Optimism that NPL meeting may put pressure on strategic defaulters

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By Stelios Orphanides

President Nicos Anastasiades’s meeting with party leaders at the presidential palace on Thursday to discuss ways to tackle non-performing loans may have not produced concrete results, but it showed that politicians are beginning to realise the urgency of going after strategic defaulters, a source said.

“There was no sudden change of attitude as they know that there is a problem,” a source familiar with Thursday’s talks who spoke on condition of anonymity said in an interview.

Thursday’s meeting, proposed by Diko chairman and failed presidential candidate Nicholas Papadopoulos proposing loan writedowns and guarantor relief, aimed at setting out a ‘national policy on non-performing loans and this is what was achieved’, the source added.

Delinquent loans in the Cypriot banking system amounted to €20 billion in December according to the central bank, and make up more than two fifths of total loans. The modernisation of the foreclosure and insolvency framework in 2014 and 2015, a requirement under Cyprus’s bailout terms, proved ineffective in helping to tackle strategic defaults – there were cases of borrowers able to repay their loans but opting not to do so. The Central Bank of Cyprus requested an overhaul of the framework repeatedly.

While no decisions were taken on concrete action, there was a consensus that addressing strategic defaults was a priority, alomg with setting up a ‘technocratic committee’ to prepare proposals to establish a body that will protect households willing to repay their mortgages but unable to do so, he added.

“The Central Bank of Cyprus already prepared a report highlighting weaknesses in the legislative framework on foreclosures and the ministry of finance is already preparing draft laws to address them based on that,” the source said.

“There was a consensus about the protection of primary home owners but with the right criteria, i.e. it will be extended to borrowers who consistently paid their loans before the crisis and cannot do this today,” he said.

The meeting also discussed the need to pass these bills without engaging ‘in endless debates and that the parties pass them at the parliament without delay’, he added.

“Where a foreclosure is necessary, it has to take place quickly.”

Earlier, finance minister Harris Georgiades in an interview with state radio CyBC warned that Europe’s regulatory and supervisory framework was getting stricter, in an apparent reference to the European Central Bank’s (ECB) announcement of new guidance for banks related to the provisioning of non-performing loans aimed at reassuring depositors in Europe.

“The addendum supplements the qualitative non-performing loans guidance, published on March 20, 2017, and specifies the ECB’s supervisory expectations for prudent levels of provisions for new non-performing loans,” the Frankfurt-based lender said.

“The addendum is non-binding and will serve as the basis for the supervisory dialogue between the significant banks and ECB Banking Supervision.”

The implementation of the addendum aims at avoiding banks piling up non-performing loans in the future by encouraging them to make timely provisions for loan impairments.

Georgiades said that following yesterday’s meeting the pressure will increase on the ‘numerous strategic defaulters’, while proposals will aim at extending social protection to borrowers who are not responsible for the problems they are currently facing.

Reaction to the meeting’s results among banks was mixed on Friday. One banker said that his bank would continue on its course applying the tools it has at its disposals, including foreclosures, restructurings and the sale of loans without having too many expectations about what politicians can produce. A colleague of his was more optimistic saying that he was expecting to see some progress in modernising legislation.

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Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • This is ridiculous that it only targets strategic defaulters. Innocent depositors could care less if the default is strategic or not the risk to their accounts remains.

  • BearFace

    Why are “loan writedowns” and “guarantor relief” being proposed?

    Loans could, of course, be restructured and re-scheduled to make full repayment more achievable but actually writing-down the loan (rather than merely making some realistic provision for doubtful debts in the lender’s own records) is just letting borrowers off the hook for some proportion of the loan – a gift, in effect. Of course, even that makes no real-world difference if the borrower is not going to repay any part of the loan regardless.

    Why should a guarantor be provided with relief? The guarantee provides some sort of security for the loan in that the guarantor should be jointly and severally liable to the extent of the guarantee. ‘Relief’ is simply letting the guarantor off the hook. Contrary to what some politico has previously claimed, a guarantee is not merely a signature on a trivial piece of paper – it is a legally-binding and very serious undertaking by the guarantor by which they knowingly and willingly place their assets at risk of default by the borrower.

    Both proposals seem to be concerned with letting borrowers and their guarantors off the hook. Why?

    Would these measures apply only to NPLs as the context suggests? What about those who, despite everything, are still somehow managing to fulfill conscientiously their legal obligations with regard to loan repayments (and what about their guarantors)? Are they not eligible for these gifts? If they are not eligible then the proposals introduce a perverse incentive to default!

    Strategic defaulters should, of course, be the primary and most urgent target as they are not bloodless stones so loan repayments can be productively enforced – but there has been precious little action on that front and I struggle to see how “loan writedowns” & “guarantor relief” will do anything whatsoever to help remedy the situation (quite the opposite, in fact).

  • MAG

    This bullshit just keeps getting funnier… The biggest defaulters are the very people the locals keep voting in to power over and over again..

  • Eye on Cyprus

    It is the norm that “households willing to repay their mortgages but unable to do so” forfeit the asset which was the collateral for the loan. If that be the home it is forfeit. If it is a third-party guarantee; the guarantor must pay the due forfeit. There can be no exception, loan writedowns or guarantor relief; whether the debt is strategic or misfortunate. Banks, borrowers and governments ignore this simple rule at their peril (or the peril of those who do play by the rules).