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Troika seeks to contain strategic defaults

In an effort to counter strategic defaulters the Troika is considering bringing forward the timeframe for the framework being developed concerning foreclosures and insolvency reports the Cyprus News Agency.

CYPRUS’ international lenders, the European Commission, the European Central Bank and the IMF, are considering expediting the timeframes with regard to foreclosure and insolvency framework in a bid to contain strategic defaults in Cyprus.

Cyprus received a €10 billion bailout from the Troika March last year which featured a haircut on deposits over €100,000. However amid the continuing contraction of the economy and the burst of the housing bubble, non-performing loans soared above €26 billion, worsening the problems facing the banking sector.

The Troika mission, which is currently conducting the fourth review of the financial adjustment programme, will submit the updated Memorandum of Understanding containing the progress so far.

The contraction of the economy in 2013 reached 5.4% of GDP outperforming the bleak projections for a downturn of 8.7%.

Sources from the Troika said Cyprus’ lenders believe that the increase in NPLs is not justified by the macroeconomic and fiscal developments on the island. The increase in the NPLs is attributed to the current deadlines for the reform to the framework covering the seizure of properties pledged as collateral and the personal and corporate insolvency believed to enable borrowers to strategically opt not to service their loans. Under the current framework a bank may need up to 20 years to seize collateral.

The current MOU provides that the insolvency legislation will be reformed by June and the new framework also covering foreclosure will be implemented by end 2014.

“We are considering a change in the time frames and front-loading the reforms, if this is possible,” a Troika source told CNA.

The reform in the whole framework will enable the banks to pressure borrowers to start servicing their loans, alleviating the acute liquidity problem currently observed in the banking sector.

Furthermore, the same source told CNA that the lenders are considering amendments in the time frames with regard to the implementation of the National Health Scheme. However he did not elaborate on the changes to the MOU provisions as this is being discussed with the Cypriot authorities.

The updated MOU will be discussed next Friday with the Finance Minister Harris Georgiades and the Central Bank Governor Chrystalla Georghadji.

Source: Cyprus News Agency

Editor’s note

For those who may be unfamiliar with the term ‘strategic default’ – it is the decision by a borrower to stop making payments (i.e. to default) on a debt, despite having the financial ability to make the payments.

Readers' comments

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  • kalin kostov says:

    Does anyone know if there is any further proceeding with the protection of the primary homes is that scheme mortgage to rent one?? We are exhausting almost all variants with our bank and this is our last hope to remain in our home….otherwise we might become one of the many NPL.. We wouldnt like such an end..but.we prefer to eat something than to give our last cents to the bank……
    The most ridiculous for me is that after 7 years of payments..and around 45000 € paid…in interest and stuff..we have obtained our title deed which finally end up to us with showing the initial amount remaining to be paid as it was 7 ears ago…. can anyone help me with advice please?! Thanks….

  • Ivan says:

    Hani has a great idea but it’s probably not too practical to change from the Euro.

    When we changed the CYP to the Euro, prices went up and the Euro was blamed, as what did cost me CYP1 became €2. So changing back would probably make the same €2 = CYP 1.50. Vendors can blame the Euro again but we would probably have an overall 50% increase just because of the changes ie. It was CYP1 and now costs CYP 1.50 (ignoring inflation)

    You say banks would start lending again, but I don’t understand where they will get the money from to lend. They needed the money from Europe to keep them afloat, so would they just be lending money they don’t have and charging interest on it? I was under the impression that it was bank lending that actually caused a lot of the problems and people are not buying property here because of the ridiculous system, so who needs to borrow the money?

    If we come out of the Euro, then unless the CYP was devalued then there would be no change in finances, so you would need to devalue to stimulate the economy. That would surely cause a problem, as who outside of Cyprus would want to be paid in CYP? The cost of imports would increase and this would further increase the price of goods in Cyprus. It would also make our debts much harder to repay and they would probably increase rather than decrease.

    I hate to think what impact it would have on those with mortgages in Euro’s or Swiss francs as the CYP would buy a lot less currency than it used to.

    I am probably taking a too simplistic view of all this, but in my opinion coming out of the Euro would work If we didn’t have the debts, so perhaps the easiest solution would be to default on the loan to Europe. But if we look back in History, when Argentina defaulted, their currency devalued by about 80% and they suffered hyper inflation. But at least they had a decent amount of produce they could export.

    Hani is correct, It would be nice to go back to the CYP as this would give our government back control of the countries finances, without European intervention. But we need to be rid of the debt first, then we could work toward coming off a fractional reserve banking system and make Cyprus financially stronger than any other country in Europe.

    It would seem to me that the debt has been created by the banks, and fundamentally the banks are privately owned businesses that should sink or swim on their merits, not be allowed to bring down the country by burdening us with debt.

    The way out of this might be to stop blaming everyone and anything and creating smoke screens. Start by getting rid of the causes of the problems, then we will not be compounding them by adding fuel to the fire.

  • MartynG says:

    Oh Well, the Troika are on their 4th Visit, I reckon, and are only just starting to dig down into the complex detail of the Cyprus banking horrors – the detail where of course several ‘devils’ lurk, one a unique devil that allows his followers to choose whether to pay their interest, make their loan repayments – or NOT! So, it seems they DON’T!!

    And now the Troika realise that ; “under the current framework a bank may need up to 20 years to seize collateral”. Nice cosy arrangements indeed, unique RoC banking practice, incredible ‘customer service’.

    “We are considering a change in the time frames and front-loading the reforms, if this is possible,” a Troika source told CNA.

    NOTE THE LAST 4 WORDS!!!

    Unless they do – accelerate the reforms – they will find a sizeable proportion of the E26BILLION NPLs will need “addressing” i.e. Remedying.

    HC (below) is right: if the TROIKA, ECB, CBoC , Cyprus banks et al don’t get the borrowers to start ‘servicing’ their loans pronto then many more Billions of bail-out and/or bail-in will be essential. And, as always, it’ll be the poor, and those naive or foolish enough to still keep their money in Cyprus banks, who subsidise the Rich during the next, even more drastic!, phase of ‘remedials’.

    My own view has always been that Roc would need to exit the Euro, devalue and then start repairing the damage; Troika et al though will defend the ill-thought-through Euro to the very last, and therefore it should be them, the ‘keepers/defenders/upholders of the Euro” who provide the next tranches of loans/support. HC is right the Cyprus government cannot simply intensify yet further the austerity on the ordinary folk, small businesses, pensioners, the property owners without Title Deeds of RoC.

    Tough and radical measures applied pronto by the TROIKA are the only things now that can prevent a total collapse of the RoC economy, long before the benefits of any hoped for MedGas and Oil revenues start to be realised.

  • Hani Chehaiber says:

    Dear Sirs,

    Stop using untested theories to the Cypriot people their are people standing on the doors of churches on Sundays for food, lives of families is at stake. Enough is Enough, the only solution is to keep Cyprus in the Euro zone and opt out of the Euro, this way the banks will start lending and make profits to cover their losses and pay the European Union back, all your theories apply in perfect economic situations well, we do not have this in Cyprus, this has to be done quickly or else the Troika and lenders will find them selves with out being paid, and will have to cough up the 26 billion of non performing loans. Wake up! we have no time, you tried now for one year, we are worse!

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