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Cyprus Economy Faces Pressure From Geopolitical Risk, Inflation And Energy Costs

Businesses In Trade, Tourism And Real Estate Face The Greatest Risks

Businesses in trade, tourism and real estate, together with lower-income households, remain the most exposed parts of the Cypriot economy as geopolitical tensions, inflationary pressures and elevated energy prices continue to weigh on the outlook.

In its latest Financial Stability Report, the Central Bank of Cyprus said stronger corporate and household balance sheets and continued lending growth have improved resilience, but companies in these sectors remain particularly vulnerable to weaker external demand, higher energy costs and any further escalation of tensions in the Middle East.

Lending Continues To Grow

Businesses in the most exposed sectors continue to carry relatively high debt levels and limited cash reserves, making them more sensitive to economic shocks. By contrast, firms in information and communication, professional and technical services, as well as transportation and storage, appear better positioned thanks to lower leverage and stronger liquidity.

Financing conditions remained supportive throughout 2025, with new business lending reaching a record €3 billion and household lending totaling €1.8 billion. Banks also maintained strict lending standards, helping contain the risk of new non-performing loans.

Lower-Income Households Remain More Vulnerable

A resilient labour market supported household incomes during 2025, but gains were uneven. Income rose by 3.9% for lower-income households, compared with 7.1% for higher-income groups, leaving more vulnerable families less able to absorb future shocks.

The central bank also warned that renewed inflation or higher borrowing costs would place additional pressure on heavily indebted households and those with limited savings.

Deposits Continue To Strengthen Resilience

Corporate deposits increased by 17.5% in 2025, the fastest annual growth since 2018, while household deposits rose by 6.2%, strengthening liquidity across the private sector.

Although the direct impact of U.S. trade policy on Cyprus is expected to remain limited, the report said indirect effects, including higher energy prices, supply-chain disruptions, weaker external demand and softer investor sentiment, could weigh on economic activity and financial stability.

How Venture Capital Can Help Create Startup Fraud

Fraud Is Often A System Problem, Not Just A Founder Problem

A new report from Imperial College London and Emlyon Business School examines how venture capital-backed founders commit fraud and how investors can unintentionally create the conditions for it.

Published in June, the study draws on cases pursued by the U.S. Securities and Exchange Commission and the Department of Justice between 2000 and 2023. Its central conclusion is that fraud is not solely a founder problem, but can also stem from the incentives, expectations and governance structures surrounding startups.

High Expectations, Higher Risks

Several high-profile cases, including Charlie Javice of Frank, Gökçe Güven of Kalder, Do Kwon of Terraform Labs, and Alexander and Valerie Lau Beckman of GameOn, have intensified debate over where ambitious fundraising ends and fraud begins.

“Fraud is much more common and normalized in the startup world than we are ready to admit and accept,” Tim Weiss, one of the report’s authors, told TechCrunch.

Weiss also cited a University of Toronto study covering 654 fraud cases involving U.S. venture-backed startups between 2000 and 2023. Although fraud remained relatively rare, venture-backed companies were more likely to face fraud charges than non-VC-backed firms, while startups launched during overheated investment markets were 19% more likely to commit fraud later.

According to Weiss, pressure from investors and boards to deliver rapid growth can encourage misconduct, particularly in fast-moving sectors such as artificial intelligence.

The Three Stages Of “Façading”

The report, co-authored by Weiss and Nevena Radoynovska, identifies a three-stage process the authors call “façading.”

Surface façading begins with exaggerated claims about a company’s progress or traction. Reinforced façading involves creating evidence to support those claims, including fabricated contracts, invoices or revenue records. Deep façading extends the deception to the product itself through fake demonstrations and staged proof points.

Rather than beginning with a single act of fraud, the report argues that misconduct often develops gradually as founders attempt to sustain increasingly unrealistic expectations.

Investors Also Shape The Conditions For Fraud

One of the report’s central arguments is that investors are not always passive victims of founder misconduct. In some cases, they help create the conditions in which fraud becomes more likely.

According to the researchers, venture capital can “co-create fraud” by continuing to back founders who have previously been accused of misconduct, signaling that such behavior carries few long-term consequences. A separate University of Toronto study found little evidence that founders accused of fraud struggle to raise funding for new ventures, even when earlier cases attracted significant media attention.

“New investors and the broader VC market do not penalize past misconduct,” the report said, linking that pattern to Silicon Valley’s long-standing tolerance for failure.

Governance Plays A Critical Role

The University of Toronto study also identified governance as a key factor. Startups with founder-controlled boards were twice as likely to commit fraud as companies with investor-controlled or shared-control boards.

It also found that venture-backed companies going public were more likely to face securities class-action lawsuits within two years than private equity-backed firms. As startups remain private for longer while raising larger funding rounds, Weiss argues that governance has not kept pace with their growing scale.

“Founders do not have a professional body or association that could govern or enforce rules of entrepreneurial and investor conduct on how to be a good founder and what reasonable growth expectations are,” he said.

Calls For Stronger Oversight

Weiss argues that regulators should take a more proactive approach by introducing routine investigations and formal audits once startups reach significant funding thresholds, rather than waiting for whistleblower complaints or investor lawsuits.

The report also calls on investors to accept greater responsibility when aggressive growth targets contribute to governance failures. According to the authors, stronger oversight by both regulators and investors would help reduce the conditions in which fraud can develop.

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