Banks at make-or-break point with MPs asked to deliver

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By Stelios Orphanides

Five years after Cyprus agreed to the terms of its bailout and after parliament half-heartedly passed some of the agreed reforms, lawmakers are being asked to deliver yet again as the economy faces the prospect of new, serious troubles for banks.

“Politicians don’t understand what this is all about and are carried away by slogans,” said economist and former banker Marios Clerides in a telephone interview on Friday, a day after the finance ministry and the central bank officials briefed representatives of political parties and other stakeholders about the probable effects of the failure to modernise the legislative toolbox of banks to reduce their non-performing loans. “It wouldn’t be the first time they let us down”.

If politicians fail to deliver, life will not continue as before, said Clerides who served as executive at the Co-op and Hellenic Bank in the past, adding that after the completion of the adjustment programme in 2016, fiscal discipline weakened and “we resumed old habits”.

The modernisation of the foreclosure and insolvency law, one of the requirements for banks to reduce their non-performing loans stock of currently at about €22bn or almost half of their loan portfolio, encountered serious political and social obstacles and after lawmakers passed a law in September 2014, it was subsequently suspended by the parliament before it was ultimately enacted the following year.

Amendments proposed and passed by various parties rendered the law, required to increase borrower discipline, practically toothless as reflected in official data, as a number of hurdles, designed as protection to borrowers, delay the process.

According to a document forwarded to the leaders of political parties by the finance ministry on June 1, inviting them to Thursday’s briefing, in 2016 and 2017, banks informed borrowers in 1,558 and 2,625 cases respectively of their intention to foreclose a property. They managed to schedule a “first auction,” which is required by the law in only 535 cases in 2016 and another 2,004 cases the following year.

The total number of properties sold at the first auction in 2016 and 2017 was 20 and 121 respectively and in subsequent auctions 1 and 19 also respectively, according to the data. The overall value of properties auctioned in 2016 did not exceed €3.5m while in 2017 it was slightly over €11.5m which accounts for 0.05 per cent of total delinquent loans. Foreclosed properties are offered at the first auction at a minimum reserved price of 80 per cent of a property’s estimated value, which is not a requirement at subsequent auctions.

“This proves that foreclosures were proved an ineffective tool, providing cover to strategic defaulters,” the finance ministry commented in the document forwarded to party leaders.

At the end of 2014, after the completion of the recapitalisation of Bank of Cyprus, the Cooperative Bank of Cyprus (renamed last year to Cyprus Cooperative Bank) and Hellenic Bank –which combined account for roughly three quarters of total deposits and loans in the banking system and nine tenths of non-performing loans–, the total equity in the banking system rose at the end of the year to €7.4bn from €4.8bn at the end of 2013.

The need to increase provisions for loan impairments, from below €9bn in December 2014 to almost €11.7bn in January 2018, was unsurprisingly mainly at the expense of the banks’ equity which fell to €5.6bn by the end of 2017, according to Central Bank figures.

The terminated loans for which banks made provisions, “if they are ever collected, they will be collected only through foreclosures,” said Clerides. “Therefore, the banks’ viability depends on whether they will be able to foreclose or not”.

Marinos Gialeli, a participant in Thursday’s briefing at the finance ministry said in an interview that consequences of the politicians’ failure to find a solution to the challenges the banks are facing would be “catastrophic”. With new stress tests looming in less than five months, Cypriot banks will have to convince regulators that they will be able to collect, or else they will be asked to again find new capital, Andreas Charalambous, a senior finance ministry official warned.

Economist Clerides said that convincing investors to again inject fresh capital into the banking system four years after they lost value as Cyprus failed to keep promises it gave that it would get its act together and modernise its economy, may prove more difficult this time.

Even with an amended foreclosure and insolvency framework, the Cypriot justice system, known for dragging its feet, may likely also delay procedures as borrowers will always have the right to contest foreclosures legally, he said.

