The European Central Bank’s ongoing efforts to deleverage its balance sheet have led to a significant reduction in the value of Cypriot sovereign bonds held by the Eurosystem. As of mid-August 2024, these bonds, which are part of the Public Sector Purchases Programme (PSPP) and the Pandemic Emergency Purchases Programme (PEPP), have declined to €6.38 billion, representing 28% of Cyprus’ public debt. This reduction aligns with the ECB’s broader strategy to curb inflation by reducing market liquidity, including ending reinvestments in its Asset Purchase Programme (APP).

The Eurosystem’s bond holdings in Cyprus are split between two key programmes: the Public Sector Purchases Programme (PSPP) and the Pandemic Emergency Purchases Programme (PEPP). The PSPP portfolio has seen a reduction to €3.99 billion, driven by the redemption of maturing bonds worth €304 million. This portfolio’s weighted average maturity now stands at 7.62 years. Meanwhile, the value of Cypriot bonds held under the PEPP has also declined to €2.39 billion, with cumulative net purchases dropping by €76 million in July alone.

The ECB’s approach is part of its restrictive monetary policy cycle, aimed at curbing inflation across the Eurozone. In a decisive move in August 2023, the ECB announced the discontinuation of reinvestments under the wider Asset Purchase Programme (APP), of which the PSPP is a part, from July 2023 onwards. This decision is a clear signal of the ECB’s intent to reduce liquidity in the market, a strategy that complements its broader efforts to tighten monetary conditions and manage inflationary pressures.

The implications of this policy for Cyprus are significant. With Cypriot bonds held by the Eurosystem now accounting for 28% of the country’s public debt, the reduction in ECB support could exert upward pressure on Cyprus’s borrowing costs. This scenario may necessitate more robust fiscal policies from the Cypriot government to maintain financial stability.

Looking ahead, the ECB has outlined its plans to continue reducing the PEPP portfolio by €7.5 billion per month on average during the second half of 2024, with a complete discontinuation of reinvestments by the end of the year. This signals a continued tightening of monetary policy that will likely impact not just Cyprus but all Eurozone economies.