LAST SATURDAY, the Cypriot parliament narrowly passed five bills affecting personal and corporate insolvency that implement the foreclosure bill passed last October. Implementation of the foreclosure bill is credit positive for Cypriot banks because it lays the groundwork for large-scale loan restructurings and improves the banks’ recovery prospects.
The laws’ passage and implementation of the foreclosure bill also allows the European Commission, the International Monetary Fund, and the European Central Bank (ECB) (known as the Troika) to conclude their fifth review of the country’s support programme. The review had been delayed by the wait to modernise the insolvency framework and implement the foreclosure law. If positive, the review’s conclusion paves the way for the next tranche disbursement. Concluding the review will also allow the country to access the ECB’s quantitative easing plan. Under the plan, Cyprus’ government bonds will become eligible for direct purchases by the ECB, which will improve bank liquidity and support modest lending.
The bills amend the corporate bankruptcy framework by introducing creditor protection for 120 days to allow for a company reorganization. They also legislate the licensing of insolvency practitioners in Cyprus and introduce a social safety net by providing protection against foreclosure on primary residences. This will allow courts to impose loan restructurings in case the negotiations between the concerned parties fail, and allow the write-off of individuals’ unsecured debt under certain conditions.
The new foreclosure framework mainly aims to shorten the time needed to foreclose and auction real estate collateral to 18 months from more than 10 years previously. Although nearly six months have passed since the new foreclosure framework was voted into law, parliament delayed its implementation until the enactment of Saturday’s bills.
The enactment will provide incentives to individuals to seek restructuring of their loans and discourages strategic defaults. This will help banks tackle the volume of nonperforming loans (NPLs), which were 50% of gross loans as of 30 November 2014.
Melina Skouridou, Moody’s Investors Service