Loan renegotiation in the Cyprus banking system spiked to record levels in the first half of 2023, driven mainly by European Central Bank interest rate hikes to tackle soaring inflation.
According to the Central Bank of Cyprus, renegotiated loans from January to June spiked to €2.13 bln, marking an annual increase of 264%, compared with €585 mln in the same period last year.
It was the highest volume of renegotiated loans for six months since the CBC started publishing data for both renegotiated and pure new loans (December 2014).
To control rampant inflations in the Eurozone, mainly fuelled by Russia’s invasion of Ukraine, the ECB has entered since July 2022 into a restrictive monetary policy, hiking interest rates nine times, resulting in a cumulative increase of 400 basis points.
ECB President Christine Lagard stated the bank would either hike interest rates or pause the hikes cycle in the coming monetary policy meeting in September.
Facing soaring loan interest rates and rising repayments, borrowers in Cyprus, mainly large corporations, rush to the banks to renegotiate loans in a bid to either “lock” interest rates or reschedule their loans in a pre-emptive move to avert problems in debt-servicing.
Loan renegotiations are also associated with rising costs due to inflation.
Loan rescheduling concerns mainly loans with no arrears that do not show credit deterioration and are not considered debt restructuring classified as non-performing loans based on the European Banking Authority (EBA).
According to the CBC data, the overwhelming majority of renegotiated loans were corporate loans over €1 mln, which in the first six months reached €1.59 bln, representing 74% of total renegotiated loans.
Compared with the first half of last year, renegotiated loans over €1 mln rose by 240%.
Renegotiated mortgages also marked a steep increase of 455% year on year at €322 mln in the first half of 2023 compared with only €58 mln last year.
The volume of renegotiated corporate loans up to €1 mln reached €159 mln, from €40 million in January-June last year, marking almost a 300% annual increase.
Loan renegotiation in other loan categories and consumer credit also rose significantly, reaching €40 mln and €24 mln, respectively, from just €11 mln and €10 mln last year.
When the ECB began its interest hike cycle in July 2022, movement in loan renegotiations accelerated in the second half of 2022, with renegotiations up to €800 mln from €585 mln in the first half.
The volume of renegotiated loans has already surpassed the total for 2022 (€1.3 bln) and was very close to 2021, where a record of €2.32 bln loans were renegotiated.
In 2021 renegotiations rose significantly as a very broad loan repayment moratorium, in place since the outbreak of the Covid-19 pandemic, ended in December 2020.