307Q308Q309Q310Q311Q312Q313Q314Q315Q316Q317Q318Q319Q320Q3% of GDP(d) Households net acquisition of financial assets    depositspension & life insuranceother insurancesecurities & equitymiscellaneous assetsnet other accountstotal fin asset acq (ex F8)new loans borrowedSource: Calculations based on Eurostat-60-40-2002040608010008Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q219Q220Q221Q2banks' risk tolerance (from 2015)risk perceptionscompetitioncost of funds and balance sheet constraintsActualTighteningEasingSource: ECB Bank Lending Survey(e) Mortgage credit supply conditions for households 020406080100120140160-30-20-1001020304006Q207Q208Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q219Q220Q22015=100Rate of change y-o-y (%)MFI loans for house purchase (y-o-y growth rate)Real House Price Index (2015=100), right axisNominal House Price Index (2015=100), right axisSource: ECB Bank Lending Survey(f) House prices and mortgage credit growth-15-10-505101509Q110Q111Q112Q113Q114Q115Q116Q117Q118Q119Q120Q121Q1% of GDP (over last 4 quarters)(c ) Bank loans to households (net flows)Source: ECB BSI  
4.  THEMATIC ISSUE: NON-FINANCIAL CORPORATE DEBT 

Situation entering the COVID-19 crisis 

Non-financial  corporations have  entered  the  COVID-19  pandemic  with  large  stocks  of  debt,  even 
when excluding the foreign debt of non-financial special purpose vehicles (SPEs). (24) Non-financial 
corporate debt in Cyprus is significantly affected by foreign debt of ship-owning special purpose entities 
(64% of GDP in 2019) registered in Cyprus, which have limited links to the domestic economy. Cross-
checking  with  other  data  sources,  this  corresponds  roughly  to  the  FDI  and  other  arms  lengths  loans  in 
Graph 4.1(a). (25) The ratio of non-financial corporate debt to GDP, excluding SPEs amounted to 106% of 
GDP, which stands above the prudential benchmark and the fundamentals based benchmark corrected for 
SPEs (Table 4.1 and Graph 4.1(b)). (26)   

Deleveraging  was  taking  place  pre-pandemic,  supported  by  GDP  growth  and  debt  restructuring. 
There has been considerable deleveraging in corporate debt in since the peak in 2014, despite positive net 
credit flows (transactions) particularly in 2018 and 2019 (Graph  4.1(c)). This was supported by nominal 
GDP growth (in large part cyclical) but also other changes in debt, e.g. write-offs and debt-to-asset swaps.  
Similar deleveraging is observed in debt-to-equity and debt-to-financial assets (Graph 4.1(d)). Debt held 
by  banks  has  been  substantially  reduced  mostly  through  loan  sales,  shifting  firms’  liabilities  to  other 
financial  institutions  (credit  acquiring  companies),  which  gained  weight  as  creditors  of  non-financial 
corporations (Graph 4.1(a)). (27) In particular, debt of the construction sector held by domestic banks was 
reduced substantially by the start of the COVID-19 pandemic (Graph 4.2(a)).  

On aggregate, the balance sheet structure of non-financial corporations is relatively vulnerable to 
shocks. On the asset side of the balance sheet of Cypriot non-financial corporations, equity has the largest 
share,  followed  by  accounts  receivable  (Graph  4.1(e)). The  ratio  of  volatile  assets  to  total  assets  in  the 
aggregate balance sheet of the sector exceeds 75%, which is relatively high when compared to other EU 
countries. (28)  Liquidity  buffers  in  the  form  of  currency  and  deposits  have  been  limited,  but  the 
aggregation could mask differences across sectors. 

Aggregate gross fixed capital formation has been dominated by construction, a significant part of 
which dwellings, with more productive corporate investment having a smaller share. Productivity-
enhancing  investment  in  machinery  and  equipment  and  other  construction  structures  tends  to  be  more 
supportive  of  higher  potential  growth,  leading  to  more  sustainable  corporate  debt.    Total  investment 
represented  19%  of  GDP  in  2019.  It  has  been  dominated  by  construction  investment,  with  dwellings, 
which  are  relatively  less  growth  enhancing,  representing  40%  of  all  investment.  Net  non-financial 
corporate investment was less than 5% of GDP in 2019, with investment to a significant extent financed 
by savings since the Cypriot banking crisis (Graph 4.2(d)). 

