Filenews 20 August 2025 - by Theano Thiopoulou
"The stability of the private sector is considered fragile and particularly sensitive to negative external developments, as a possible decline in domestic economic activity or a deterioration in financing conditions could negatively affect the servicing of existing debt, increase levels of non-performing loans and further limit access to new borrowing; especially from vulnerable households and businesses". This is the exact reference included in the Central Bank's Financial Stability Report for 2024.
The central bank notes that high debt levels remain a significant source of vulnerability for the entire domestic private non-financial sector, despite the significant decline recorded in recent years. In particular, the debt of domestic households and non-financial corporations continued to contract in 2024 as a percentage of GDP, reaching a total of 134.8% of GDP in December 2024, while remaining above the average of the euro area counterpart.
At the same time, it is noted that, despite the continued decline in domestic debt levels, the debt-to-GDP ratio has fallen to historically low levels, mainly due to the significant increase in nominal GDP (denominator effect) achieved over the last decade, and less due to net repayments, which makes the private sector vulnerable to a possible slowdown in economic activity; due to global macroeconomic developments and geopolitical/economic tensions.
"The continued high level of debt burdening the balance sheets of the private non-financial sector, and in particular vulnerable households and businesses, may pose challenges in the repayment of its obligations. Any deterioration in economic conditions could negatively affect the ability of borrowers to continue to service their obligations, increasing the risk of these loans being converted into new non-performing loans," the CBC technocrats note, recalling once again the serious risks still associated with old private debt which remains a burden on the economy.
Key source of vulnerability
Going a step further, the CBC characterizes high private debt, for both households and non-financial corporations, as the main source of vulnerability to financial stability, which limits the possibility of loan repayments in the event of negative macroeconomic shocks. He adds that passive deleveraging makes the reduction of private debt particularly vulnerable to a possible decline in domestic economic growth.
Despite the progress recorded by specific indicators (e.g. income, repayment capacity of private sector loans, corporate leverage ratio, debt-to-income servicing ratio for households) in 2024, the private non-financial sector in Cyprus continues to be characterised by high levels of debt and structural vulnerabilities; which make it vulnerable to negative external developments. "The improvement in the balance sheets of households and enterprises, combined with the increase in their liquidity, temporarily strengthens their resilience. However, SMBs' dependence on the banking system for financing purposes, high levels of leverage and a legacy of long-term MEXs limit their ability to absorb new economic shocks.
A possible deterioration in the macroeconomic environment, combined with strengthening inflationary pressures and a possible reversal of the downward path in interest rates, due to geopolitical or financial pressures, could reverse the downward trajectory of private debt and intensify risks to financial stability. Therefore, it is even more imperative for the private non-financial sector to continue its efforts to actively deleverage its balance sheet and strengthen its liquidity buffers, so that it can absorb potential shocks and maintain unhindered access to new bank lending.
The importance of the real estate market
The real estate sector is one of the most important for the Cypriot economy, not only in terms of economic activity but also in terms of financial stability. As noted in the report, the risks posed by the real estate sector to financial stability remain significant and require continuous and thorough monitoring. The real estate market is directly linked to the developments of the real economy, which makes it particularly vulnerable to economic changes and fluctuations. Therefore, the increased uncertainty that characterizes macroeconomic policy at the international level has increased the likelihood of extreme scenarios such as a sharp decline in real estate prices.
The exposure of the financial sector to the real estate sector poses a vulnerability to financial stability, notably in the remote scenario of a downturn in real estate prices. Despite the relatively low direct exposure of credit institutions and credit acquisition companies to the real estate market, their high indirect exposure through their loan portfolio is a significant vulnerability for these sectors, the CBC notes.
