The Republic's debt interest rate risk is limited thanks to ESM

The interest rate risk for the debt of the Republic of Cyprus is limited, despite the continuous rise in the base interest rates of the Central Banks, due to the loan from the European Stability Mechanism (ESM) the Finance Ministry’s Public Debt Management Office (PDMO) said.

The loan, granted by the European Stability Mechanism (ESM) in 2013 as part of the Cyprus assistance programme, amounting to €6.3 billion, constitutes 90% of the Republic's floating interest rate debt. The debt of the Republic in floating interest rate amounted to 30% of the total debt.

According to the PDMO’s 2022 report, taking into consideration that the vast majority of floating rate debt is related to ESM loans which are indexed at low interest rates and the fact that the interest rate of the loan in question recorded minor increases in 2022, indicating that changes in the market interest rates do not reflect the same change on ESM interest rates, the interest rate risk is expected to be limited.

The PDMO notes that, on the floating rate debt, “and taking into consideration that the majority of the said debt concerns ESM loans with the first repayment to be executed in 2025, minor changes are expected to be recorded”.

In 2021 and 2022, the debt to GDP ratio recorded a significant reduction of 12.5% and 14.6 % respectively “due to the strong nominal GDP growth and the improved fiscal position of the General Government translated to a sharp decline in the government debt to GDP ratio.”

The net debt to GDP ratio, excluding cash reserves of the order of €2.596 million, was estimated at around 77% as at the end of 2022.

Moreover, at the end of 2022, the weighted average maturity stood at 7.3 years for the total debt and 7.9 years for the marketable debt “and performs very well compared to the EU levels, thereby reducing the refinancing risk”, it said.

Liquid assets covering financing needs until 2024

According to the PDMO, by the end of 2022 the cash buffer reached € 2.6 billion, mainly due to the repayment of a domestic bond of the order of €610 million, issued to ex- Cyprus Cooperative Bank (CCB).

“It is worth mentioning that this level of cash covers the financing needs of the year 2023 and a significant part of the financing needs of the year 2024”, it added.

It is recalled that due to the early repayment of Cyprus’ loan to the IMF in February 2020, the exchange rate risk for the debt of the Republic has been eliminated.