Credit developments and repayment capacity 

For non-financial corporations net bank credit flows were low in 2020, with pure new credit to non-
financial  corporations  remaining  limited,  amid  the  COVID-19  crisis.  Pure  new  bank  credit  to  non-

(24)  In the case of Cyprus non-financial special purpose entities are ship-owning corporate structures, created for ship registration in 

Cyprus. 

(25)  Graph 1 shows the distribution of Cypriot non-financial liabilities by sector, with domestic bank loans representing less than 
50% of these liabilities since 2018, while the exposure of other creditors including other financial institutions having increased. 
(26)  Fundamentals-based  benchmarks  are  influenced  by  the  initial  stock  of  debt  (1995  in  this  case).  For  details  on  the 
methodologies,  see  Bricongne,  J.  C.,  Coutinho,  L.,  Turrini,  A.,  Zeugner,  S.  (2019),  “Is  Private  Debt  Excessive?”,  Open 
Economies Review, 1-42 and European Commission (2018), “Fundamentals-based private debt benchmarks: enhanced sample 
and robustness checks”, note to LIME June. To adjust the fundamentals-based benchmark of 2019 for SPEs, the SPE debt in 
1995 as a share of 2019 GDP (about 60%) needs to be deducted for the benchmark. Prudential benchmarks are not affected by 
the presence of SPE debt. 

(27)  Credit acquiring companies have been buying non-performing loans from banks since 2018.   
(28)  Volatile  assets  include  equity  and  investment  fund  shares  or  units  (F5),  financial  derivatives  (F7)  and  other  accounts 

receivable/payable (F8). The source is Eurostat. 

20 

 
                                                           
4. Thematic Issue: Non-financial Corporate Debt 

financial corporations declined by about 30% in 2020 compared to 2019. (29) As a result, net bank credit 
flows to the sector remained low despite the loan moratorium in place, which reduced repayments (Graph 
4.2(c)). Bank credit to non-financial corporations continued subdued in early 2021. This has contained the 
increase in the non-financial corporate debt ratio. 

Credit  developments  reflect  in  part  measures  taken  by  the  government  to  shield  companies  from 
liquidity pressures.  Companies have been  shielded promptly and significantly  from liquidity pressures 
since the  start of the COVID-19 pandemic. The government has contributed significantly to wage costs 
(e.g. through short-time work schemes)  and temporarily lowered the tax burden with tax deferrals, while 
a legislative  moratorium on loan payments was in place from March 2020 until the end of the year. No 
substantial package of loan guarantees for non-financial corporations was adopted. Interest rate subsidies 
have been put in place, but the take up has been low in the case of corporates. (30)  

The take-up of moratorium on debt repayments has been high among non-financial corporations, 
particularly among sectors most affected by the COVID-19 pandemic, but also for those where non-
performing  loans  have  been  high.  Credit  facilities  to  non-financial  corporations  with  suspended  loan 
payments  corresponded  to  52%  of  non-financial  corporations  credit  facilities. (31)  Some  of  the  sectors 
with a  high  moratorium  take-up also represented the largest shares of the 2020 stock of  corporate  non-
performing  loans:  construction  (29%),  wholesale  and  retail  trade  (22%),  and  real  estate  (17%).  Non-
performing  loans  in  the  tourism  and  accommodation  sector,  which  had  the  largest  moratorium  take-up, 
were more limited (7% of total non-financial corporate non-performing loans in 2020). (32) 

The non-financial corporate debt-to-GDP ratio is forecast to increase in 2020, owning mostly to the 
cyclical drop in GDP, affording rapid correction if defaults are contained. The ratio of debt-to-GDP 
of  the  non-financial  corporations  sector  is  forecast  to  increase  in  2020,  despite  the  limited  level  of  net 
credit transactions, mostly due to the drop in GDP (Graph 4.1(c)). Most of the impact is estimated to be 
cyclical. However, if the COVID-19 pandemic is to leave more significant scars in the economy, some of 
the estimated cyclical fall could change into structural.  

