Foreign borrowing now accounts for just under a fifth of all lending by commercial banks, according to the most recent figures from the Monetary Survey, and continues to rise.
Foreign loans and advances of commercial banks reached CYP 2,099.3 mln or 19.5% of the total in June, up from 1,981.2 mln or 19.0% in May.
When Cyprus joined the EU May 2004, foreign borrowing was only 9.8% of the total, according to Central Bank reports at the time.
The acceleration in foreign borrowing has been sparked by two developments. First, the entry of Cyprus into the EU, which led to the automatic lifting of all remaining restrictions on foreign borrowing.
This allowed anyone and everyone to borrow in euros or other currencies.
Eurozone interest rates are lower than those in Cyprus, and anecdotal evidence suggests that gap between local lending rates and euro rates is rather bigger than the gap between official rates (now currently only 50 basis points).
The second reason is Cyprus’ entry into the Exchange Rate Mechanism in May 2005. The entry of the pound at the same central parity rate as its previous peg to the euro led to increased confidence to the Cyprus pound.
Since fewer people expected devaluation, more people felt able to take the currency risk of borrowing in euros.
Overall borrowing rises
While foreign borrowing rose between May and June by 6.0%, total borrowing rose in the same period by 3.3% to 10,759.1 mln.
Almost half of the total is accounted for by “personal and professional loans”, of which only 3.3% is hire purchase and 1.6% is credit cards, so presumably the rest is accounted for mainly by mortgages.
Deposits in the banking system amounted to CYP 16.6 bln in Jun, more than double annual GDP. Of this, CYP 9.9 bln was resident deposits and CYP 6.7 bln was non-resident deposits.
Customer deposits at International Banking Units, which for the time being are still measured separately, amounted to CYP 5.2 bln.
Deposits at Co-operative Banks amounted to CYP 4.9 bln.
Source: Financial Mirror