Since the 2013 banking crisis, private investors and government invested almost €3.5bn into Cypriot banks. The Bank of Cyprus share is traded currently at roughly four tenths of the price investors paid in its 2014 capital increase. Hellenic Bank’s share, suspended from trading last month while the bank is negotiating the buyout of the Co-op, was last trading at around one third of the value it had three years ago. The government, which invested almost €1.7bn in to the Co-op, practically saw the value of its investment wiped out.

Minutes before the participants at the briefing at the finance ministry walked out the building, the International Monetary Fund (IMF) said in a statement that the political and social acceptance of strategic default in Cyprus undermined financial intermediation. Most participants confirmed with their comments to the press the IMF’s assessment by criticising that the proposed measures to reduce delinquent loans mainly aimed at facilitating foreclosures.

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About Author

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

  • Gui Jun An

    Bank loans to developers are building skyscrapers and casinos in Limassol!
    Our banks are insolvent and government blabs about 4% annual growth, while banks advertise easy loans and borrowers snap them up. Live now and never pay later.
    Mounting interest charges on NPL’s is the cause of non-repayment; a couple owed 50,000 in 2008 now owe 150,000 – the compounding of interest due has led most loan defaulters into no-man’s land.
    Had foreclosures been performed in 2013 instead of restructuring, banks would have recouped most of their write-downs. As things stand today, banks are deeper in the ‘bitsada’ than they were in 2013.
    Property bubbles come and go everywhere; here they just keep coming…and that’s how government likes it.
    A pie in the sky economy…
    .

    • Mike

      Unfortunately a debt on a banks books is classed as an asset, bizzare but a tradeable commodity and have you seen the Casino building in Limassol. Compared to the glitzy and glamourous facades of the ones in the North it is a drab, unwelcoming, plain and souless facade. I passed it yesterday and even the title of Cyprus Casinos seemed to me to lack any kind of enthusiasm or energy to attract those stupid enough to gamble and ruin their and their families lives.

      • BearFace

        Why is it “bizzare’ that a debt owed to an entity is an asset in its books? It is not in any way bizzare – it is a self-evident statement of fact. If I start with total assets of 1000 euro in cash but then lend you 800 on a long-term basis then my total assets remain at 1000 which is represented by cash of 200 and a debtor of 800. It couldn’t be otherwise. No profit, no loss – just a conversion of a cash asset to a debtor asset. If/when you repay me then that debtor asset is converted back to a cash asset – all very clear and simple.

        A problem arises if it becomes doubtful that you will repay the loan in full. I need to recognise that doubt in my balance sheet so must make some provision for it. If, during a specific year, it appears probable that you will only ever repay 500 then I must prepare to accept a loss of 300 and reduce the net level of the debt to 500. My balance sheet value has dropped by 300 and I may have to make further provisions (losses) in future years if the prospect of repayment worsens.

        If I were acting something like a pawnbroker (very loosely speaking) then I’d be holding jewellery (or similar) which you’d provided as security for the loan and which I’d reckoned to have an open-market valuation of at least 800. The problem of you being unable or unwilling to repay the loan can be resolved: you lose the jewellery but are relieved of the loan while I sell the jewellery and get my 800 back. Perhaps I get more than 800 so receive a profit as reward for the risk I took or, there again, perhaps I get less than that for it so make a loss due to my mistake in over-estimating the net realisable value of it when making the loan.

        If I were acting more like a bank and you’d mortgaged immovable property to me as security for the loan then what practical recourse do I have to get my money back if you default? You still have possession, use and benefit of the property (unlike the jewellery in the previous scenario) but, in Cyprus at the moment, my options are severely limited. The least messy way to get some cash back reasonably quickly is to sell that loan to a third-party even though I won’t get anything like the amount you owe me so I’m hit with that hefty loss. I obviously can’t keep on doing business like that and still survive financially on my own two feet so would be very much more careful and sensible in future about how much I will lend, to whom I will lend and upon what terms I will lend. I would learn from my mistakes – wouldn’t I?

