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Judgement day for banks approaching?

Banks do not count loans that are fully secure as being nonperforming even though they have not been serviced in 90 days. If the Troika treats such loans as nonperforming, several more billions will be needed to recapitalise them.

IN 2009 the Central Bank of Cyprus issued a circular asking banks to register new loans granted for the restructuring of existing ones in an attempt to prevent what it referred to as the “fictitious restructuring of loans”.

The circular confirmed reports that banks were “redeploying” existing loans that are not being serviced before the 90 days to avoid them being considered as nonperforming. The bankers’ actions allegedly focused on the construction and real estate sector, where hundred of businesses were left exposed.

Recently, Troika inspectors have been collecting data in efforts to assess how much money Cyprus will need for a bailout – and one of the issues concerning the banks is the way that nonperforming loans are defined.

According to the International Monetary Fund (IMF) “A loan is nonperforming when payments of interest and/or principal are past due by 90 days or more, or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons – such as a debtor filing for bankruptcy – to doubt that payments will be made in full.

“After a loan is classified as nonperforming, it (and/or any replacement loans(s)) should remain classified as such until written off or payments of interest and/or principal are received on this or subsequent loans that replace the original”.

However, it now appears that the banks in Cyprus do not count loans that are fully secure as being nonperforming even though they have not been serviced for 90 days.

If the Troika treats these so-called ‘fully secured’ loans as nonperforming, the banks will need considerably more from the state for their recapitalisation. There are also loans backed by real estate and by shares whose values today are a great deal lower when the loan agreements were made.

(We have reported previously that although the Central Bank’s Property Price Index shows a fall in residential property prices of 8.3% over the past two years, anecdotal evidence suggests that the decrease is at least double that figure, while property prices in the once popular tourist resorts have fallen by as much as 40%).

In an interview with the Sunday Mail, former president George Vassiliou said that if provisions are made for all of these loans, several more billions would be needed and “you are simply making sure that Cyprus would never recover.”

Readers' comments

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  • Andrew says:

    Start by squeezing every last cent from the developers and their guarantors. This means seizing ALL their business and PERSONAL assets including assets which have been moved to foreign accounts, family, friends and Mercedes Benz. Make these people BANKRUPT first. Then take back all bankers bonus and reduce their pay to minimum wage. When this has been done there will be a true value given to “non performing loans”.

  • Steve says:

    To put all this in perspective, last week I attended a review of global financial issues given by the head of investment for a major international asset management company and finance house. A lot of time was spent on the Euroland crisis with many comparisons of the the members in trouble and not in trouble.

    Cyprus was never mentioned. When I asked why not, the answer was that Cyprus’s debt of 12 billion Euros or more (over 300% of GDP?) is in absolute terms too small to bother about. I did not want to embarrass the group that had invited me, so I did not make my intended comment, which would have been that this sort of thinking is contributing to the problem.

    How can anyone expect the Greeks and Spaniards to put up with painful austerity measures if Cyprus is going to get off without the pain such measures inflict? In the end it is individuals who are – or will be – suffering.

  • Garry says:

    FINALLY!!!!!

    As an ex-banker I’ve been commenting on this situation for several years. I was starting to think that this crazy state of affairs was never going to be addressed. It’s clearly written in all 3 banks’ annual reports that NPL’s are only the loans that are not supported by collateral and that fully collateralised loans are not reported as NPL’s. So a plot of land worth 2 million 4 years ago with 1.8 million loaned against it with never an interest payment made – DOES NOT COUNT! despite the fact that there are now 20 houses on it (some with mortgages of their own) which would prevent the bank from ever seizing the ‘collateral’ without a 10 year legal fight.

    These guys with the Troika are going to have their work cut out! I bet the sale of office shredders has gone through the roof!!!!!

  • Gavin Jones says:

    Ex-President Vassiliou is part of the Old Guard and like the rest of them, he should be put out to grass.

    What he’s actually saying is that it’s perfectly alright to carry on with same old ‘artful ways’. According to him, if the troika classes all the banks’ dodgy loans of billion of Euros to the developers, businesses and private individuals as non-performing, “several more billions will be needed…”

    Quite. The troika’s way is how it should be rather than the Byzantine, ‘creative accounting’ wheezes that Mr. Vassiliou would seem to favour.

