Cyprus: Technical Assistance Report-Debt and Cash Management

IMF Staff Country Reports, January 5, 2022

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In tandem with Eurozone financial market developments and the prevalence of negative interest rates in 2020, Cypriot banks passed through the costs of their liquidity to their customers, reducing the attractiveness of placing PDMO cash surpluses in domestic bank deposits.
Suitable investment alternatives to central bank deposits for the PDMO’s liquidity buffer are scarce, given negative yields on other Eurozone sovereign and agency issues.
This situation is shared by the PDMO with almost all of its Eurozone peers.
While this is likely to persist in the short term, it should not preclude establishing a framework governing the PDMO’s investment policy or a suitable set of guidelines.

Negative interest rates in 2020 led Cypriot banks to pass liquidity costs to customers, discouraging use of domestic bank deposits for PDMO cash surpluses.
Negative yields on other Eurozone sovereign and agency issues limit suitable investment alternatives to central bank deposits for the PDMO’s liquidity buffer.
The challenge of scarce investment options is common among Eurozone peer debt management offices.

Establish a formal framework governing the PDMO’s investment policy despite the short-term persistence of negative yields.
Develop a suitable set of investment policy guidelines tailored to the PDMO’s liquidity buffer constraints and the Eurozone interest-rate environment.
Maintain awareness of Eurozone peer practices given the shared nature of the challenge.