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CYPRUS: Interest rates on loans must fall

HOUSING LOANS interest rates continued to drop in December, falling to their lowest level since mid-2011. Interest rates on consumer loans also fell to their lowest level for two years’ (Central Bank of Cyprus, 2014). Loans of up to €1m for small and medium enterprises (SMEs) rose in December 2013 following a downward trend recorded since July 2013.
Interest rates on housing loans dropped to 4.66 per cent in December 2013 from 4.71 per cent in November. Likewise consumer loans rates slipped from 6.56 per cent in November to 6 per cent in December. By contrast, loans to SMEs of up to €1m jumped to 6 per cent from 5.61 per cent; and rates on business loans of over €1m rose to 5.23 per cent from 4.26 per cent in November.
Contrast these figures with those in the eurozone where mortgage rates in the eurozone were at 3.37 per cent, the same as in November. Home loans aside, Cyprus has the most expensive business loans in the EU. In the EU, business loans rates registered at 3.28 per cent in December (up from 3.26 per cent in November).
The data demonstrates how the still-high interest rates charged to households and businesses here are the Achilles heel of the Cypriot economy. All the local banks (commercial and cooperative) need to further lower their lending rates, so that loans become affordable and align themselves with the corresponding rates in the EU. Nevertheless, as in any ‘open and free market’ we should avoid regulating interest rates by law as such an intervention would bring about serious negative repercussions.
Even today, it seems, whenever a bank ‘restructures’ a loan, this restructuring is accompanied by an increase in the interest rate. This so-called ‘re-pricing’ often involves a 1 per cent to 3 per cent increase on the borrowing rate, depending on the value of the existing rate.

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It’s about time the banks put a stop to this practice (even though, admittedly, it looks like things are starting to change). This practice constitutes unethical behaviour on the part of the banks, but at the same time it helps neither the economy (households and businesses) nor the banks themselves (since they artificially inflate profits on their books), making the repayment of loans even more unsustainable.
Unless the banks and the Central Bank sort this out at once, the state may have to intervene. But while regulating interest rates by law may be ‘effective’, it will also cause side effects and further tarnish the country’s reputation as an international financial centre.

O Δρ. Γιώργος Μούντης είναι ο διευθύνων σύμβουλος της Delfi Partners & Company και επισκέπτης καθηγητής στο Neapolis University

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