New household debt crisis looms

Economists fear that hiking inflation now being fed by the war in Ukraine could trigger another debt crisis on the island as households struggle to pay off their loans.

According to CyStat data, the inflation rate in February reached 6.6%, while experts feel the ongoing conflict in Eastern Europe could push up prices of essential goods such as energy and food products. According to the data, consumers have seen EUR 66 knocked off every EUR 1,000 of income, while wages remain at the same levels.

In comments to news site Stockwatch, economist Stelios Platis noted that rising inflation coupled with Cyprus having one of the highest levels of private debt in the EU could lead to a new debt crisis.

Central Bank data shows the ratio of domestic privatesector exposures to GDP was 92% in September 2021, one of the highest ratios across Europe, but down from 192% at the end of 2017.

“The nature of inflation today and the relevant structural causes that have pushed prices up seem to advocate the maintenance of strong inflationary pressures for the rest of 2022. This is expected to exert significant pressures on lowerincome households, as they must spend much more on electricity, fuel, heating and food than their income,” said Platis.

He added that inflation puts pressure on households’ ability to service their existing loans.

Economist Michalis Florentiades argues a new private debt crisis is a remote scenario, however, noting that “the pressures of higher inflation and a possible slowdown in

growth may affect the ability of some households and businesses to move forward”.

Florentiades said banks must have the necessary funds to deal with such a possibility.

According to the economist, borrowers benefit from the extremely low interest rate policy of the European Central Bank. He notes that inflation, combined with very low interest rates, has traditionally benefited those in debt while hurting savers and deposits.

Phileleftheros daily’s own calculations estimate a family of four needs just under EUR 2,000 to make ends meet each month.

Its calculations considered that a minimum of EUR 750 will be going either towards a housing loan or rent, another EUR 400 to 800 for electricity bills every couple of months, and EUR 400 a month for shopping.

The report calculates that a family of four will need between EUR 100 and 160 a month for fuel, while another EUR 100 will be going towards water and internet bills.

Summing up, a family of four will need a minimum of EUR 1,800 to meet their basic needs.