Cyprus has raised nearly 4 billion euro by selling EU citizenship. She also received 56 million euro of loans in June from the EIB and the CEDB
Source: Cyprus Government
As part of the EU, Cyprus is monitored by Eurostat, which collects statistical data on member states, including that of national debt. Eurostat measured Cyprus’s national debt at 97.5% of GDP at the end of 2017. The IMF uses a slightly different measurement method for national debt. That organization stated the gross national debt to GDP ratio of Cyprus was 99.3% and the net debt to GDP ratio was 81.2% at the end of 2017. The Cypriot government itself calculated its debt to GDP ratio as 98.4% at the end of 2017.
Gross debt sums up all of the money owed by all levels of government in the country. Net debt reduces that figure by deducting from the debt the value of the assets held by the government.
The national debt of Cyprus is high. It also has some unusual characteristics — the country has the highest percentage of debt held by non-residents of all the countries monitored by Eurostat at 82.2%. The extraordinary debt figures of Cyprus are the results of a banking crisis that occured in the country from 2012 to 2013. The country is still recovering from the effort that its government had to go to in order to solve the problems created by banking debt.
Leading banks all across the globe ran into a liquidity crisis in 2008. Cyprus wasn’t excessively affected by this event. However, the problem of the world’s banking sector eventually hit Cyprus.
The core of the 2008 crisis lay in over leveraged property development and banks extending mortgages to those who struggled to make payments. This problem continued to run in Cyprus and the lowered economic activity in the developed world that resulted from the 2008 crisis collapsed the Cypriot property market in 2012. Fewer international buyers of vacation properties resulted in lower sales figures for Cypriot developers, a property overhang, falling property valuations, and bankruptcies.
When Cyprus’s banks were left with unpaid loans to bankrupt property developers, they became unable to cover the loans that they had taken out internationally to provide funds locally. Cypriot banks had invested in Greek government debt. When the government of Greece faced a crisis in 2011, the EU and IMF bailout conditions demanded a “haircut” in the value of Greek government bonds. This meant that holders of Greek government debt had to accept a halving in face value of their bond holdings. This pushed Cypriot banks further towards insolvency.
The losses of the banks meant that they wouldn’t be able to pay back bank account holders in case all customers decided to withdraw their funds. This situation risked bankrupting the government, which had given depositor guarantees for all of the country’s banks.
The fact the many of Cyprus’s banks were owned by the banks of other European countries, that the parent banks had provided large loans that were unlikely to be paid back, and the fact that Cyprus is part of the Eurozone meant that Cyprus’s banking crisis became a problem for other European countries as well.
The Republic of Cyprus had to bail out its banks with the assistance of EU funds and the IMF. This problem increased the country’s national debt from a debt to GDP ratio of 65.7% at the end of 2011 up to 109.4% by the end of Q3 2016. The country has been improving its debt positions since then, but it still has a long way to go before it will have paid off all of the debts accumulated during 2012 and 2013.
The difficulties of the banks of Cyprus meant that they could not raise funds from international loans. The necessity of forcing haircuts on the holders of both Greek and Cypriot government debt made it impossible for the country to raise any more debt by selling bonds to investors. So, the debt profile of Cyprus changed from one that issued bonds in order to finance a government deficit, to one that need to seek intergovernmental loans.
Cyprus’s priority of paying down its IMF and European assistance loans means that the prospect of increasing the national debt is not a medium-term goal. Instead, the government is focused on reducing the national debt.
The table below shows how the debt profile of Cyprus has changed because of the 2012-2013 bank bailout. These figures are from the PUblic Debt Management Office of Cyprus and the numbers shown represent millions of Euros.
|1. Long-term Loans||1,000.6||10,649.1|
|Budgetary Central government||822.4||10,636.2|
|of which IMF Loans||0||676.4|
|of which financial sector recapitalisation||1,500|
|Local Authorities Loans||128.7||0|
|2. Medium-term Securities (E.M.T.N.)||4,550||4,710.6|
|Social Security Funds||341.3||204|
|3. Short-term Securities (E.C.P.)||242.7||0|
|C. UNCONSOLIDATED GENERAL GOVERNMENT DEBT||18,494.7||26,885.9|
|D. CONSOLIDATED GENERAL GOVERNMENT DEBT||10,862||18,724.7|
|% of GDP||56.3||98.4|
As these figures show, the domestic debt of the Cypriot government has not changed much in the seven years between the end of 2010 and the end of 2017. However, the overall debt has increased by about 8 billion Euros. All of this amount was sourced from loans and not through bonds.
The repayment tasks of the government of Cyprus was made harder by the high cost of emergency debt.
The Ministry of Finance is in charge of organizing the government’s budget which is the ultimate source of further debt in the country. This department is answerable to the country’s parliament. However, the Ministry does not implement its own debt policy. Instead, the Public Debt Management Office is tasked with managing the country’s national debt.
The Public Debt Management Office’s task is to get that public debt down. Part of that responsibility lies in reducing the cost of servicing that debt by paying down high interest loans by taking out lower cost debt. This strategy saves the country money, thus free up more funds to pay down more debt.
The graph below shows the success of the PDMO’s strategy to reduce the cost of the debt.
The previous “haircut” imposed on bond holders makes the investor community wary of buying Cypriot government bonds. However, there are some investment instruments that the PDMO can use to raise lower cost loans. These are:
Short-term instruments reduce the risk of default because investors tracking the health of developing problems would be able to end their involvement before any credit event could evolve. The PDMO is able to sell 13-week Treasury bills. These instruments do not pay interest. However, they are sold at a discount and redeemed at full face value.
For long-term financing, governments usually offer bonds. Although the investor community has no appetite for Cypriot government bonds at the moment, the PDMO is able to sell 6-year bonds to three different sectors. These are:
Retail bonds are not tradeable on any secondary market. However, members of the public who buy them have the right to cash them in with 30 days notice.
The EMTN program is a method of placing Cypriot government bonds under other legal jurisdictions, making it impossible for the government of Cyprus to change the law and cancel or reduce its obligations to the holders of those bonds. These bonds are subject to English law and are tradeable on the London Stock Exchange. This form of instrument has been the most successful device for the PDMO to raise cheaper debt for the government of Cyprus.
The PDMO has also issued bonds as a form of debenture to secure private loans from banks and foreign governments.
What facts should you know about Cyprus’s national debt?