articles | 07 June 2018

Cyprus in race against time to reduce NPLs

The Finance Ministry and the Central Bank of Cyprus recently presented political parties with proposals to resolve the non-performing loans problem by improving the current legislative framework as banks are running out of time, participants said.

“The European Central Bank (ECB) already applies stricter rules concerning non-performing loans,” said Andreas Charalambous, a senior finance ministry official who chaired a joint meeting with representatives of political parties and other stakeholders, including the Central Bank of Cyprus.

As the ECB expects banks to set more ambitious targets with respect to handling delinquent loans, and the European Banking Authority (EBA) is expected to publish the results of new EU-wide stress test in November, “it is important (for Cypriot banks) to successfully pass it and avoid the need for new capital,” Charalambous said in a telephone interview on Thursday. 

Cypriot lenders, which are still struggling with a mountain of around €22bn in non-performing loans, making up almost half of their total loan portfolio, need to either reduce their stock of delinquent loans, or convince that a stricter legislative framework will help them collect their loans sooner compared to what it would take with a less effective framework, he said.

“It’s an imperative for an improvement in the banks’ performance via mainly restructurings or other means, and the legislative measures to be passed as soon as possible,” Charalambous said.

He said that the government requested that political parties submit their proposals by next week ahead of a legal vetting, before the cabinet decides to send them to the parliament.

Other participants at the meeting criticised the ministry for not presenting proposals that will govern the government’s scheme to aid vulnerable borrowers with Estia, a scheme which will subsidise the monthly instalments paid by borrowers against their restructured loans.

“There were positive comments but also negative reactions as it was expected, which was justified, as (participants) expected to be informed about Estia,” economist Stavros Agrotis said in a telephone interview on Thursday after the meeting.

Agrotis, who represented Disy, the only party supporting the government of Nicos Anastasiades, said that “what matters is to launch the process of improving the legal framework to tackle strategic defaulters and protecting vulnerable borrowers with Estia.

The finance ministry said in its stability programme 2018-2021, a document outlining its economic and fiscal policy framework submitted to the European Commission two months ago, that it plans to reduce non-performing loans by one third of the current stock accounting for €22bn with a three-pronged strategy. The strategy provides for the sale of the Cyprus Cooperative Bank operations, into which it injected more than €4bn over the past four years, the creation of Estia, a body that will assist vulnerable groups repay their loans, and a stricter legislative framework governing foreclosures and insolvency. 

On Thursday, the International Monetary Fund which participated in Cyprus’ bailout five years ago, criticised the social and political acceptance of strategic default which undermined financial intermediation. While as part of Cyprus’ bailout terms, the parliament modernised legislation on foreclosures in 2014 and insolvency the following year, the amendments were considered toothless as they extended excessive protection to borrowers not servicing their loans.

“The problem is unlikely to be tackled soon and will take years,” said Agrotis, who is also the chairman of the state-owned Housing Finance Corporation. He warned of the impact of inaction. This, he said, “would make it necessary for the banks to find more equity, unless we make progress and continue to make progress”.

In 2013, depositors lost €8bn when Bank of Cyprus was forced to convert almost half of its uninsured deposits into equity while those of Cyprus Popular Bank, also known as Laiki, lost all their deposits in excess of €100,000 after the bank failed to find an investor willing to bail it out once more, after the Cypriot government recapitalised it with €1.8bn the year before.

Marinos Gialeli, who represented Diko in the meeting, said in a telephone interview that officials from both the finance ministry and the Central Bank of Cyprus said that banks need to quickly remove non-performing loans from their balance sheets.

“The current restructuring(-based) scheme is over,” said Gialeli, who is also in charge of the provident fund of hotel workers, and added that the finance ministry and the central bank “believe that unless we immediately find a solution, the consequences will be catastrophic”.

Agrotis said that the ministry’s proposals address gaps in foreclosure legislation, improves the law on the sale of loans, introduces legislation on the securitisation of loans, and fixes areas in the law affecting the issue of title deeds from indebted developers.

He and Gialeli said that the finance ministry revealed that the amount of non-performing housing and retail corporate loans which could benefit from Estia are estimated at €3bn.

According to the Cyprus News Agency (CNA), the representative of Akel Charis Polycarpou expressed his regret over the government’s failure to present a comprehensive plan which instead opted to present proposals mainly focused on facilitating foreclosures, which the communist party generally opposes.

Source: Cyprus Mail

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