Dealing with Private Debt and NPLs: A Comprehensive Blueprint

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By Renos Ioannides*

The excessive private debt burden of households and businesses and the stubbornly high levels of non-performing loans are on top of everybody’s agenda these days, as they should be in light of their strategic importance for the country.

2018 will be, one way or the other, a milestone year for local banks on both fronts. Despite the inroads made to date, the situation is not self-healing and far-reaching decisions ought to be taken. If they are not, the long-term stability of the financial system may be put at risk and the impressive rebound of our economy may be jeopardised.

Solutions to the problems cannot be developed in isolation. A multi-disciplinary approach is required, which must be finely balanced so as not to jeopardise both the current and the potential state of the economy, public finances, the stability of the local financial system and the well-being of the people.

Debt levels must be managed to match viable borrowers’ debt servicing capacity; this is the only way of converting unsustainable debt to sustainability. At the same time, those borrowers who are exploiting the prevailing system’s weaknesses at the expense of their fellow citizens must be exposed and efficienty dealt with. A much needed revamp of the facilitating framework, the insolvency, enforcement and judicial regimes in particular, is therefore imperative.

Above all, what is required is a strategic view which shall be led and driven by a governing body of experts. This governing body should be fully accountable for progress and results via disciplined, pre-defined milestones and timelines.
A comprehensive blueprint (“business plan”) must be drawn up, instead of a piecemeal approach, with specific pre-agreed milestones (short-term, medium-term and long-term objectives, detailed output deliverables, pre-defined timelines and the set-up of expert teams accountable for each output deliverable).

A specimen blueprint is provided below, broken into distinct but inter-related step components, by way of indication of the multi-disciplinary approach that ought to be followed.

Such high-level blueprints can act as the basis for further technical analysis and expert discussions on each of the constituent components to arrive at a country-level resolution policy.

The specimen blueprint comes in two parts, the Core Key Portfolio Management Solutions on the one hand and the Peripheral Framework Facilitators on the other.

The two parts are intrinsically inter-linked and should, as a result, run in parallel.

 

(*) Renos Ioannides is a financial analyst [email protected]

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