    Transparency is indeed hardly a priority in the Levant but Judgement Day is here, his generation’s modus operandi having contributed to the state in which Cyprus finds itself.

  • paul lambert says:

    This comment by the president typifies the view of the government in Cyprus …”let us continue lying and covering up anything that is ‘inconvenient’, or we will go away and sulk and blame our situation on everyone else “

  • Odd_Job_Bob says:

    For the banks? Not too sure on that…

    Cyprus isn’t half as clever as it believes it is.

    No-one is fooled by the creative accounting which has presented an inaccurate view of the state of Cyprus banks. The coded messages of the IMF report, dated November 2011, as previously highlighted by Nigel (Cyprus: Selected Issues Paper; IMF Country Report No. 11/332) state that we just don’t believe ‘em. Some may say they never have, not even when they joined the Euro.

    So, why did they let Cyprus join?

    There are three things that the troika can do after the “further analysis” that they promised during the above report and which is now taking place:

    1) Conclude that the debts are completely unrecoverable and that the Cyprus economy is a basket case and best left well alone to completely collapse

    2) Realise that, even if the basket case is irredeemable, allowing Cyprus to leave the Euro would be disastrous for the country, plus possibly set a precedent. The whole Euro-integration project could be set back quite a bit. Half-hearted austerity measures, limited reform and not all the money requested will avert disaster, but really only kick the can of a complete overhaul a bit further down the road

    3) Give the requested money (any guesses on what the final bail-out requirement is? My guess is over 100% of GDP!) but insist on the harshest austerity measures yet, plus take over the running of the Cypriot economy

    There is a 4) (the amount required is as requested, all banks and the Cyprus economy are saved – yay!) Yeah, right.

    If they do 1), then the EU will have shown that they are a serious and competent financial institution making financial decisions for financial reasons. If a country is insolvent and irredeemable, it’s out. If it’s 2), this would suggest that European integration is really what the main goal is and they are prepared to back this with cash (even though not too much!)

    If it’s 3) however (as it has been with Italy and Greece, some may say with Ireland, Portugal and a bit of a fudge with Spain), then this would suggest that this is the very aim of the Euro-project: control of the economies.

    It will also mean that the naughty behaviour of the banks will go unpunished as they will be propped up by IMF cash, in exchange for sovereignty.

    The Cyprus government though, is believing they can take the cash, but then not conform to any of the measures imposed, especially if the euro were to collapse.

    However, once the bankers are in and sovereignty taken away, with such a strategically important place that this island is, it will be MUCH harder than they think to get sovereignty back.

  • Robert says:

    This reminds me of the situation in the US where properties were mortgaged at 100%. When the banks started repossessing houses and flooded the market with properties at below cost the price of property plunged even further. This ultimately caused many people to end up with mortgages that were double the value of the property. Welcome back to reality Cyprus! If the banks start to repossess the property prices will plummet. In fact the future does not look very bright for Cyprus. I can see higher unemployment, strikes, public sector not being paid, poverty and homeless in the streets. We need some very competent leaders to take us through the tough times ahead.

  • peter says:

    The Cypriot definition of a nonperforming loan is when lender and borrower no longer meet for coffee.

  • Mike says:

    Amazing how most members of the public could see all this unfolding for years but not those charged to oversee the health of the economy could not. Incompetence is possibly too mild a word to describe.

    Spending more than you make means you are broke. Any creative accounting only masks the fact it does not change it.

    As for the former President, Mr Vassiliou’s comments, I’m afraid his administrations policies may have been part of the problem.

    Until We put the interests of the Country and integrity before party political interests then we will never recover and perhaps do not deserve to as sad as that is for those hard working taxpayers doing their best to survive.

  • Geo says:

    The banks refuse to see any value in the properties that they have mortgaged even though they are in the mortgage contract as “security” and they have put a “forced sale value” on these properties.

    They also have, in a lot of cases, the developer as guarantor but in most cases know that there is no money there or if there is they do not want to upset him/her.

    I would like to see how they have written down these loans in accounts!!!

  • Costas Apacket says:

    It appears that the Kingsize bed has been well and truly made, but those responsible don’t want to lie in it?

    Perhaps a Bunk would be in order?

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