The day after Parliament approved a legislative package on the management of non-performing loans finds political parties highlighting the provisions they supported as a benefit for borrowers. However, significant uncertainty remains over what will ultimately apply in practice and what impact the broad legislative intervention may have on Cyprus’s financial system.
Political gains but legal uncertainty
Political forces and MPs are approaching the Easter period able to point to specific measures they supported as favourable for borrowers.
At the same time, questions remain about which provisions will ultimately stand, what can be implemented in practice and how the reforms will affect the management of the country’s large stock of non-performing private debt.
Credit rating agencies and international organisations continue to place significant weight on the level of non-performing loans in Cyprus.
Sources from the banking sector told Politis that several legislative proposals approved by Parliament may violate the Constitution, particularly the principle of freedom of contract.
Among the contested provisions are the introduction of a cap on accumulated interest, limiting the total amount owed including interest to twice the original debt, the deletion of any remaining debt after the foreclosure of a mortgaged property, and limits on the liability of guarantors.
Another measure viewed as unconstitutional is a proposal by the Ecologists’ Movement – Citizens’ Cooperation to maintain the reserve sale price at 50% after the first auction.
The Director of the Press Office of the President of the Republic, Victor Papadopoulos, said on Tuesday on CyBC that President Nikos Christodoulides will act based on the opinion of the Legal Service, which will examine the constitutionality of the proposals approved by Parliament.
AKEL Secretary General Stefanos Stefanou said the party’s proposals on foreclosures were reasonable and grounded in reality, adding that they contain no unconstitutional elements and calling on the President not to refer them back to Parliament.
The issue of guarantors
A separate chapter concerns guarantors.
Today, banks generally do not require personal guarantees from third parties when granting loans. In the past, however, it was standard practice for loan applications to include guarantors, often several, to increase the likelihood of approval.
In many cases, guarantors did not fully understand the risks they were assuming. As a result, there are currently around 70,000 guarantors linked to non-performing loans who carry a significant financial burden.
A legislative proposal submitted by Averof Neophytou on behalf of the Democratic Rally parliamentary group, together with MPs Marinos Sizopoulos and Ilias Myrianthous (EDEK), Alekos Tryfonides (DIKO), Andreas Themistocleous (independent), Kostis Efstathiou (independent) and Alexandra Attalides (Volt), provides that in cases where a property is foreclosed or recovered by the mortgage lender, the liability of guarantors will be limited.
Under the provision, the guarantor’s obligation cannot exceed the amount of the original loan, minus either the amount collected through auction or the value for which the property was repossessed by the lender.
The regulation would not apply in cases where the guarantor is also the principal debtor. It effectively ends guarantor liability once a case reaches auction.
The constitutional issue arises because the law alters the terms of existing loan contracts. Nevertheless, observers say it would not be surprising if the regulation ultimately enters into force.
Special courts and foreclosure suspensions
Another proposal, submitted by DIKO, concerns the establishment of special courts to handle financial cases, with the aim of resolving such disputes within 12 months.
Although this proposal may not raise constitutional concerns, questions remain about whether it can be implemented in practice.
Two main issues arise. First, the proposal allows the Supreme Court to issue guidance enabling the president of a district court to appoint specialised judges to handle financial disputes. However, the Supreme Court is not obliged to do so.
Second, the introduction of timelines, even indirectly, for the adjudication of such cases is viewed negatively by members of the judiciary.
Banking executives told Politis that if specialised courts were able to resolve foreclosure cases within a year, the issue of suspending foreclosure proceedings for various reasons would not pose a major problem.
Currently, however, the courts operate with significant delays. District courts in Nicosia and Famagusta are hearing cases filed in 2020, in Larnaca and Limassol cases from 2018 and 2019, and in Paphos cases dating back to 2017 and 2018.
Broader implications for the financial system
Banking sources also warn that legal uncertainty surrounding the recovery of non-performing loans will eventually be reflected in the cost of borrowing.
Higher risk for lenders could translate into higher interest rates for borrowers.
Bank of Cyprus Chief Executive Officer Panicos Nicolaou had previously made similar remarks during the presentation of the bank’s 2025 results.
Looking further ahead, banking sources warn that if a major crisis again forces banks to manage large volumes of non-performing loans through sales to specialised investment firms, there may be little investor interest.
Such a development, they say, would be highly damaging for the country.
Experience from the European banking system during the eurozone crisis of 2012–2013 showed that the most effective way to clean bank balance sheets of non-performing loans was through their sale to specialised entities.
For this reason, European authorities are promoting legislation to create a large secondary market for non-performing loans across the EU.
All parties involved, including the government, political parties, banks and credit-acquiring companies, emphasise the need for solutions for genuinely vulnerable borrowers and guarantors trapped in debts they cannot repay.
However, it remains uncertain whether the new legislative interventions will ultimately achieve the intended outcome.