Although the Troika anticipates a shallower recession in 2014 than had been anticipated, future recovery of the island’s economy is likely to be more subdued due to high unemployment, lack of liquidity resulting from the high level of non-performing loans and indebtedness.
Several media reports over the past week have touched on the issue of non-performing loans. There seems to be a general recognition that some borrowers have stopped making payments and are defaulting on their debts, despite having the financial ability to service them.
As we reported on Wednesday, the Troika wants to contain these strategic defaults by bringing forward the dates agreed for implementing the legal framework dealing with the forced sales of mortgaged property and foreclosures.
At an economic conference senior bankers also called for the reform of the legal framework to be expedited to help the commercial banks put pressure on their borrowers to repay their loans.
John Hourican, CEO of the Bank of Cyprus was reported as saying “The NPLs in Cyprus are the worst in Europe by a mile, they are greater than 40%. NPLs might represent the single impediment to the recovery of not just the banking sector but the economy.”
Regarding the reform of the law on repossessions, Hourican said “we would not and could not and should not repossess collateral and flood the market with it that would cause a death spiral,” adding “it is important in order to create moral hazard.”
“We need to put that in place because that is an important part of a proper functioning arrangement between customers and their lenders,” he added.
What are the banks going to do with properties they are forced to repossess?
- The banks need liquidity (not homes) to build up their reserves and be able to lend at a reasonable rate of interest.
- Repossessed homes will need to be maintained to keep them in a marketable condition and that’s money the banks can ill afford to spend.
- Flooding the market will put further downward pressure on prices – resulting in what Mr Hourican refers to as ‘a death spiral’.
Meanwhile, a source from the European Commission has said “We feel strongly that every reasonable attempt must be made to recoup that money.”
The Troika has also requested that banks directly affected by the bailout assess any connected lending practices by past or present board members or managers which may have caused “disproportionate losses”.
Property developers owe the banks over €6 billion in loans, most of which are considered to be non-performing. Commenting on the situation one prominent developer said “When the situation is not normal in Cyprus’ banking system, we cannot all demand the rest to behave normally.”