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Central Bank blasted on FX loans

The Central Bank of Cyprus has been blasted by the Borrowers Association accusing it of not regulating the banks correctly when they were granting loans in Swiss francs and other foreign currencies.

central bank of CyprusTHE BORROWERS Association slammed the Central Bank of Cyprus (CBC) on Tuesday accusing it of not properly regulating banks when they were giving out loans in foreign currency.

“Where was the Central Bank when monetary policy reports mentioned an increase in loans taken out in Swiss francs? When amongst other things they could see that borrowers were overlooking the risks of the exchange. Did the finance ministry know this? If yes, and since they did nothing they too committed crimes.”

The issue concerns 3,000 borrowers that took out loans in foreign currency – mainly Swiss francs but they saw their debt increase 35 to 40 per cent after the exchange rate worked against them.

Of the 3,000 borrowers found to have received credit in foreign currency, approximately 40 per cent – €600 million in 1,200 accounts – were Cyprus residents, the Central Bank said on Monday.

According to the Central Bank’s stats report on the issue, 98 per cent of foreign-currency loans were made by the Bank of Cyprus, Hellenic Bank, and Alpha Bank.

The same report estimated that, if the loans were to return to the original exchange rate, the Bank of Cyprus stands to bear losses of €147 million, Hellenic Bank €11 million, and Alpha Bank (only from housing loans) €10 million.

Total losses across the Cypriot banking system could reach €250 million, the report found.

During a House finance committee on Monday, the CBC said the problem could not be addressed through legislation after deputies said they would seek to legislate solutions for borrowers, pegging the exchange rate to the point it was on the date the loan agreement was signed thus burdening the losses on the lender.

The association said the CBC was proving, yet again, that it wasn’t working for the benefit of national economy and maintaining financial stability but rather was facing the issue with the borrowers “superficially”.

“It would be good if the CBC became seriously concerned with the major responsibilities it has on the state of Cyprus’ economy.”

Moreover, the association accused the CBC of never taking the necessary steps to ensure that a circular they sent out to banks on October 11, 2006 outlining the risks to borrowers in taking out loans in foreign currency was actually adhered to.

Also disagreeing with the finance minister Harris Georgiades on restructuring loans they said “we insist that restructures are easy and can be done correctly in a way to benefit both sides, as long as there is good will from the banks.”

The association also sought to wonder if banks need three years to learn how to restructure loans and to what extent it would be fair if borrowers were burdened with the cost of the delay, appealing to both the CBC and the state to find a solution for the troubled borrowers, bond holders, and depositors that had a haircut.

Readers' comments

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  • scruffy says:

    @ Johnny Cyprus.

    I think the issue is of mis – selling. You are right to say that many buyers accepted a Euro mortgage when their income was in a different currency.This is normally a very bad idea and yet the banks were encouraging just that.
    When a bank sells a mortgage they have a duty to advise the customer of the best product for their particular situation. Everyone who requires a mortgage is not a financial expert but the mortgage seller is supposed to be qualified enough to offer a customer an appropriate product.

    The banks knew this was a bad idea for the customer but because of the financial benefits to the bank they pushed these mortgages . Do you really believe that the average guy in the street would walk into a bank and ASK for a Swiss Franc mortgage. Hardly.

    I myself took a Euro mortgage although I am from the UK but fortunately, I was aware that historically, the Euro had never been, and unlikely to ever be, stronger than Sterling and was therefore comfortable with that decision.
    I hear many comments about these poor folks should not have “gambled”. These poor folks were not informed of any risks so therefore they did not even know they were “gambling”.

    Another common comment is that when you “invest” your money you should understand the dangers of losing your “investment”.

    In the context of someone going into a bank and asking for a mortgage this analogy is absurd.

    All he did was walk into what he thought was a respectable bank and ask for a loan to buy a house. If he was an investor he would have gone to the Stock Exchange or a bookies.

    To defend the banks in these circumstance is appalling and is, I’m afraid, the problem with our modern societies today. No one can trust anyone.

  • Costas a Fortune says:

    The Cypriot banks must hold their hands up and take blame for being a massive part of this problem. Banks gave out multi complex mortgages that were not suitable for normal lenders, they didn’t follow basic banking rules, they didn’t even give people a cooling off period!

    They , along with the Lawyers and developers seemed to be able to hide any problems and then pounce for highly inflated costs. At initial meetings for certain complexes the Banks, and certain lawyers were in talks with the developers and knew what they were offering and seemed to follow a pattern of disregard for many of the people applying for a mortgage. Even to the point where they were supposedly sending their own independent surveyors to sites and asking for more draw downs when in fact these developments were sometimes over a year behind. False promises and one sided contracts by developers and signed off by certifying officers in Paphos and illegally stamped when the lenders were not even present (and many have proof that they were not present or in fact not even in the country).

    We were told to put our trust in Paphos based lawyers whom also let people down right from the start .

  • jonhhy Cyprus says:

    Hang on a minute, anyone who took a mortgage out in Cyprus who was not a citizen here or of somewhere else in the Eurozone, took out a foreign currency loan.

    In as much as their incomes; pensions and so forth are in British pounds or whatever and the loans were denominated in the Euro, they are exposed to the risk of exchange rate fluctuation.

    Since Cyprus entered the Eurozone the Euro/Pound exchange rate has fluctuated between highs and lows with around a 35% differential. Many might feel comfortable with the present exchange rate but, no-one knows where it is going in future.

    What does the Borrowers Association have to say about that? Do they think that all foreign buyers should have been formally warned about the risks of a Euro loan?

    Those with property here, and a foreign currency income will be only too conscious of the risk of property taxes, living expenses etc inflating too due to exchange rate differences.

    The authorities cannot underwrite all these risks, buyers have to accept some responsibility.

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