By Stelios Orphanides
Cypriot banks may face additional challenges in reducing their stock of non-performing loans once the European Central Bank (ECB) decides to cut back its expanded asset-purchase programme, economists said.
The economists commented in response to a Reuters report dated March 15, which said that banks in the European Union could face a non-performing loans problem totalling €1 trillion in case the ECB reduced its bond-buying programme of currently €80bn a month by one quarter. The Reuters report, which cited an “internal EU document,” said that the ECB is likely to do so next month.
“Monetary transmission is complex, but such ECB action would likely increase risks for banks with non-performing loans and real estate on balance sheets like ours,” economist Marios Zachariadis, who teaches at the University of Cyprus, said.
Cypriot banks, which struggle to reduce their almost €24bn, or roughly half of their loan portfolio, in non-performing loans, have been swapping debt for other assets in recent years, including real estate, as part of loan restructuring agreements. Bank of Cyprus, the island’s largest lender, saw its real estate portfolio rise to €1.4bn last year.
While Cyprus does not at present participate in the ECB asset-purchasing programme, as its sovereign rating is still below investment grade and completed its adjustment programme a year ago, it has already benefited indirectly, as evidenced in the downward trend in the government’s borrowing cost. Bank rates have also fallen to record lows over the past two years, after the ECB reduced its rates to historic lows, part of its policy to fight deflation and stimulate the euro area’s anaemic growth.
In February, the annual inflation rate in the single currency bloc accelerated to 2 per cent, from 1.8 per cent in January and -0.2 per cent in February 2016. The ECB’s main task is to safeguard price stability in the euro area by targeting an inflation rate of close to, but below, 2 per cent in the medium term.
Winding down the asset-purchase programme, as part of which the ECB accumulated already €1.4 trillion in assets, including €248m in Cypriot securities, may result to an “important” additional burden for borrowers servicing their debt, economist Alexander Michaelides, who teaches at the Imperial College in London, said. “But if no one is paying their loans, then not a problem at all”.
But with or without the ECB winding down its money printing, Cypriot banks would sooner or later would have to deal with the consequences of their mountain of non-performing loans.
By November, lenders in Cyprus had only restructured roughly 57 per cent, or €13.6bn, of their total non-performing loans, with only three quarters of those being regularly serviced.
“Of these €10,2 billion, or 42 per cent of the total, are restructured facilities, most of which we expect will be reclassified as performing once they meet the regulatory requirement,” Ioannis Tirkides, Bank of Cyprus’s economic research manager, said in an interview.
“We are by no means at the end of the road but a lot has been done already and the banking sector is steadily returning to strength,” Tirkides said. “To get to the end of the road we need to persevere with restructuring workouts and understand that there are no other effective alternatives”.
Still, the problem with non-performing loans may get even more complicated in a couple of years, when banks will ask guarantors of terminated loans to pay them, financial ombudsman Pavlos Ioannou said on Saturday. This would affect the ability of the guarantors to pay their own loans, he added.
As Cypriot banks are likely to terminate roughly half of their non-performing loans within the next two years, this would imply significant write offs, economist Marios Clerides said on Monday.
This, according to Tirkides, would not have a significant impact on the banks as they already booked a total of €9.6bn in provisions by November.