Conversion to Euro – May 2007
THE CYPRUS pound will be locked into its final exchange rate against the euro by May or June next year, ahead of the government’s target to join the eurozone on January 1, 2008, the Central Bank and Finance Ministry said yesterday.
Following the successful ecu-peg policy, the Cyprus pound was pegged to the euro on 1 January 1999, the first day of the introduction of the new European currency. The central parity rate was maintained at CY£1 =€1,7086. Initially, the fluctuation margins were also maintained at ±2,25%.
However on 1 January 2001, however, wider bands of ±15% were introduced in order to enable the Central Bank to absorb any shocks from potential destabilising capital movements and to deter speculative capital flows, in the context of capital account liberalisation. At the same time, the narrower bands of ±2,25% were temporarily maintained in order to anchor prices and expectations.
By some quite crude maths that could be GBP/CYP at 0.75 at the bottom. Those paying for a property in stage payments might like to note the downside potential.
Sentiment is that it is still 50/50 on whether or not there will be a devaluation, but perhaps the best thing is to keep as little capital in CY£ as possible, just in case!
Given the above, what happens if you have a mortgage here in Cyprus in Cyprus Pounds and the Cyprus Government devalues and then goes into the euro?
It would mean that you could be a winner! It all depends on what the source of the money that you use for the mortgage repayments is. If the Cyprus Pound is devalued, it means that other currencies will buy more CYP than before, so if you are using a sterling UK income for repayment for instance, the amount of Sterling that you will need to change to make the same CYP payment will go down.
Put another way, if you have a mortgage in CYP that is equivalent to say GBP50,000 and the CYP devalues 10%, then you would only have to pay GBP45,000 to clear it.
If you have a CYP50,000 mortgage at the current exchange rate of CYP1 = €1.74333, then the euro equivalent of the loan right now is €87,166. If the CYP devalues against the Euro by 10% then the exchange rate would be CYP = €1.56899, which means that a CYP50,000 loan would then equal €78,449. A 105 reduction.
For a more detailed account please refer to Price Waterhouse Coopers booklet below.
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