The prudent macroeconomic policy of the state and the improved financial stability of the banking system strengthened the country's credibility in the markets, resulting in the issuance of a 10-year bond with more favourable terms, for the benefit of the Cypriot economy and society in general. Therefore, when Cyprus borrows cheaper, more resources remain available for social benefits and the pressure for taxes or cuts is reduced.
Why so much confidence in Cypriot Bonds?
On 21 January 2026, the Republic of Cyprus issued a 10-year bond and raised €1 billion, with a coupon of 3.25% and a yield on issuance of 3.339%, in the context of covering financing needs in 2026 and the broader strategy for the management and refinancing of public debt.
Demand reached nearly €16.5 billion, a sign of confidence from institutional investors such as insurance funds, banks, central banks, according to the Ministry of Finance/GDR. Trust is gained and is linked to the proper assessment and management of risks, both exogenous, such as geopolitical developments, the level of ECB interest rates, and endogenous, i.e. macroeconomic and banking.
In the case of Cyprus, the main macroeconomic indicators have improved in recent years and based on forecasts for 2025, they are moving better than the EU average: GDP growth of 3.5%, public debt of ~56% with a downward trend, unemployment of 4.6%, and a fiscal surplus showing discipline of +3.3%, according to Eurostat, the European Commission and the Ministry of Finance.
The second pillar is the banking system. After a difficult decade, there is a clear improvement in financial stability with improvements in capital adequacy and liquidity and a significant reduction in non-performing loans (NPLs), according to the Central Bank of Cyprus.
This overall picture reduces uncertainty and strengthens the country's stability. What is crucial, however, is the duration of this picture and whether the positive performance withstands adverse external developments and/or internal pressures to relax fiscal discipline.
How do the odds of the recent edition compare with the previous edition and with the publications of other EU member states? Did the state pay more or less interest and if so, why;
The decrease in the yield of the recent issue (3,339%) compared to the April 2023 issue (4,219%) is equivalent to approximately €8,8 million. less interest cost per year for €1 billion. borrowing. It is noted that the decrease is not exclusively due to an improvement in the country's risk, but also to the de-escalation of ECB interest rates, by about one percentage point, which affect the overall level of yields in the markets.
In the primary market, Cyprus' yield of 3.339% ranks at competitive levels. In recent 10-year issuances of EU member states, yields are in the range of 3.1% – 3.5%: Greece 3.47%, Ireland 3.145%. The economy of Cyprus is valued comparatively favourably by the markets, but the ratings are vulnerable to both adverse external factors and any easing of fiscal constraints. Therefore, yields may increase if there are mishandling of fiscal policy.
In the secondary market, at the beginning of February 2026, the yield of the Cypriot 10-year bond was ~3.052% and is favourable with countries such as Spain ~3.23%, Greece ~3.37%, France ~3.45% and the Czech Republic ~4.32%, according to data from ECB, Bloomberg and Trading Economics. This outcome for Cyprus indicates that institutional investors accept a lower expected rate of return and that our bond yields are not in line with the profile of a risky emerging economy.
Why lower government bond yields are in our interest;
When government bond yields fall, the state borrows cheaper, and this is reflected in the budget: it pays less interest, so it frees up resources for health, education and infrastructure, and reduces the need for tax increases. But the benefit is not automatic, because it is judged by where the savings are directed. If productive investment, targeted spending and reforms are supported, the social benefit can be long-term. However, if they are allocated to non-productive or horizontal expenditures, without targeting, the result is temporary. Indicatively, it is one thing to invest in digital services, education and infrastructure, which reduce future costs, and another to be distributed horizontally without targeting or evaluating results.
At the same time, the reduced risk of the state reduces the pressure for stricter tax measures and creates room for targeted relief or social benefits, especially to vulnerable groups and pensioners, without undermining fiscal stability. This option is a double-edged sword: it can support society or reinforce intense 'lobbying pressures', leading to unnecessary spending. Therefore, fiscal discipline and an emphasis on policies that enhance growth and credibility are a priority.
In addition, lower country risk implies cheaper funding for Cypriot banks and increases the likelihood that part of this reduction will be passed on gradually to households and small and medium-sized enterprises through lower interest rates. This is not a given: it depends on competition in the banking system, market conditions and the risk profile of each borrower, both households and small and medium-sized enterprises (SMEs).
Finally, lower country risk enhances Cyprus' attractiveness for investment from abroad, especially in new industries, start-ups and technology, supporting employment and wage prospects when the benefits are spilled over to the wider economy. Otherwise, investment may remain concentrated in a few sectors and not translate into a general increase in productivity, wages and employment.
How decisive is the yield of government bonds?
It may not always be obvious how decisive the yield on government bonds is. Internationally, however, it is in the spotlight, precisely because it determines how much of the state budget ends up in interest and consequently, how much fiscal space is left for the needs of society.
A typical example is the US, where the pressure for lower interest rates is also linked to the goal of refinancing part of the huge public debt (about 38 trillion dollars) with lower borrowing costs.
The debate has also intensified at the political level, with the US President publicly pushing for a looser monetary policy. This highlights that interest rates directly affect a state's choices and social policy. On a smaller scale, the same is true for countries like Cyprus: even a few million euros less interest can translate into very targeted fiscal choices.
That is why credibility in the markets is important: prudent macroeconomic policy and the strengthening of the financial stability of our banking system have allowed lending on more favourable terms, for the benefit of the Cypriot economy and society in general. The challenge is to maintain credibility not only in good times, but also in good times. And when external conditions worsen and internal pressures for fiscal easing increase, as international markets reward consistency, but react quickly when they detect signs of fiscal easing or inconsistency in economic policy.
* Ph.D., CMA (USA), FCPA (Aust) / Professor of Finance, University of Cyprus
