ACCORDING to new data provided by the ECB (August 2013), despite the fact that interest rates for deposits in Cyprus have decreased dramatically (something that should have been done a long time ago), loan deposit rates for households and businesses are on the increase.
Data published by the ECB indicate that the great reduction of deposit interest rates at the rate of 2% has not brought about any reduction to lending costs due to the fact that lending costs have increased to a significant extent. Unfortunately, it has been proven that announcements made by banks regarding reductions of interest rates for loans were not true.
The ECB reports that interest rates for business loans have increased at the rate of 6.50% (in July 2013) in relation to 6.35% in June 2013. It is worth mentioning that such interest rates are the highest in the Eurozone, much higher than those in Greece (5.80%) (in Greece, interest rates for loans for large and small and medium enterprises were slightly reduced from 5.84% to 5.80%). It is remarkable to note that interest rates for business loans are almost 3.50% higher than the average interest rates for business loans in the Eurozone (3.30%) (ECB 2013).
Furthermore, interest rates for housing loans in Cyprus increased from 5.37% (in June 2013) to 5.60% (in July 2013). According to data provided by the ECB (2013), the average interest rate for housing loans in the Eurozone is 3.28% – much lower than the interest rate for our own housing loans.
Such increase in the interest rates for loans is noted at such a time when interest rates for deposits are on their downfall (they are at their lowest level since 2008). Interest rates for new deposits in Cyprus have been reduced from 2.34% to 2.24% since June 2013 and from 4.50% in the same month in 2012.
There are certain possible reasons for such increase in interest rates. Since new loans are only a few, it seems that this increase emanates from existing loans. When banks ‘restructure’ a customer’s loan, such ‘restructuring’ is usually accompanied by something in consideration: the increase of the interest rate (‘re-pricing’). Such increase (even nowadays) is often set at the rate of 1-3% (this depends of course on the level and basis of the existing interest rate). As a result of these restructurings, households and businesses are unable to repay their loan instalments which already bear high interest rates (the highest in EU) as stated above.
Institutional stakeholders should wonder how large and small-to-medium businesses will be in a position to repay loans which bear interest rates at the level of 7.0-9.5%. This policy has affected and still affects Cypriot households and businesses. As a result, non-performing loans in the banks’ portfolios are on the increase and loan restructurings which are still made to this day have the effect of increasing interest rates (bankers will ‘correctly’ attribute the particular interest rate increase to the “increased” risk assumed by the bank for restructuring the particular loan).
We believe that this is the time for making radical changes – the announcements made by Banks to the effect that interest rates will be reduced by 0.25%-0.5%, are not sufficient in order to assist over-indebted households and businesses to breathe.
We are in need of the immediate intervention by the government as well as quick reforms…
Dr. George Mountis
Banking | Wealth & Trust | Asset Management
Tel: + 357 – 99 49 41 42