By Stelios Orphanides
The handling of the current banking crisis focuses on addressing the symptoms, not the causes of it, and may strengthen expectations among borrowers that failing to honour obligations will pay off in the future, an academic economist said.
Estia, a scheme promising debt relief to borrowers with mortgaged primary homes approved on Tuesday by the cabinet, strengthens the belief that those who have not repaid their loans are ultimately rewarded, said Marios Zachariadis, who teaches economics at the University of Cyprus, in a telephone interview on Thursday, three days before parliament convenes to vote on crucial bills for the banking sector.
Parliament is being asked to vote on Sunday on the extension of government guarantees to Hellenic Bank which will allow it to acquire the healthy operations of the mismanaged state-owned Cyprus Cooperative Bank in accordance with a deal signed by the two lenders more than two weeks ago. The implementation of the deal depends on the European Commission’s approval, which has asked Cyprus to modernise its judicial and legislative system in such a way to allow banks to speed up the reduction of a €22 billion mountain of non-performing loans – 45 per cent of the total.
“The problem is more general,” Zachariadis said in reference to the task parliament is expected to complete. “Are they (politicians) going to set up a judicial system which will render their role as middlmen obsolete? Α well functioning system would render the average Cypriot politician’s middleman role largely obsolete.”
Estia is designed to support borrowers with non-performing loans provided their income is below €50,000, the value of the collateralised primary residence is below €350,000 and the value of their net assets below 125 per cent of the value of the residence. The scheme, which applies to both mortgages and business loans provides for a subsidy of one third of the monthly payment to a restructured loan, reduced to the value of the collateral. A senior finance ministry official said on Wednesday that borrowers may benefit from as much as a 50 per cent reduction to their burden.
The chairman of Disy, the party which supports the government under Nicos Anastasiades, said on Thursday in an interview with state radio CyBC that Estia may also offer relief to bank customers who pledged their primary residence as collateral to borrow money to gamble.
Zachariadis said the banks’ problems with non-performing loans go back to before 2013 when a twin budget and banking crisis catapulted the economy into a prolonged recession.
The Cypriot economy started to grow again in 2015, expanding last year by 3.9 per cent and 3.4 per cent the year before. This year it is expected to grow at a similar pace to 2017.
As part of Cyprus’s bailout programme, the island had to reform its foreclosure and insolvency framework to allow banks to recover non-performing loans faster. In September 2014, three months after Cyprus tested international markets for the first time with the issue of a government bond, parliament passed a new framework which also involved lengthy procedures depriving banks of the tools to enforce borrower discipline.
In June, the International Monetary Fund (IMF), which together with the European Commission and the European Central Bank (ECB) oversaw Cyprus’s bailout programme from 2013 to 2016, said that strategic default enjoyed political and social acceptance in Cyprus. Cypriot politicians from all opposition parties regularly participated in protests against auctions of strategic defaulters’ homes.
According to Eurostat figures, the percentage of the population behind schedule in paying for their housing loan or rent was 8.6 per cent in 2016, 8 per cent in 2015 and 8.9 per cent in 2014. The percentage of the population living in poverty and was in arrears with mortgage and rent payments was 13.4 per cent in 2016, 13.7 per cent in 2015 and 11.7 per cent in 2014.
According to a Cystat survey based on 2015 data, the percentage of households with a gross annual income below €50,000 was 79.3 per cent.
According to figures prepared by the Cyprus division of the Royal Institute of Chartered Surveyors (RICS), in the fourth quarter of 2017 the average value of apartments and houses island-wide was €110,995 and €351,322 respectively.
“The scheme is not about mainly vulnerable groups but a large portion of the population who did not pay their loans,” said Zachariadis commenting on Estia.
While it could be argued that introducing the bill could help banks which are facing fresh stress tests in the second half of the year to reduce their non-performing loans faster, “things in the society don’t work like that,” the economist continued. “The society takes into account past events before shaping its future expectations. With any policy we apply, such are the expectations we create”.
Even after the bailout, which prescribed a series of structural reforms including privatisations, labour market liberalisation and streamlining judicial procedures, political intervention remained in place, undermining meritocracy in boards of directors of both private and public owned companies, which the World Economic Forum has highlighted, according to the economist.
“We didn’t have the most capable to manage these problems which were huge from the beginning, while the framework (itself) was problematic,” he said. “To find the most capable people you need meritocracy and transparency. This practice doesn’t exist in Cyprus”.
“With what’s on the table, I don’t think that our problem will be solved without drastic reforms in the financial system and the economy,” Zachariadis continued. “This state all these years failed to create a fast-working judicial system, not in the past 58 years, not in the past five years when changes could have happened that people could understand”.
“We instead apply policies based on exceptions,” he said and added that the current banking crisis, is merely ‘a symptom’ which may reappear. “We entered a vicious circle, and it takes drastic changes to escape”.