        • Costas Apacket

          In response to your last sentence – Not in Cyprus you wouldn’t, and that’s the problem.

        • Well loan assets usually include 2-4% NPL’s the difference here is 50+%

  • Barry White

    As the donkey is a beast that will never voluntarily move while grazing on others’ pastures, the combined recent visit of the US Treasury official warning of ‘money laundering’ and the ECB and cast of hundreds calling for the elimination of political obstacles to NPL reduction has clearly put a blowtorch to the animal’s hind regions.

    Worse yet the before Christmas EU applied bank stress tests along with the unravelling of the COOP at the same time points to very little in the till for the Civil Servants 13th and 14th salaries.

    A repeat of the ‘Tof’ moment?

    Panic stations !!

    • Mike

      I am sure I am not alone in seeing this as a possibility and like many others now have left just a small ‘working’ balance in my bank here – just in case. If I could trust the rhetoric that our politicos are so assured of spinning us I would probably leave it here but I don’t – yet! Last time we went pop I moved what little I had out some 18 months before hand as I saw it was unsustainable but although not taking chances now I think it can be averted but perhaps not with populist politicians and certainly not ones with NPL’s and acting as guarantors to ‘friends’ who owe multiples of millions. So sad.

      • Neroli

        Well done you, I and many others do the same so trickle in funds for the bills!

  • JS Gost

    Would the NPL (Neanderthal Protection League) like to comment ? I am positive they can blame someone else for the mess, deny or launch some personal attacks. Along with the country’s culture in general the banks prove just how broken the country is at the moment, major change has to take place at all levels if Cyprus stands any chance of surviving, let alone recovering.

  • The auction figures are disappointingly small, perhaps this is an indication of how over valued properties are here ?

    • JS Gost

      Banks don’t want to sell ‘recovered assets’ as they can lie about their value while they are on their books, without crystalising the loss. Piece of agricultural land near me. No chance of building, no views, no electric or water, 2.5km from any village on a hill. 4,000m for €2320,000. We now know why the Hellenic will buy the co-op, everyone else is aware of what is going on and a lid can be kept on the current mess; but for how long ? and what is the cost of delaying crisis 2 ?

      • Yes its always delay until a miracle or new government. Tackling the subject and facing reality is never done.

    • Neroli

      In uk at the auction of foreclosed properties, the reserves are much lower as the banks, building societies and government want their money back quickly I have bought many properties at these auctions to ‘do up’ and put back on the market for first time buyers. With ELAM thugs and Movement Against Foreclosures group hanging about outside the auction it may put me off purchasing here!

      • Mike

        There are agents (in Paphos) who market these properties presumably on behalf of the bank. A cousin of mine has bought a couple so no problems with the ‘wanting something for nothing brigades’. It’s all dealt with by lawyers but do get a good one if you decide to go down that route.

        • Neroli

          I have my house here but wouldn’t buy another!

    • Evergreen

      A good view.

  • Philippos

    You cannot take this disaster in isolation from what is happening elsewhere in the economy. More recent financing, for example, to build hotel extensions, for all these extra Russians and to refurbish some existing, where even the Russians were complaining about the poor conditions, are looking as if they will default to a greater degree than the successful foreclosing on older NPL’s, So we shall start going backwards again. Fiscal Policy is becoming very lax again and income from and employment from tourism is declining markedly. The Konaki is close to cracking again. “Cyprus 2030” (?). We shall be lucky to make it into next month. The fact of the matter is that our politicians largely are people of the village and i don’t mean the “Global Village”. They have no experience nor understanding of international finance nor economics, nor the structure of the economy of Cyprus, nor the inter relationships of the European economies. They think that they are protecting people by frustrating the Lenders ability to recover their customers lent money to unrepentant borrowers. They are NOT, they are bringing down the system and will that help protect the “people”?. Sometimes you have to amputate to save the rest of the body, if you want it to survive of course.

