The option for the creation of a bad bank in Cyprus should remain on the table, Minister of Finance Harris Georgiades has said, adding the decisions should be taken by the bank`s executives themselves and not by politicians.
“This is not a decision to be taken on a political level neither one should expect political decisions on the issue. This is primarily a decision based on operational plans of the banks executives themselves and not an issue to be settled with political decisions, political interventions or even worse by stakeholders which believe that in this way they could safeguard their own narrow interests against the collective interest,” he said in an interview with CNA.
The option of a bad bank or an Asset Management Company is considered as a solution that would help remove bad loans from a bank’s loan books. Cyprus on March 2013 signed with the EU and the IMF a €10 billion financial assistance package, which featured a controversial and unprecedented haircut on banking deposits over €100,000 to recapitalise Bank of Cyprus, the island`s largest lender, which absorbed Laiki Bank that will be wound down. The haircut, which apart from institutional deposits affected severely local companies, life-time savings and provident funds, was coupled with capital controls that hampered activity in an economy that has been in recession since the second half 2012.
As a result, Cyprus, according to an IMF staff report, eyes a prolonged deleveraging process with a credit-less recovery, as the decimated banking system cannot provide credit to the economy.
“This was a sharp but unfortunately unavoidable correction against the irrational credit growth that described the Cypriot economy in the last 7-8 years. A private lending which is the highest in the EU and which unfortunately was channeled to non productive investments, consumption and, primarily, the housing babble,” Georgiades said.
However, bleak projections by Cyprus` lenders that the economy would contract by 8.7% of GDP in 2013 were not materialised, as the economy has shown signs of resilience.
Georgiades agreed with the IMF`s remark that Cyprus enters a period of “credit-less recovery”, noting that amid a situation described with lack of credit, the economy relies on productive sectors such as Tourism, Shipping and the services sector that are not credit-depended.
Lack of credit weighing on the economy
The Cypriot Finance Minister noted however that “the economy’s basic problem that weighs on the economy, the households and the productive sectors is the fact that the banks` ability to fund has been dramatically curtailed.”
Georgiades went on to say that the ability of the banks to resume lending “is directly attached with the issue of Non-Performing loans.”
NPLs, loans in arrears for a period of 90 days have been rising dramatically in the Cypriot banking system amid the continued economic downturn. According to Central Bank figures, NPLs exceeded €26 billion in December. Cyprus lenders say that the authorities should reform the legal framework to facilitate debt restructuring that would enable the banks to restore debt servicing.
“This is issue will be dealt with in but in not a generalised approach but on case by case approach,” he said, acknowledging that banks in Cyprus traditionally had limited tools to encourage borrowers to repay their loans.
“We need to provide increased capabilitities towards a more effective loan collection a process,” he said, pointing out that the foreclosure process in Cyprus takes up to 20 years.
“This serious deficiency will be addressed,” he said adding the government will establish a framework based on three pillars.
“The series of actions will involve the financial ombudsman, the insolvency framework, and as a last resort the rent against mortgage scheme,” he said.
He noted however that “in case of definite non-viable and non-cooperative borrowers and especially corporations, tools that have been utilized elsewhere such one or even more Asset Management Company should be included in the options.”
Recalling that the scheme will be announced soon, Georgiades noted it will be financed from the state budget allowing selected cases to keep their residence paying a rent that is lower to their installments maintaining the right to repurchase their house economic conditions permitting.
He made clear that this scheme will not be universal but will apply for selected cases where companies or households cannot meet their loan obligations due to income reduction or loss of work.
On Cyprus` returns to the international capital markets, Georgiades recalled the President`s remarks for a planned return in the second half of 2015 noting that this target was set “very cautiously and very responsibly.”
“Based on the policy we have been following consistently for the last year, this target for returning to the markets becomes more feasible day by day,” he said.
“If we remain focused on the consolidation and reform policy the target (to tap the markets in second half of 2012) will be surely feasible,” he said, recalling that the Cypriot bond`s ten-year yield has shown rapid correction. The Cypriot bond yield declined below 5% today after reaching the all time high point of 14.6% in 2012.
He noted however that the “excellent course the Cypriot yield is following will not lead us to hasty decisions or unsound actions aiming at creating impressions but to remedy perhaps the most important problem that lead Cyprus to request financial assistance in the first place.”