IN 2009 the Central Bank of Cyprus issued a circular asking banks to register new loans granted for the restructuring of existing ones in an attempt to prevent what it referred to as the “fictitious restructuring of loans”.
The circular confirmed reports that banks were “redeploying” existing loans that are not being serviced before the 90 days to avoid them being considered as nonperforming. The bankers’ actions allegedly focused on the construction and real estate sector, where hundred of businesses were left exposed.
Recently, Troika inspectors have been collecting data in efforts to assess how much money Cyprus will need for a bailout – and one of the issues concerning the banks is the way that nonperforming loans are defined.
According to the International Monetary Fund (IMF) “A loan is nonperforming when payments of interest and/or principal are past due by 90 days or more, or interest payments equal to 90 days or more have been capitalized, refinanced, or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons – such as a debtor filing for bankruptcy – to doubt that payments will be made in full.
“After a loan is classified as nonperforming, it (and/or any replacement loans(s)) should remain classified as such until written off or payments of interest and/or principal are received on this or subsequent loans that replace the original”.
However, it now appears that the banks in Cyprus do not count loans that are fully secure as being nonperforming even though they have not been serviced for 90 days.
If the Troika treats these so-called ‘fully secured’ loans as nonperforming, the banks will need considerably more from the state for their recapitalisation. There are also loans backed by real estate and by shares whose values today are a great deal lower when the loan agreements were made.
(We have reported previously that although the Central Bank’s Property Price Index shows a fall in residential property prices of 8.3% over the past two years, anecdotal evidence suggests that the decrease is at least double that figure, while property prices in the once popular tourist resorts have fallen by as much as 40%).
In an interview with the Sunday Mail, former president George Vassiliou said that if provisions are made for all of these loans, several more billions would be needed and “you are simply making sure that Cyprus would never recover.”