Aggregate gross operating surplus is estimated to have  increased in 2020, supported by  measures 
that helped contain labour costs, allowing for temporarily higher precautionary corporate savings, 
but there is heterogeneity across sectors. The gross operating surplus of non-financial corporations is 
estimated  to  have  increase  by  4.8%.  This  allows  for  an  increase  in  gross  savings  of  roughly  30%  on 
aggregate,  while  investment  is  likely  to  remain  subdued  as  indicated  by  the  ECB  bank  lending  survey 
tourism  and 
(Graph4.2(f)).  There 
accommodation sector is the most significantly affected, with tourism revenues having dropped by around 
85%,  while  the  construction  sector  is  more  resilient  despite  the  end  of  the  citizenship  for  investment 
programme, which will negatively affect the demand for high-end residences.  

is  however  considerable  heterogeneity  across  sectors.  The 

Non-performing loans 

Progress was made in reducing non-performing loans of non-financial corporations in the banking 
sector, but these are high still and much of the reduction was achieved through sales of loans. Non-
performing  non-financial  corporate  loans  in  the  banking  sector  declined  from  60%  in  2014  to  18%  in 
2020Q3  according  to  ECB  data  and  definitions  (Graph  4.1(f)).  A  part  of  the  reduction  was  achieved 
through  write-offs  and  debt-to-asset  swaps,  which  reduce  debt  stocks,  but  another  part  was  achieved 
through sales of loans, which still leave the corporate sector burdened by debt.  

It is still early to assess by how much arrears could increase in 2021 and 2022, as facilities coming 
out of moratorium have varying payment schedules. The first payment moratorium expired for most 
loans  at  end-2020  (as  there  was  a  limit  of  9-month  for  each  facility).  From  the  non-financial  corporate 

(29) Central Bank of Cyprus Monetary and Financial Statistics https://www.centralbank.cy/images/media/xls/2ndMFSApril2021eng.xls. 
(30)  The take up for interest subsidies was higher in the case of mortgage loans (see section chapter 3). 
(31)  The facilities under moratorium representing the largest exposures to banks are those in the sectors of food and accommodation 
(EUR  1.7  million  or  81%  of  performing  exposures),    real  estate  (EUR  1.2  million  or  67%  of  performing  exposures), 
construction  (EUR  1.1  million  or 88%  of  performing  exposures)  and  wholesale  and  retail  trade  (EUR  0.9  million  or  47%  of 
performing exposures). 

(32)  The data corresponds to all credit facilities (loans and advances and debt securities). 

21 

                                                           
4. Thematic Issue: Non-financial Corporate Debt 

loans with a payment due up to February 2021, 5% recorded arrears, but it is important to note that in the 
case of non-financial corporations payment schedules can be quarterly or even bi-annual, hence it is too 
early to infer a default rate from this data. A new moratorium has been offered until end-March 2021, but 
is more restrictive and the take up is low. An increase in arrears will slow down the deleveraging process 
through further delays in repayments and capitalization of interest due. 

Credit  tightening  due  to  risk  and  cost  factors  has  been  observed  in  2020  and  moving  into  2021. 
There  was  further  credit  tightening  for  non-financial  corporations  in  2021,  according  to  the  ECB  bank 
lending  survey  (Graph  4.2(e)).  The  tightening  can  be  mostly  attributed  to  higher  risk  perceptions  and 
much  lower  risk  tolerance  by  banks,  but  higher  costs  of  borrowing  also  had  an  impact.  The  cost  of 
borrowing for non-financial corporates in Cyprus has been higher than in the EU (Graph4.2(b)). This will 
make it more difficult for firms to bridge liquidity gaps without government aid. 

