articles | 29 February 2016

Central Bank Governor optimistic about economy and banking sector

Central Bank of Cyprus and European Central Bank (ECB) Board member Chrystalla Georgadji has said she is optimistic about the course of both the Cypriot economy and the banking system, as the island edges closer to its exit from its three-year economic adjustment programme, which expires in March 2016.

Geoghadji said the first signs of a reduction in the high stock of non-performing loans have started to appear and added that the improvement of the marcroeconomic environment which in turn will contribute to a reduction in the non-performing loans constitutes an essential prerequisite.

After the financial metl-down of 2013, the Cypriot government concluded in March 2013 with the EU and the IMF a €10 billion bailout to avert the collapse of its oversized banking sector.

The programme featured a bail-in of deposits over €100,000 to recapitalise the island`s largest lender and the second largest bank went into resolution.

The haircut was accompanied with capital controls that hampered the economic activity.

Georghadji said the economy consistently out-performed the projections of Cyprus’ lenders, registering growth of 1.6% of the GDP in 2015, to be followed by growth which may exceed 2% in the current year.

“The recent economic developments were better than those anticipated by our international lenders, particularly concerning the growth rate of 1.6% in the previous year and an expected growth rate above 2% in 2016,” she told CNA.

Georgadji said the growth rate increase will have a positive impact both on the labour market as well as on the reduction of NPLs, which in turn will benefit economic activity, as the borrowers are relieved and consumption is strengthened, improving the banks’ balance sheet which will have bigger incentives to provide new credit and finance the economy.

“If positive performance were to continue, collective effort should continue as well to consolidate the economy and our banking system. I am confident that with responsible actions by everybody we could achieve even better results,” she said.

On the banking sector, Georgadji said that following the events of 2013 Cyprus’ major banking institutions have passed the 2014 EU wide stress test and enjoy today “a strong capital” base, adding that the banks have increased the coverage ratio without having to raise capital, whereas the Cooperative sector received additional state aid of €175 million, after the capital injection of €1.5 billion in 2014 from bailout funds.

“The level of NPLs remains the biggest problem facing the banks,” Georgadji pointed out, adding that apart from the creation of internal restructuring units in the banks, the improvement of the macroeconomic environment, which remains as an essential prerequisite, is expected to gradually ease the problem.

She noted however that despite the fact the NPL ratio remains at high levels, “signs for the improvement of the situation through restructuring has begun to emerge.”

Georgadji pointed out that loan restructuring reached €4.7 billion by November 2015, adding that restructuring started to pick up pace as both lenders and borrowers familiarise themselves with the relevant procedures and the new insolvency framework.

The Central Bank Governor pointed out the CBC has set new targets to the Cypriot commercial banks for the first quarter of 2016, amounting to €1 billion in proposed and viable restructuring solutions and an additional €1 billion in agreed restructuring.

She dismissed suggestions that the banks are operating as asset management companies rather than banks, pointing out that in 2015 banks provided new credit amounting to €1.7 billion, of which €1.2 billion in corporate loans and €0.5 billion to households “which is a respectable amount considering the size of Cyprus.”

“However, we should keep in mind that many households and businesses are over-indebted and are trying to find ways of deleveraging (to repay their loans) rather than obtain additional new loans,” Georgadji stressed.

Replying to a comment, she reiterated that preliminary studies by the Central Bank have shown that 10% - to 20% of the household NPL stock is attributed to strategic defaulters that is borrowers who opted not to repay their loans although they have the capacity to do so.

“There are signs that a percentage of households that do not pay their loans while they potentially could do so,” she said, without elaborating further on the matter as the study carried by the CBC using macroeconomic indicators and econometric models is still in progress.

She did nonetheless point out that following the approval of the insolvency framework and the law on foreclosures in April 2015 by the Parliament, “strategic defaulters bear the risk of facing legal measures.”

Georgadji said however that the phenomenon of strategic defaulters was particularly evident in 2013 and 2014, adding that it is moving on a downward trajectory.

“We should remain focused on the target (of NPL reduction) but the results of our efforts will take time,” she told CNA.

CBC structure to change by end-2016

Georgadji said the CBC Board approved a study carried out by Roland Berger consultancy firm focusing on three pillars: the CBC organic structure, the internal processes and standardised practices, as well as issues of human resources and governance.

The Board approved the CBC’s new structure which should be implemented by the end of 2016, she said, noting that the CBC received technical assistance by the IMF which submitted its own proposals that are currently being evaluated by the CBC Board.

The CBC head said she is in contact with Finance Minister Harris Georgiades who at some stage should submit to the Parliament amendments to the CBC’s legal framework.

Source: Famagusta Gazette

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