    • Copernicus

      You are right that the NPL problem cannot be seen in isolation and that the measures taken by the banks and the Central bank have proved to be inadequate to say the least. In Cyprus they have tried to reinvent the wheel and all this to protect not the distressed households but the developers and hoteliers. These are the most difficult problem loans as their collateral is spread over 2-3 banks as per PIMCO report. These borrowers are politically connected and had a stay of execution thanks to the leaders of all complexion. Their debts are so huge they can NEVER be repaid. They are only able to pay interest because the government has helped them with the VISA plan and this will have an expert date. The banks have helped by restructuring but these borrowers have not started repaying principle and interest.
      If the banks cannot sell their NPLs, if there are any buyers, the risk is within the whole economy since foreclosure does not mean the banks are out of the woods. A fall in NPLs and increase of real estate on banks’ balance sheet means the risk of a fall in real estate prices is within the likely scenario given a dysfunctional real estate market; this will require more provisions. This is why in other countries these loans are not parked on bank’s balance sheets. The politicians know exactly what they are doing but they are protecting their own constituents and they hope that growth will help them. It may help very few but not the major borrowers who owe hundreds of millions. They simply cannot service interest and principle payments on debts from 100-400 million which each have from sales of flats or tourism receipts. Look at the net income before paying property taxes and you can see how much they can generate per annum!

      • Some debts have already been sold. Who would buy them at any price considering the current laws ? This i why i believe they have been assured of changes soon to help them recover. I suspect its being kept quiet and ultimately the EU or IMF will get the blame. Nasty foreigners making us pay our debts 😉

        • Copernicus

          Very little of the developers and hoteliers have been sold. The only amount sold is the HB portfolio which in the main are terminated loans. The banks will have to eat humble pie and contribute to the attraction of equity with debt write offs. Ther is no way an investor will buy a NPL without changes to management and ownership. Family run companies are useless to change direction as they are arrogant and do not want to change course. It is time for the banks to call in the borrowers and say unambiguously they need to bring in equity. If they can attract some equity that will justify debt write off these loans with their collateral can be moved to Special purpose companies where the banks retains a minority shareholding so as not be be consolidated in their balance sheet. If this cannot be achieved then there is no chance of banks being able to recover their loans in full and this they must understand. The problem is that the banks have been left on they own instead of the Central Bank exercising pressure to earlier resolution and the ECB rules on NPLs have kept on changing requiring more provisions. Just like in Ireland and Spain the government/central should have acted earlier. This is what you get when the Central bank is not independent but appointed to serve the government.

          • A Hotel is a good tangible asset. Surely bankruptcy and foreclosure will eventually follow ?

          • Copernicus

            The question is whether banks are best to manage hotels if they foreclose. Clearly the answer is no and new owners/investors must be attracted who will bring equity and expertise. Without a debt reduction/write off no foreign investor will want to assume the debts which the current owners have run. IN fact Phillipos makes a very point above in saying that instead of the hoteliers paying off their debts the banks allowed them to invest in further expansion when the factors that led to an increase in tourist traffic were transitory. Now if the Russian go to Turkey these hoteliers will have to cut prices and hence get into the red again. The bank have only themselves to blame for not acting earlier but we know why The Central Bank has been a passive spectator for reasons also we know.

      • Philippos

        A very powerful couple of paragraphs, it shows for those who want to see, just how precarious things are in a nation weaned off accountability. Mrs Merkel told the newly elected Anastasiades in 2013′ “If you don’t agree to our proposals you will not have a Banking System by the time you return to Cyprus” The TROIKA has simply delayed that reality. Now that “We” are back on “Cyprus Economics” that day is returning ever closer. It seems now that the only unanswered question is “When?” and it may be more close than people have come to think

    • A is B

      Excellent

  • Costas Apacket

    Repossessions mean less votes for the party which allows them.

    There’s the rub.

    Vested interests win over financial prudence, yet again.

    • Cydee

      As always!