Cyprus  underwent  a  significant  overhaul  of  its  corporate  insolvency  regime,  but  the  usage  of 
procedures continues to be relatively low to support deleveraging. Restructuring of insolvent or pre-
insolvent  firms  in  particular  is  very  limited,  with  examinership  applications  amounting  to  19  by  end-
August 2020 since the inception of the procedure in 2015. Bankruptcy cases amounted to 38 in 2019 and 
declined to 31 in 2020, while liquidation cases increased from 67in 2019 to 77 in 2020. (33) Liquidation is 
still the preferred option of creditors, but also has a limited and slow contribution to the resolution of non-
performing  loans  and  deleveraging. (34)  Insolvency  procedures  were  not  suspended  for  most  of  2020, 
unlike  foreclosure (see section chapter 3), and steps to facilitate online procedures have been taken, but 
their impact will only be observed later in 2021. 

The  system  of  issuance  and  transfer  of  property  titles  remains  deficient,  hampering  the 
sustainability  of  debt  in  the  construction  and  real  estate  sectors  and  of  collateralized  debt  in 
general.  Cyprus  has  a  particular  system  where  units  belonging  to  a  mortgaged  real  estate  development 
can be sold (usually off-plan)  without  having a property title, and  without  knowledge  or consent of the 
mortgage lender financing the development. This creates impediments to the foreclosure of the property 
in  case  of  shocks  that  affect  the  borrowers’  inability  to  make  re-payments.  It  also  creates  subsequent 
problems for the issuance and transfer of title deeds. (35)  

(33)  http://www.meci.gov.cy/meci/insolvency.nsf/page08_gr/page08_gr?OpenDocument  -  Bankruptcy  statistics  available  from  the 

department of Insolvency of Cyprus. 

(34)  Voluntary  liquidations  were  higher  at  2097  in  2019  and  2235  in  2020,  but  these  involve  mostly  solvent  firms,  set-up  for  a 

specific purpose and liquidated when the purpose has been achieved (e.g. holding companies). 

(35)  In such cases, the bank providing the mortgage financing to the developer needs the consent of all the buyers of units already 
sold to foreclose on the mortgage property in case of default of the developer. Moreover, a cut in financing in case of default of 
the developer often means that at least part of the project gets unfinished and does not fulfil the requirements for the issuance of 
final titles and transfer to the final buyers. 

22 

                                                           
Table 4.1: 

Non-financial corporations debt indicators, Cyprus 

4. Thematic Issue: Non-financial Corporate Debt 

(f) European Commission forecast 
(1) Benchmarks for flows (% of GDP) are estimated on the basis of non-consolidated flows. 
 (2) Gross non-performing bank loans and advances to Non-financial corporations (% of total gross bank loans and advances 
to Non-financial corporations).  
(3) Quarterly data is annualized. 
Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

23 

2003-072008-122013-17201920202021f|20Q220Q320Q4SourceStocksDebt, consolidated (% of GDP)(a,d)163192209170177|175177177Debt, consolidated (% of potential GDP)(a,b,d)168192203179174|178177174Prudential threshold (% of GDP)(1)(c)646470858383|Fundamental benchmark (% of GDP)(1)(c)160142159140150145|Debt, consolidated (% of gross operating surplus)(a,b,d)669959977830772|809796774Interest paid (% of gross operating surplus) (3)(a,b)36.732.026.624.9|Debt, consolidated (% of gross financial assets)(a,d)151127159119|Domestic  loans in forex (% dom. Loans)(d)19.016.47.65.64.8|5.04.94.8FlowsCredit flows (transactions, % of GDP) (2)(a)11.410.95.53.2-0.70.3|1.70.5-9.7Benchmark for flows (% of GDP)(1)(c)|Investment (% of value added)(b)13.317.314.816.216.715.9|Savings (% of value added)(b)13.921.019.111.516.416.6|p.m. Banks NFC NPLs (% of NFC loans)(2)(d)49.924.8| 
 
 
    
 
Graph 4.1: 

