After Gordian comes Themis. Who’s next?

Banks selling non-performing loans does not mean that private debt will decrease.

Encouraging foreigners to relocate to Cyprus is the fastest and most effective way to exit the financial vicious cycle the country finds itself in.

Another company prepares to enter the non-performing loans (NPLs) market in Cyprus. Themis – the Goddess of Justice – will own and take over the management of NPLs that the global giant Pimco will acquire from the Bank of Cyprus (BoC). BoC and Pimco agreed for the sale of NPLs with gross book value of €1.4 billon (Helix 2), which consists of 38,224 loans, mostly from private and small- and medium-sized companies, secured with approximately 9,614 properties. The deal is expected to go through in the next few weeks. Themis is another addition to the long list of companies that have been operating in the Cyprus market in the last few years, trying to get a slice of the management of problematic loans and the properties attached to them.

Including Helix 2, from 2017 and onwards Cypriot banks have sold NPLs worth of €4.5 billion, while another €9 billion was moved in various other ways outside the banking system. For example, the now defunct Cyprus Cooperative Bank’s loans are currently owned by KEDIPES. In total, NPLs, in and out of banks, are estimated at €18-19 billion (even though there are no official data) and they are being managed by the banks themselves or by Credit Acquiring Companies or by Asset Management Companies.

It is a paradox that currently only a handful of people are still concerned with the matter of NPLs. Maybe they believe NPLs do not present an issue anymore, since most of them are outside the banking system. The reality, of course, couldn’t be more different than that. NPLs are still a burden that companies and households shoulder and selling them will not release that pressure, since it’s only reasonable that those who invested in them will want to have a good return. So, where are we heading? Probably towards more foreclosures (which are not particularly successfully anyway), more pressure on indebted companies, a rise in real estate supply, etc.

At the same time, the state’s attempt to intervene with the “Estia” scheme was a failure, as interest was minimal (around 50% of those eligible applied and of those circa 10% were approved). It remains to be seen whether a second attempt by the state, this time through the purchase of banks’ NPLs through the state-owned KEDIPES, will have a greater impact. Even so, the fact remains that the level of private debt is still significantly high, exceeding 114% of GDP. In this climate, banks are struggling to give out new loans to viable companies and households. It’s like trying to square a circle, since they want to dispose of their large and costly liquidity (see deposits) and on the other hand they don’t want to give out loans, which after a few years will become part of a new cycle of non-performing loans.

Is there a way to exit this vicious cycle? There is a way, even though at first glance it might not appear as purely a financial one. The solution is to increase the population of the country. It might sound paradoxical for a number of reasons but increasing the population can reduce the percentage of private debt, since it will surely lead to an increase in the GDP, e.g. more consumption, increase in demand for housing, etc, and it will also increase the number of prospective clients for bank loans. Given that Cyprus suffers from a low birth rate, as the occasional governmental incentives have not achieved their purpose, the only solution that remains is to attract (young) foreigners to permanently relocate to Cyprus. The steady arrival of a few thousands of foreigners of good financial standing for permanent stay in the country will have particularly beneficial effects on the whole economy. This is something we experience daily as a company, trying to find office space for foreign groups that wish to set a base in Cyprus. The needs of their employees are manifold: office space and homes to purchase/ rent, food (supermarkets, restaurants, etc, entertainment, education for their children, transportation and so on. Foreigners who are not solely looking for new job opportunities, but for a safe and modern country to live and raise their families also offer similar benefits. Without the Cyprus Investment Program, we have now an opportunity to prove that we can attract qualified immigrants who will create real bonds with our country by investing and having an impact across the board.