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Fifth insolvency bill facing problems

The fifth and final bill of the “insolvency framework” has caused a new rift between the Cyprus government and Troika technocrats, particularly with regard to the proposed treatment of guarantors to bad loans.

insolvencyFOUR BILLS of the insolvency framework have already made their way to parliament, but the fifth was under Troika scrutiny.

Cyprus’ international creditors appear to have red-flagged a provision linking guarantors’ obligations to those of the borrower, meaning they should be let off the hook if the borrower has declared bankruptcy, and that their obligations should be reduced in line with concessions made to the borrower.

But the Troika delegates, in town to discuss the progress made on the country’s economic adjustment programme, appeared resolute that guarantors’ obligations should remain unaffected by any settlement the bank may agree with borrowers.

Disagreement has also surfaced on a second front – that of the proposed protection of primary residences.

According to Sigma TV station, in addition to the criteria set for viable borrowers to be eligible for a court order imposing a repayment plan to the bank – thus precluding foreclosure – the Troika technocrats demand that before a borrower’s primary residence can be protected by the court, the borrower’s other assets must be liquidated.

A bank, the Troika argued, cannot be entitled to less than it would be if the borrower were to declare bankruptcy, in which case all of his assets would be liquidated at market value.

Disagreements on the insolvency framework cause yet more uncertainty as to the prospects of the country’s economic adjustment programme, which was thrown off track after parliament voted to suspend tougher foreclosure legislation until the end of January last month. The suspension was extended on Thursday until March 2.

Despite the fact that, as long as the programme remains off track, Cyprus is not eligible for any more funds from the emergency bailout loan agreed in March 2013 with international creditors, Finance minister Harris Georgiades said a more damaging blow was struck to the country’s credibility, rather than its coffers.

Speaking on state radio, Georgiades said the government is sufficiently funded to operate smoothly in the near future, but noted that “we are faced with a serious problem, precisely because of the uncertainty of government funding, whether by the Troika, or by international markets, which was our goal”.

Noting that, despite the House’s decision to extend the suspension of the law on foreclosures, the Troika mission chiefs are expected in Cyprus next week, in order to record and evaluate progress, Georgiades said the mission will likely not amount to anything, given the recent negative developments.

Readers' comments

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  • Andrew says:

    Seize a Developers remaining assets by all means, if he has failed to repay HIS mortgage. But it is quite a different matter for a bank to seize those homes already SOLD by developers.

    Any homes bought in good faith and overseen by a Cyprus Lawyer should not be put in the same category as unsold property.

    Of course guarantors should remain guarantors.

  • Stuart says:

    It seems that nothing in Cyprus bears any relationship to planet earth as far as economic responsibility is concerned. Here we find guarantors with no means of underwriting failure to pay by those for whom they were legally accepted by the banks. Then we have the borrowers who want their primary residences protected by the courts but also want all their other assets protected too; assets which could have been sold to repay part of their respective non-performing loans.

    In support of all this anarchy are the opposition politicians who seem hell bent on blocking the foreclosure legislation indefinitely for any of three possible reasons. Either they genuinely want to protect so-called ‘vulnerable groups’ or they are simply opposing for opposition’s sake or, perish the thought, they are being secretly funded by big borrowers with vested interests. Take your pick.

    All in all it adds up to a small island in denial where the monetary standards adopted throughout the civilised world are completely non-existent or, if they do exist, are totally ignored by a country which, devoid of any political integrity, apparently continues to sustain ‘damaging blows’ to its already negative credibility.

  • @Geoff Avis on 2015/02/02 at 10:04 am – Thanks for your comment. In Cyprus, unlike the UK, there is very little ‘social housing’ so if people were thrown out of their homes they would have nowhere to live (in theory).

    Spain started evicting people who couldn’t maintain their mortgages from their homes, but soon put an end to the practice following a number of suicides.

    There are ways out of the problem – if the banks could think ‘out of the box’. See the article by Dr George Mountis ‘Curing the non-performing loans disease‘.

    and also my article Mass repossessions unlikely.

  • Josh says:

    I know that in Arabic there is no such word as “Responsibility”.
    It seems that this applies here also.
    I have always considered that there is no Greek Word for “Discipline” following my 12 years on the island.
    So why should they change?

  • @Pete on 2015/02/02 at 9:33 am – I’ve heard of numerous cases where receivers/liquidators acting on behalf of a bank refuse to chase guarantors for payment of the debt.

    If a debtor fails to pay banks should pursue him/her and, if necessary, liquidate their assets to recover the debt.

    What’s the point of having guarantors if they don’t guarantee the loan? You might just as well appoint a stuffed teddy bear as a guarantor!

  • Geoff Avis says:

    in every civilised country if you take out a mortgage and fail to make repayments or fail to reach an agreement with your bank you will lose your home. Individual circumstances are unique to each borrower. A blanket government (or parliament) safety net will distort the market and continue to destabilise the economy.

  • Mike says:

    Martyn and Peter below have summed it up nicely. I find it incredible that people or organisations signing documents to act as guarantor to anyone purchasing a home or business should be relieved of their legal obligations that they have freely and willingly signed up to when the subject fails to maintain payments. What is the point of guarantors if they carry no responsibility. Surely someone with more than half a brain cell will see this for what it is and just throw it out. Since when have each of us been elevated to having diplomatic and financial immunity. I find it incredible that we are even discussing it. We are in danger of being in receipt of a backlash from other European tax payers who themselves are suffering austerity measures but paying their way to reach a common end – hopefully. Cyprus, and now Greece, seem to be hell bent on ruining all this. Blackmail must not be given into. Negotiate yes, blackmail no.

  • Pete says:

    In the case of a local developer with various bank loans, the guarantors have been ignored by the bank and liquidator (who is also the bank’s receiver) on the grounds they have no money !!!!!

  • Peter Davis says:

    A Guarantor is saying “If he doesn’t pay you I will”. It is a legal binding requirement that MUST be in writing, – as opposed to an indemnity which says “I will ensure you are paid” and can be verbal only.

    The reason individuals need an guarantor is that their financial situation is not acceptable to the lender, for instance when my daughter at uni and bought a house, she had no income and no capital it was ‘bank of mum and dad’ who were the guarantor.

    So understanding what was required as a guarantor why now should anyone be able to do the ‘Cyprus sidestep shuffle?’

  • MartynG says:

    Seems like more of ‘looking after our mates’ and quite right the Troika should be challenging some of the weird interpretations of law and banking practice that still seem to prevail in this country.

    Added to the clear ‘messing around’ and outrageous delaying tactics by the opposition parties on ‘foreclosures’, plus quite a lot more high level visits, it seems, to Athens since last weeks Greek Election outcomes, suggest there may be intensifying thoughts on what Cyprus might get to gain as their Big Greek Brothers proceed to try renegotiate their loans/support terms within the Eurozone, which in itself seems to be descending still further into financial and economic chaos.

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