(Updates with background in fifth paragraph)
By Stelios Orphanides
The cabinet on Tuesday approved, Estia, a scheme designed to help struggling households repay their debts, and the entity that will manage bad loans, the government spokesman said.
Ministers also accepted the resignations of the co-op bank board of directors who will however, stay on until the deal with Hellenic is completed, spokesman Prodromos Prodromou said according to the Press and Information Office.
Estia provides for an adjustment of the loan balances as part of restructuring “to the value” of the mortgaged residence and an adjustment of interest rates within the range of 3.5 per cent and 2.5 per cent, he said.
The scheme also includes a long-term repayment period of the restructured loans and subjects applicants to “strict income and wealth criteria,” Prodromou said. Family income should not exceed €50,000 a year and the net value of other assets should not exceed 125 per cent of the value of the mortgaged residence.
According to the scheme, the net value of a household’s assets also includes the primary residence and other loans, in addition to the one in question. Applicants must be Cyprus residents over the past 10 years. The number of beneficiaries of Estia is estimated at around 15,000, which accounts for loans worth €3.4bn.
Beneficiaries of Estia will have one-third of their monthly repayment subsidised by the government, and have to pay the rest two thirds themselves, the spokesman said. The scheme will not be restricted to housing loans but will also cover business loans which have a residence as collateral.
Prodromou said that the Land Development Organisation, a state-sponsored entity tasked with the construction of social housing, will be managing Estia and will apply concrete criteria in selecting beneficiaries.
The 2019 budget will allocate “slightly more than €30m” in funds for Estia, Prodrmomou said, adding that the staff of the non-performing loans administration panel will not be appointed by the government.
The Land Development Organisation will enter an agreement with the non-performing management body, other banks, and bad loans management entities in the future, after pledging to adhere to Estia’s standardised loan restructurings, the government spokesman added.
“Loans will be automatically restructured to become manageable with the state contributing one third,” he said.
Prodromou said that the cabinet also approved the establishment of a body that will initially manage the Cyprus Cooperative Bank’s non-performing loans, worth €7bn, that will be under state ownership. Assets from other banks could also be added later.
The cabinet session took place against the backdrop of a run on the co-op by jittery depositors, spooked by statements that the bank could go under if the deal with Hellenic didn’t go through. Concerned Co-op depositors continue to withdraw funds from their accounts, with some of them already queuing at Hellenic Bank to open accounts amid uncertainty over whether the parliament will give its go ahead.
“The Finance Minister informed the cabinet that the board of directors of the Cyprus Cooperative Bank has submitted its resignation which was accepted but the board was asked to remain in place during transition until the non-performing loans management body is set up,” the spokesman said.
He also said that revenue from the non-performing loans management body will help cover the fiscal impact of Estia, the scheme designed to help vulnerable borrowers, and also help reduce public debt.
Private equity may also participate in the delinquent loans managing body based on terms serving public interest, he said, adding that the cabinet authorised Finance Minister Harris Georgiades to go ahead with the procedures required to set up the body.
The cabinet also asked Georgiades to immediately task an independent agency, if not the International Monetary Fund, with designing the body’s operational framework and an independent agency to evaluate that agreement or to select a new company to manage the loans, Prodromou said.
As a result of the €2.4bn issue in favour of the Co-op in April, public debt, which last year fell to 97.5 per cent of gross domestic product (GDP), once again rose beyond the 100 per cent mark. As part of the agreement signed by Hellenic Bank and the Cyprus Cooperative Bank more than two weeks ago, the government is required to issue €1bn in guarantees in favour of Hellenic to shield it from possible impairments resulting from underperforming assets acquired by the state-owned Co-op.
The European Commission said on June 19, that for it to approve the agreement, Cyprus will have to modernise its legislation and judicial procedures to help banks reduce their non-performing loans totalling around €22bn and making up 45 per cent of the total. Opposition parties criticised Hellenic’s deal with the Co-op which provides for the transfer of its operations, including €9.7bn in deposits, for a consideration of €74m, for being unfavourable to the state which recapitalised it with €1.7bn.
Diko, the second-largest party in the opposition bloc, with which ruling Disy could form a majority and pass the laws, said that it would do so only with the submission of a bill on Estia and the government agreeing to concessions demanded by its chairman Nicholas Papadopoulos during a meeting with President Nicos Anastasiades on Monday.
Parliament is expected to vote on all the bills on Friday after they are reviewed by the finance committee.
With the government reliant on Diko’s support, a spokesperson of the party said earlier that its support should not be taken for granted.
While Anastasiades aready agreed on Monday in a letter to Diko’s proposals, “written assurances were insufficient,” said Diko general secretary Athos Antoniades. He also said that his party insisted on the immediate assumption of the political responsibility for the co-op’s failure which is directed at the bank’s top executive Nicholas Hadjiyiannis and indirectly at Finance Minister Harris Georgiades, his close friend.
With the resignation of the Co-op’s board, which also included Hadjiyiannis, this obstacle appears to have been also lifted.
Antoniades also sent a message to Disy chairman Averof Neofytou saying that the latter’s “flattery” was not satisfying Diko.