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29th March 2024
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Non-performing loans key to economic recovery

Cyprus: Troika non-performing loansTHE TROIKA of international lenders has completed its fourth review of Cyprus economic adjustment programme and a positive outcome will result in Cyprus receiving a new tranche of aid of about €686 million by the end of June.

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.”

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15 COMMENTS

  1. My views make 1 big company that owes a lot npl bankrupt and I am sure the other companies will start will start paying up.

  2. There’s an awful lot of waffle, weazle-words and techno-speak in the above:

    e.g.: “it is important in order to create moral hazard”

    “disproportionate losses”

    one prominent developer said “When the situation is not normal in Cyprus’ banking system, we cannot all demand the rest to behave normally.”

    The only really meaningful and factual statement is by John ‘Hurricane’ Hourican (the) 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.”

    Take out the word MIGHT and replace it by WILL, and replace ‘greater than 40%’ with ‘close-on 60%” and you get, I reckon, a much clearer picture.

    Chronic situations require deep,often radical, solutions. Does he, or anyone else!, have any?

    Even ‘thinking outside the box’ might not work in this mega-complex situation.

  3. Worth getting hold of PWC’s ‘Fit for the Future’ (17th Annual Global CEO Survey, Aoril, 2014) – and referring specifically to their Summary of Local (I.e. Cyprus) Results,

    or reading it on the web under 17th Annual Global CEO Survey Country Summary: Key findings in Cyprus.

    The highest concerns about potential business threats amongst 70 Cyprus CEOs were:

    High and/or Volatile Enery Costs – 63%
    Shifts in Consumer Spending/Behaviour – 63%
    BRIBERY & CORRUPTION – 66%

    The next highest were:

    LACK Of TRUST IN BUSINESS – 50%
    high & Volatile raw material prices – 50%

    The CAPS are mine: what an environment in which to try and do – and develop! – business

    “When asked about their Organisations’ prospects for Revenue Growth in 2014, 67% said they they were not confident/not very confident about their prospects for Revenue Growth.”

  4. 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”.

    The above is a “joke right”? That would be the last thing the bank’s would do. What of course should happen is a completely independent party should be investigating.

    For example,true story, developer takes out a mortgage on a piece of land in Pissouri for just under one million euros. The land is about 800 sq meters. What does that tell you! I think the board of directors and Troika are blind.

  5. So who pays the bill? The Cypriots won’t deal with it (the problem is beyond known remedies). The troika won’t crack down on the issue as they know that it can’t be resolved. I would suggest that the banks will take the easy pickings (those who have paid in full) and wait to see who will challenged this through their robust and efficient legal system (sarcasm for those who didn’t notice). After this it will be easy picking on assets abroad. Those who do not lodge a defence will lose their properties back ‘home’. If you don’t take action by the end if the year you will lose your right to do so under the limitations legislation. I would suggest that Cyprus will then become very keen to pursue debtors (not Cypriot developers and friend of course) but only the Johnny Foreigner. Flood the system with actions against banks, lawyers etc and it won’t be able to cope. Fight or they will take all you have. I’m convinced this is their plan knowing that you will never win through their corrupt system. Get your lawyers ready!

  6. If the banks had stuck to the conditions in their contracts with the developers and had taken whatever the repayment plan had been before granting further loans, most, if not all these NPL’s would not exist therefore it must be the banks who take the hit. But this being Cyprus with everyone either having been in EOKA or gone to school with, or being related to everyone else, it’s unlikely to happen.

  7. @M Hannah – In England, the Bankruptcy Act of 1869 abolished debtors’ prisons and they have now been eradicated in most of the western world.

    Article 1 of Protocol 4 of the European Convention on Human Rights prohibits the imprisonment of people for breach of a contract.

    Last year the Greek Finance Ministry decided to impose prison sentences on debtors who owe the state more than €5,000.

  8. Janner. There is a Solution!! Force the Developers who OWE €6 Billion to, “PAY IT BACK”, Or get put in Prison, Simple as that, BUT, again most of them are Cousins and Uncles etc etc so there you have it. end of story.

  9. Dear Sirs ,

    The Troika with its economic theories never anticipated to face Pandora’s Box with the NPLs!

  10. This is likely only scratching the surface too. Banks keep stalling the repayment on loans for incomplete developments even though they continue to charge extortionate interest rates and additional charges. These loans are far from being serviceable but the banks hesitate to call them in so they don’t have to declare them as non-performing.

  11. Janner, below, has it right. There is NO solution to the massive NPL mountain. The foundations of it are totally unstable.Those charged with finding Solutions are clearly just waltzing around the problems. The quotations above indicate we have here a new version of a Magic Roundabout, with property and property values at its nucleus, waiting to spin out of control.

    There now isn’t a ‘traditional’ solution to this unique set of problems. A unique solution to a unique set of inter-locking problems is needed. Thus the talk-shops continue.

    Are these key players simply going to keep the plates spinning until the hoped- for flows of MedGas and oil arrive??

  12. The Troika are no different from MEP’s and British MP’s. Pretty gutless. However, they hold the purse strings. Scary!

    Why not make it easier for the banks to chase the NPL debts? Oh you are! How about addressing the real property problems.

    Let nature take it’s course and repossess ALL property that are not paying their loans. Flood the market and naturally cause a nice big house price crash. That way the pain will be shorter. By delaying this all you are doing is what Spain tried…and failed. Kicking the can down the road springs to mind.

  13. “Someone will have to take the hit. It’s all about the money!”

    Unfortunately I have a sinking feeling that it will be the innocent purchaser.

  14. “Someone will have to take the hit. It’s all about the money!”

    Unfortunately I have a sinking feeling that it will be the innocent purchaser.

  15. Aren’t these so called experts supposed to come up with solutions? It sounds to me as if ‘the experts’ know that there isn’t a solution and they either wait and sit it out (can’t afford to do that by the sounds of it) or they go after the assets the NPL was secured against (but they don’t want this either ie. the property). Couple all this with not wanting to touch primary residences and it causes even more confusion. All I know is that people won’t pay if they don’t own what they thought they had bought and when there isn’t a justice across the board (one rule for the elite another for the rest of us). How the troika can say Cyprus are on track when NPL’s are the worst in Europe and capital restrictions are still in place is beyond me! Someone will have to take the hit. It’s all about the money!

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