Creditors repeat urge for reforms amid slow NPL reduction

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By Stelios Orphanides

Cyprus needs to take advantage of the current higher-than-expected economic growth to promote structural reforms that will help reduce risks to its financial system and public finances and improve its competitiveness, bailout supervisors said.

Last month’s presidential elections which gave President Nicos Anastasiades a new mandate, “provide a window of opportunity to reduce the key vulnerabilities of the Cypriot economy,” the European Commission (EC) and the European Central Bank (ECB) said in a joint statement on Friday, following the completion of the island’s fourth post-programme surveillance. “Uncertainties and risks remain, such as contingent risks from the banking sector and the fiscal impact of the healthcare reform”.

They also recommended that procedure to attract investors for the state-owned Cyprus Cooperative Bank or part of its assets, which was announced on Monday, “proceeds in transparency and orderly manner”.

The Cypriot economy, which expended 3.9 per cent last year, up from 3.4 per cent in 2016, is expected to continue growing over the medium-term, but at a slower rate, the two institutions said. To maintain growth, Cyprus will have to reform the public sector and swiftly complete the reform of the justice system to improve claim enforcement

While “growth was broad-based, with buoyant tourism and construction benefitting other sectors of the economy,” driven by consumption and tourism, and allowed labour market conditions to improve, it did not lead to a significant reduction of youth unemployment and non-performing loans, they continued. “In addition, the persisting current account deficit warrants close monitoring, given the high level of external debt and negative households’ savings”.

The reduction of delinquent loans, which fell to €21bn, or two fifths of the total, at the end of 2017, was uneven among banks, while the margins to further reduce them via loan restructurings are becoming narrower, the said the EC and the ECB, which together with the International Monetary Fund (IMF) supervised Cyprus’s bailout in 2013 to 2016.

As bank profitability remains weak and lenders are still facing the need for provisions for loan impairments, the need to accelerate the reduction of non-performing loans in the system remains “pressing” especially in the case of banks “lagging behind,” they said.

The two institutions said that it is of “utmost importance” for the payment culture in the Cypriot economy to improve, as the government is preparing to announce plans to set up a body that will manage non-performing loans of households not servicing their loans.

“New schemes initiated by the authorities contribute in this respect and are in line with international best practices,” they added. “It is also urgent to introduce the necessary legal amendments to make full use of all available tools, including to the insolvency and foreclosure frameworks, and to create conditions for a well-functioning secondary market of loans and loan securitisation”.

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About Author

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

  • JS Gost

    How about us honouring the promises we made in 2013 ? this would require us to have had any semblance honour, which is sadly missing.

  • Didier Ouzaid

    Nah, they’ll use the surplus money (they’re already well into it, actually) to crank up public wages, compensate bank workers and other delicacies. And guess what, there aint anything creditors can do, cause you know…they already gave the money.

    Ok they lent the money. But shhh, that’s the second part of the plan: avoiding strict repayment. Or use the gas money for that. Maybe.

  • Bananaman

    Not even a whisper about how the privatisations went, Hilarious

  • Terryw45

    A few primary residence repossessions, ‘a encourageur les autres’, a quiet word in the guarantors ear ?

  • clergham

    Ha, ha ha ha ha

    I think the technical term is Baying at the Moon

    This is the Middle East. The money’s gone . Get over it

  • SuzieQ

    P!$$ing in the wind springs to mind.

  • Kevin Ingham

    You have to make hay while the sun shines.

    Cyprus remains in very poor economic shape, but the windfall tourism and the dubious passport scheme did provide a window of opportunity to start implementing the necessary reforms. It isn’t going to make the pain of the reforms go away, but it would have made it slightly more bearable.

    However, pretty much all of the bailout requirements have been ignored, the banks remain in a parlous state, personal debt is enormous, the Cyprus problem is no closer to a solution (with the implications that is going to have for gas exploration) and the whole underlying mess that caused all the problems have been effectively allowed to fester.

    Meanwhile the country embarks on another round of unsustainable development and dodgy business dealings to prevent the wheels falling off in the short term.

  • Copernicus

    The same old story about NPLs which everyone knows cannot be properly dealt with by the banks because the distress of some borrowers, due to high indebtedness and legal protection, cannot and will not be managed by the banks. In all other EU states the governments of the day worked the solution out quickly.
    In Cyprus there will be an all party committee to decide on what the asset management will do. This will be a recipe for disaster if the politicians are left to decide! The fear of the government, and the banks, should be returning NPLs will soon find their way back to the banks as some of the early restructuring for the well connected will not be fully cured. If the resolution of distressed debt takes too long they banks may need more provisions.
    The government should move swiftly with reforms and not rest on its success with fiscal discipline since the external factors which have benefitted Cyprus may not be there unless of course some EU states go ahead with implementing/introducing the Magnitsky act and money flows to Cyprus yet again. The developers will delight in such a development and so will the banks but not sure if the EU will be happy!