Thematic Graphs: Non-financial corporate debt 

4. Thematic Issue: Non-financial Corporate Debt 

Source: European Commission Services 

24 

0501001502002500506070809101112131415161718192021*% of GDP(a) Non financialcorporations debt liablities by creditorDomestic loans from banksDomestic loans from other fin.Domestic loans from gov't & HH   domestic bond holders   foreign bond holdersDebt security liabilities:Unallocated loans   of which RoEA bank loans   of which other arms-length  Foreign arms-length loans:  FDI loans & unallocForeign loan liabilities:Debt assets, F2-F4 ex FDI debtDebt assets incl FDI debtGross debt liabilities (cons.,Estat)Source: Calculations based on Eurostat and ECB0501001502002500304050607080910111213141516171819% of GDP(b)  Non financial corporations debt and benchmarksCross-border intracompany / SPE / MNE debt, %GDPAdjusted* NFC debt, % of GDPAdjusted* fundamentals-based benchmark, %GDPUnadjusted* fundamentals-based benchmark, %GDPPrudential benchmark for consolidated NFC debt, %GDPSource:Eurostat and Cyprus Central Bank *SPE debt in the case of Cyprus. "Adjusted" excludes this debt050100150200250040608101214161820*Ratios of debt to equity, GDP and total financial assets (%)(d) Non financial corporate debt in relation to equity and financial assetsDebt / GDPDebt / equityDebt / financial assetsSource: Eurostat-600-500-400-300-200-100010020030040005060708091011121314151617181920*% of GDP(e) Non financial corporation balance sheetA, debt securities (F3)L, debt securities (F3)A, loans (F4)L, loans (F4)A, equity and inv. fund shares (F5)L, equity and inv. fund shares (F5)A, insurance, pensions & s.g. (F6)L, insurance, pensions & s.g. (F6)A, other accounts (F8)L, other accounts (F8)A, currency and deposits (F2)A, fin. deriv. & employee stock op. (F7)L, fin. deriv. & employee stock op. (F7)Net financial assetsSource: Eurostat010203040506017Q117Q217Q317Q418Q118Q218Q318Q419Q119Q219Q319Q420Q120Q220Q3(f) Non financial corporations non performing loans% of NFCs loans and advancesSource:Non performing loans and advances, ECB consolidated data-30-20-10010203040070809101112131415161718192020Q4y-o-y % change(c) Decomposition of non financial corporations debt flowsCredit flowReal growthInflationOther changesD/GDP, changeSource: Eurostat   
 
Graph 4.2: 

Thematic Graphs: Non-financial corporate debt (cont.) 

4. Thematic Issue: Non-financial Corporate Debt 

Source: European Commission Services 

25 

0123456782007-062007-122008-062008-122009-062009-122010-062010-122011-062011-122012-062012-122013-062013-122014-062014-122015-062015-122016-062016-122017-062017-122018-062018-122019-062019-122020-062020-12Cost of borrowing -ECB index(b) Non financial corporations cost of borrowingCost of borrowing for corporations - CYCost of borrowing for corporations - Euro AreaSource: ECB MIR020406080100120140% of GDP(a) Sectoral composition of non financial corporations bank loans (NACE rev.2)A - agricultureB - miningC - manufacturingDE - electricity, gasF - constructionG - tradeHJ - transp. inform. com.I - accommodationL - real estateMN - prof. adm. activitiesremaining activitiesSource: ECB and Ameco-25-20-15-10-505101520253004050607080910111213141516171819% of GDP(d) Non financial corporations investment financing capital transfersnet other fin liab./residualincrease in net equity liab.increase in net debtself-financing/net savingnet investmentSource: Calculatiosbased on Eurostat-100-5005010015020008Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q219Q220Q221Q2(f) Credit demand conditions for non financial corporationsFixed investmentInventory and working capitalAlternative external financingInternal financingInterest rate levelOtherActualexpectationsTighteningEasingSource: ECB bank lending survey-20-10010203040506070809008Q209Q210Q211Q212Q213Q214Q215Q216Q217Q218Q219Q220Q221Q2(e) Credit supply conditions for non financial corporationsbanks' risk tolerance (from 2015)risk perceptionscompetitioncost of funds and balance sheet constraintsActualexpectationsTighteningEasingSource: ECB bank lendingsurvey-10-5051015202509Q110Q111Q112Q113Q114Q115Q116Q117Q118Q119Q120Q121Q1% of GDP (over last 4 quarters)(c) Bank loans to non-financial corporations (net flows)domestic NFC loansdomestic corporate bondsSource: ECB BSI