By Stelios Orphanides
The finance ministry said it has prepared and is already implementing a strategy that aims to ‘effectively and swiftly’ reduce the banks’ non-performing facilities (NPFs) by 40 per cent from the €20.6 billion they stood at in December 2017.
“A comprehensive strategy has been designed in order to successfully resolve, during the course of 2018, the final hurdle to full normalization of the economy, that of NPFs burdening the banking sector,” the ministry of finance said in its stability programme for 2018-2021 published on its website on Thursday.
The strategy provides for a stronger and more effective legal framework aiming at addressing strategic default, i.e. borrowers able to pay but choosing not to, the ministry said. The plan also provides for the establishment of a body that will take over ‘the most challenging portfolio’ of non-performing loans (NPLs), either mortgages or credit extended to small and medium size enterprises (SMEs) which have the borrower’s primary residence as collateral.
The announcement in March of the sale of the state-owned Cyprus Cooperative Bank, the lender into which the government pumped more than €1.7bn in the form of capital and to which the government issued €2.35bn in bonds a month ago and deposited €2.5bn, marked the beginning of the implementation of the strategy, which provides for the co-op changing to private ownership.
“The legal framework was recently introduced in 2015 following the advice received by international experts in the area,” the finance ministry said.
“Despite the limited period available for evaluation the legal framework, it is acknowledged that there are certain shortcomings in the process that hamper the effectiveness of the system and prohibit the normalization of the sector. To this end, consultations have taken place among stakeholders as well as the International Monetary Fund and the European Commission to identify the specific provisions as well as processes of the framework that undermine its effectiveness”.
In order to make it easier for banks to reduce delinquent loans the government is already preparing changes to legislation “which along with other things would facilitate the development of a functioning secondary market for NPFs in Cyprus, further strengthening the law on foreclosures, through enhancing the sale-of-loans law and introducing a bill on loan securitization with a view to tackle the problem of strategic defaulters,” the ministry said. “Tangible progress in all these areas is key for the banking sector to address effectively and swiftly legacy issues and adequately support the real economy”.
The objectives of the proposed changes include encouraging more restructurings of both viable and non-viable loans, it said. In the first case, the Central Bank of Cyprus’s directive on the management of arrears will serve as the basis, while in the case of non-viable loans, the parties will agree on repayment plans on the basis of the insolvency legislation.
It also provides for the creation of an ‘efficient secondary loan market’, a more transparent, efficient and effective foreclosure framework, and enhancing of the capabilities of the government’s insolvency service, the ministry continued. Further, the government’s plan provides for the introduction of electronic auctions, likely in reaction to failed physical auctions last year, which attracted protestors including politicians and neo-Nazis.
Finally, the government’s plan provides for a more efficient and less time-consuming transfer of title deeds and reduction of costs, and the reform of the judicial system.
The establishment of Estia, named after Hestia, the Greek goddess of domesticity and tasked with taking over ‘the most challenging’ retail loans, may be accompanied by a scheme to incentivise affected households and SMEs to participate, the ministry said.
“Through burden sharing, the incentive scheme aims at supporting vulnerable households, enabling them to meet their obligations to the extent possible, thus contributing to the stabilisation of the banking sector and the creation of conditions for sustainable growth,” it said.
“Even though the detailed provisions of this scheme have not been finalised yet, it is envisaged that for the participation in the scheme, eligible portfolio will be NPFs that have been classified as such in 2017 while borrowers should meet specific pre-defined income and asset criteria in order to exclude free riders or strategic defaulters exploiting the government’s support, thus ensuring fairness and limiting moral hazard.”
The annual cost to the taxpayer of the implementation of the strategy is estimated at up to 0.4 per cent of economic output, the ministry said. A further one-off increase in government debt by 11.7 percentage points of the economy has been already included in the baseline budgetary forecast