Overcoming Private Debt (Unblocking and Rebuilding the Loan-Burdened Real Economy in Cyprus)

Abstract

The article discusses the enormous private debt in Cyprus and how it impacts the conditions for economic recovery. It stresses the need more drastic and decisive action from the Government including the participation of international multilateral financiers in reconstructing and funding viable institutions in Cyprus which can bring about change in the real economy. It is further noted that the unprecedented levels of private debt and non-performing loans in combination with the fact that the bulk of the deposits in the banking system are foreign owned while almost the whole of the loans weigh on Cypriots make a potential recovery through conventional methods alone unlikely to be successful. It is suggested that in order for a steady and sustainable growth to take place the national currency must first reflect its true exchange value when taking the fundamentals and facts of Cyprus into consideration rather than those of Europe as a whole. It is argued that the creation of a professionally staffed financing institution is of paramount importance to act as a reliable and independent advisor to the Government in the mould of Development Agencies in Ireland and the Netherlands with respect to the involvement of the Government in public sector projects and Private Public Partnerships and most importantly in acting as a competent intermediary for the need to convert debt to equity through viable projects. The new institution should also take the lead in disentangling the complex web of loans and collaterals currently weighing on business enterprises and to provide project financing solutions. Through this mechanism the Government and possibly other European institutions can join in to back this process and support though own funds economic development where it makes a difference to the economy.

Keywords: Private debt, repayment capability, project evaluation, corporate lending, credit risk

JEL Classification: D61, G17, G21, G32, G33, H43