IMF pushes for tougher foreclosures law to tackle NPLs

5

By Stelios Orphanides

The International Monetary Fund (IMF) said that it expects economic growth in Cyprus to pick up at 4 per cent this year and 4.2 per cent next year even as risks related to the high-stock of non-performing loans undermine the economy’s prospects.

“The brisk pace of economic activity is underpinned by ongoing and planned construction projects, and is only partly dented by decelerating private consumption, as households step up loan repayments over time,” the IMF said in a statement on Thursday. “Despite the vigorous upswing, non-performing loans still weigh on banks’ profitability and have prevented significant improvement in households’ and corporations’ financial health. Political and social acceptance of strategic default continue to undermine financial intermediation”.

The IMF said it expects unemployment to fall this year to an average of 9.5 per cent from 11 per cent last year, before dropping to 8 per cent in 2019. The government, which last year produced a fiscal surplus of 1.8 per cent of gross domestic product (GDP) is forecast to generate a 2.1 per cent surplus in both 2018 and 2019. The current account deficit is expected to narrow this year to 5.1 per cent of GDP, from 6.7 per cent last year, and further widen at 7.2 per cent in 2019.

The IMF, which together with the European Commission and the European Central Bank (ECB) participated in the troika of international creditors which supervised Cyprus’s 2013 bailout, said it expects that the government will continue producing fiscal surpluses of up to 4.5 per cent of the economy over the five coming years which will allow public debt fall to 72 per cent by 2013. Government debt fell last year for the first time after the fiscal and banking crisis of 2013 below the 100 per cent mark. In April, the issue of €2.4bn in government bonds in favour of the Cyprus Cooperative Bank increased public debt once more above a year’s economic output.

The “banks’ weak asset quality and insufficient diversification of economic activity are sources of downside risks to this outlook,” it said, adding that the Fund’s directors recommend that the island should amend its insolvency and foreclosure legislation by also introducing “tight eligibility criteria” to avoid moral hazard and contain the cost of a scheme currently being drafted aiming at helping vulnerable borrowers.

The advice comes as the government prepares a stricter foreclosure and insolvency framework to help banks tackle delinquent loans which undermine their capital adequacy. It is part of a three-pronged strategy that also includes the sale of the Co-op’s operations and the introduction of Estia, a scheme that that will help cooperative borrowers affected by the crisis.

The IMF board of directors “noted that Cyprus’s capacity to repay the Fund is expected to be adequate under staff’s baseline scenario but is subject to significant downside risks.”

A year ago, the government repaid close to one-third of the €1bn borrowed from the Fund.

The IMF directors “agreed that sustained strong economic growth and accompanying fiscal primary surpluses would be crucial to achieve a projected rapid decline in the public debt-to-GDP ratio and allow continued access to financial markets on favourable terms. Strong and continued efforts to implement ambitious macroeconomic policies and structural reforms would further reinforce Cyprus’s capacity to repay”.

In this context, directors welcomed the authorities’ willingness to continue post-program engagement with the Fund,” and agreed to extend monitoring through July 31, next year.

They also recommended that Cyprus should not allow public spending to increase above the economy’s medium-term growth, expected to drop to 2.5 per cent.

It suggested instituting a “durable mechanism” that will allow the executive to keep the public wage bill under control. They also advised caution with the fiscal impact of the national healthcare scheme.

A legislative package overhauling human resources in the public sector tabled two years ago by Interior Minister Constantinos Petrides, failed to pass the parliamentary hurdle in late 2016.

“Directors urged the authorities to restart macro-critical structural reforms to help diversify the economy,” the Fund said. “To attract capital into innovative sectors, they recommended focusing efforts on strengthening the enforcement of commercial claims and the efficiency of the courts, as well as pursuing privatization”.

In addition, they advised that Cyprus should avoid excessive concentration in construction, currently aided by investment in real estate made by high net worth individuals acquiring real estate to benefit from the government’s Golden Visa scheme, stressing “the importance of full compliance” with anti-money laundering and counter terrorist financing standards as well as strengthening the island’s legislation against corruption.

Share.

About Author

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

  • Copernicus

    “Despite the vigorous upswing, non-performing loans still weigh on banks’ profitability and have prevented significant improvement in households’ and corporations’ financial health. Political and social acceptance of strategic default continue to undermine financial intermediation”.

    So the IMF has woken up to the fact that their suggestions post crisis have failed miserably and now they have to tell us the the strategic defaulters are politically connected. To remind some redeemers the IMF suggested that Cyprus should have a credit less recovery and that was based on their models who knows where. Has anyone seen in any part of the world of growth funded without credit??? The reason credit is not extended as much as one would like in Cyprus is that the private sector is over borrowed and banks had to deleverage. Also hardly many credible or bankable projects other than the visa linked construction!

    The Cyprus authorities should work on the distressed borrowers who will suffer from more efficient foreclosures by the banks by going ahead with their published ESTIA enemy; what happened to the idea floated before the elections? The rest, especially corporates who cannot pay or are protected by politicians should be allowed to go to the wall. For too long zombie firms have been allowed to survive by paying only interest and getting restructuring to buy time. The IMF is right to point this out but will the politicians do anything? Yes they are giving these borrowers even more incentives and benefit to build more towers in Limassol!

    It is time for the banks to really call in loans, both principal and interest. New companies can grow if these dinosaurs are allowed to go fall. Best if banks lend to corporates with decent boards and not family run firms!

    • Kevin Ingham

      Agree entirely- a healthy economy requires solvent banks lending to innovative business.

      All we have at the moment is a continuation of the rusfeti/haratsi “business” model that has caused most of the problems in Cyprus and will continue to do so as long as the usual “businessmen” and the politicians treat the country, it’s assets and it’s banks like their own piggy bank .

      Its this cabal of clowns who are the only real beneficiaries of selling state sovereignty for god’s sake

      • Copernicus

        Sure but the cabal of clowns are getting richer, have their personal wealth abroad and owe the banks millions. The real clowns are the mPs who are on TV day in day out pretending they have the answers. The complete clowns are the taxpayers who have seen €4 bln pumped to save the CoOp which had no chance of ever returning any gain to the government but it simply was a sacred cow for all the parties and one dared to even today contemplate closure. Now the unions want all the staff to be retained by the government or HB. What a joke!

  • Cydee

    Another warning about the ‘golden visa’ scheme…

  • Costas

    the TC are the most non performing sector, they didnt pay anything