Prominent economist Giannis Telonis, in a revealing statement to Brief, said that while Cypriot banks have been relieved of the burden of non-performing loans (NPLs), transferring these loans to loan management companies (servicers) has not resolved the problem for the broader economy.

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As he explained, “the loans may have left the banks, but they remain within the economy as the property of another entity,” adding that “borrowers are still accountable for the amounts owed.”

Telonis noted that private sector debt in Cyprus remains excessively high compared to the eurozone average. Those with non-performing loans, he added, are unable to access new credit until their existing obligations are settled.

According to the economist, the implications for the economy are significant: “Banks are subject to strict supervision regarding the quality of their loan portfolios. Businesses and individuals with bad loans cannot be financed. This means a substantial part of the banking system’s liquidity cannot be directed toward productive lending,” he explained.

“The only available outlet for banks,” he continued, “is to deposit funds with the European Central Bank. Consequently, the economy is deprived of capital for investment — the very oxygen and driving force of growth.”

Telonis pointed to a second negative consequence: the shrinking base of potential borrowers. “Banks, as profit-driven institutions, aim to maximise returns. Since part of their deposits will inevitably yield low returns at the ECB, they seek higher returns from the funds they do lend — meaning higher lending rates,” he explained.

“This results in a more expensive cost of financing for investments, and in some cases, even in the abandonment of projects when borrowing costs exceed viability thresholds, thereby constraining growth,” Telonis warned.

The economist stressed that transferring bad loans to loan acquisition and management companies may have rescued banks, but “did not solve the problem of the real economy, which continues to face liquidity constraints, high financing costs, and barriers to growth.”

“The management of non-performing loans is a critical issue for the stability of the financial system and for the protection of society,” Telonis emphasized.

He acknowledged that loan servicers play an important role in restructuring and reducing NPLs, but stressed that their operations “must be conducted with full transparency and accountability.”

“It is not enough to simply liquidate or sell loans,” he added. “What is needed is a combination of measures that ensures both business sustainability and citizen protection.”

Telonis underscored that banks and loan management companies must cooperate closely with borrowers, offering restructuring solutions aligned with the real financial capabilities of households and businesses.

He concluded by calling on the state to establish a clear regulatory and supervisory framework to prevent abuses and excessive pressure on borrowers. “The proper and responsible management of non-performing loans is not just a matter of economic policy — it is a matter of social justice,” Telonis stated.