The overall loan restructuring dynamics in Cyprus accelerated significantly in 2023.
The main reason is the constant increase in interest on loans due to the increase in key rates by the European Central Bank.
This is according to a report published on Friday, February 2, by the Central Bank of Cyprus. According to the island nation's main financial institution, the volume of loan restructurings in Cyprus reached a record high in 2023. From January to December, the total value of restructured loans rose to €4.489 billion. The growth amounted to 245%. By the way, this is the largest amount of restructured loans in the history of observation.
Interestingly, the vast majority of restructurings (68%) in 2023 involved large corporate loans over €1 million, totaling approximately €3 billion (+183% year-over-year). Residential loan restructurings accounted for €0.92 billion (+761% year-on-year). Restructurings of smaller corporate loans (up to €1 million) amounted to €380 million (+417%) and consumer loans to €90 million (+417%).
With the European Central Bank (ECB) not yet planning to cut key interest rates, restructuring activities are expected to play a central role in preventing default in 2024. Increased loan repayment costs could worsen the financial situation of households and businesses, bringing negative consequences for the economy.
Tellingly, in the latest financial report of the Central Bank of Cyprus, its Governor Constantinos Herodotou noted that a timely, appropriate, and sustainable restructuring solution is needed.
There is no denying that the right restructuring solutions enable both businesses and households to meet their obligations. This ensures that banks' balance sheets are not burdened with new defaults, the smooth operation of businesses continues, bankruptcies are reduced and as a result, it contributes to the orderly functioning of the economy," Herodotou said.
Recall that restructuring is a change in the terms and conditions of an existing loan.
The loan agreement remains in force, and all issues are resolved in the organization that issued it. It is impossible to go to another bank. This program is aimed at improving the financial situation of the borrower who has had difficulties with debt repayment.
Restructuring is carried out according to one of the following options:
- reduce the interest rate - each month the debtor will spend less on servicing the loan;
- "stretch" the term of the loan - it increases, but the amount of monthly payments on the loan decreases;
- give the borrower a credit vacation - for some time it is possible to pay only the interest on the loan;
- you can pay only the interest on the loan;
- write off the accrued interest.
It is important: the terms of the loan do not become fundamentally better - for the debtor it is only an opportunity to "get a break", to prevent a difficult situation, not to spoil relations with the creditor. Banks agree to restructure in order not to burden themselves with bad debt and to get their money without judicial enforcement and confiscation of property.