“Clearly, there is a strong growth, but this has not led to the decrease in non-performing loans one would expect which certainly is reflected in borrowers’ bad discipline,” CNA cited the IMF’s resident representative in Cyprus Vincenzo Guzzo as saying. His views were echoed by George Syrichas, one of the Central Bank of Cyprus’s executive directors, who said that the drop by €6bn in bad loans since 2014 to below €22bn, was still now enough as the economy grows.

Guzzo, who was speaking at an event in Nicosia on Thursday, said that the practice of strategic default is related to two factors; the long and ineffective procedures required to resolve commercial disputes in Cypriot courts and the notion that there is a protective blanket for primary homes.

To enforce a contract takes up to 1,200 days on the island Guzzo said, citing World Bank data. Foreclosing a collateral asset takes 10 years, the longest period in the European Union.

Cyprus modernised its foreclosure and insolvency framework as part of its cash-for-reforms agreement with the IMF, the European Commission and the European Central bank, completed in March last year. Still, the unpopular foreclosure law has been rendered toothless and the Central Bank of Cyprus has repeatedly asked for it to be improved. The participation of Cypriot politicians in demonstrations against foreclosures and auctions shows that there is little hope chance of this happening.

“The weak (contract) enforcement keeps the bad repayment discipline as the prevailing strategy for many borrowers,” he added.

Non-performing loans in the Cypriot banking system, which almost five years ago experienced its worse crisis, account for 45% of total loans and are considered the most significant risk for Cyprus’s economic recovery.

Bank of Cyprus, the island’s largest bank, which was recapitalised with depositors’ funds in 2013, had to increase its provisions for loan impairments in August by €500 million, which cut into its capital buffers. Hellenic Bank, the island’s third largest lender, also had to announce €50m in additional provisions this year.

The IMF official said that Cyprus requires an ambitious strategy to both reduce non-performing loans and the high indebtedness of the private sector, which stood at 265% of economic output at the first quarter of the year.

Central banker Syrichas said that a number of initiatives to reduce the non-performing loans in the system is being discussed without providing details, according to the CNA.

The Cypriot analyst of the UK’s bank Standard Chartered Marios Maratheftis said that data on consumption confirm the assumption that borrowers are not paying back their debt, also according to the CNA. This practice he said, changed after 2013.

According to Cystat said, private consumption dropped 0.7% to €12.6bn in 2016 compared to 2012 against a drop of nominal gross domestic product (GDP) of 1.7% in the same period.

“If Cypriot stopped shopping, they could repay their debt,” he was cited as saying.

While the island’s recovery reflected in the quick lifting of capital controls, merely two years after their introduction in 2013, whereas it took Iceland nine years to do so, the Eastern Mediterranean island needs to reconsider it its economic model founded on consumption, real estate and capital inflows from abroad reflected in a current account deficit which in 2008 widened to 13% of GDP.

Innovation, he said, will help the island’s transit from a crisis management model to sustainable growth.

Source: Cyprus Mail