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Thursday 17th June 2021
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HomeProperty InvestmentBad loans are key to assessing EU bailout

Bad loans are key to assessing EU bailout

BAD debts in Cyprus and Greece will determine the size of the financing needs to be identified by troika.

The large group of technocrats from the European Commission, the European Central Bank and the International Monetary Fund will launch deliberations with the Cypriot government today on the basis of first estimates on the support that Cyprus will need.

The fiscal part is relatively easy, as the government declares that the financing needs by 2014 are more or less known and the only unknown factor is the size of the deficit.

The government places its needs close to €4.5 billion but this might change if deficit is higher than initial forecasts.

The biggest challenge for the island’s negotiating team, however, is the financial part of the assistance, the capital that the banks need.

Cyprus Popular already needs €2.5 billion and Bank of Cyprus €0.5 billion.

The needs will increase further on the basis of the Blackrock-type diagnostic checks in Cyprus and Greece.

The toughest part of the deliberation with troika is the methodological handling of bad debts.

Based on an established practice, Cypriot banks do not go to a provision for those loans that are in arrears beyond 90 days as soon as there is a complete guarantee (e.g. property).

Troika follows a different approach however. Their methodology is stricter. They believe that even if the loans are 100% secured, the full provision is required.

The European Commission, which allegedly has a better understanding of the particularities of Cyprus, has a more moderate approach and believes that banks can recover part of the borrowing by selling the property.

The methodological approach to be adopted will largely determine the capital needs to be identified by troika for the banking sector.

First IMF estimates talked about €10 billion while Standard and Poor’s and Fitch referred to €4.5 billion and €6 billion respectively.

The finalization of the needs will emerge after completion of diagnostic tests in the portfolios of banks in Cyprus and Greece. But due to a delay in the completion of tests, it is expected that support will be determined by the initial calculations of the troika.

Bad loans are the most important issue that the negotiating team faces and if troika’s calculations reach upper range, the debt will reach 130% of GDP, raising questions of sustainability.

15 COMMENTS

  1. I hope whilst the Troika is remembering our sensitivities they also notice that it took 10 years for me to get my title deeds.

    Double the number of Government employees and that comes down to 5 years.

    Treble it and it comes down to 3 years 3 months and six days.

  2. I think that before it gets serious for those properties that are occupied and have non-performing Developer loans against them, there are plenty of land plots with part finished properties on them which will probably also have Developer non-performing loans secured against them.

    I suggest that the Banks call these in first and resell the land to the highest bidder to recoup some of their losses.

  3. The only ones to suffer in all this will be the residents of Cyprus. I cannot for the life of me see any Greek Cypriot politician ever enact austerity measures required to being living within means. The government cannot continue to spend more than it raises in tax revenue as it is unsustainable and foolhardy.

    Cyprus has an uncanny way of somehow falling into S**t but comes out smelling of roses. First the tourist revenue was down but compensated for by overinflated property sale prices. When that floundered it was Russian money that kept it going and when that goes it will be gas revenues that compensates.

    The Troika will have to insist on any harsh terms but I can see us accepting them and then totally ignoring them. No change there then!

    We shall see what happens soon but I cannot see anyone wanting to upset the unions or public servants at any cost to the country.

  4. Will the banks try to sell properties which have been paid for in full, yet have a non performing loan secured against them that the hapless buyer was unaware of due to their lawyers misconduct? Will the banks go after the developers personal assets first.

    If the banks do get billions of Euros to bail them out then how can they justify making innocent people homeless. It seems that the banks will get paid twice for their bad lending practices.

    Should the banks get any form of bailout then it is only right and proper that they write off all developers loans secured against homes which are already sold. Then land registry will have no reason to withhold title deeds any more.

  5. Oh, what the temptation must be to try and lie their way out! Watch this space as to how soon Greece & then Cyprus have to leave the Euro.

  6. Necessary precautions would probably mean the closing of all bank accounts, withdrawing all funds and removing all money from this island hastily.

  7. Its hard, nigh on impossible, to see any upside in what follows, austerity measures in Greece, Spain and Portugal are clearly not working, the Germans n Dutch etc. still seem unlikely/unwilling to subsidise profligacy – so Jim, you are probably right that Euro exit and devaluation come ever-more likely/closer. What a humiliation for Cyprus if it has to happen during its 6 months of Presidency.

  8. Peter.

    Have you seen the recent BBC Hardtalk interview with Popular Bank Chairman Michael Sarris?

    During the course of the interview, he admitted that the €13 billion loan exposure of his bank to Greek businesses and individuals was “doubtful”. (One can safely assume that the balance of €10 billion owed to the Bank of Cyprus and other Cypriot banks is also “doubtful”). There are also fears of other massive “doubtful” loans in the domestic market.

    What has to be borne in mind is that the total amount of loan exposure of Cypriot banks, including developer loans, is €152 billion (IMF figures). When put into perspective, I would suggest that your figure of €3 billion is somewhat short of the mark.

  9. Am I understanding this correctly?

    First, the bale out package will include the non-performing mortgage debts of the developers, so now that the amnesty has failed to have part of the developers’ debts paid for them, the bale out will be doing it without any obligation for the developers to pay back?

    Second, the size of the bale out will depend on how much of the non-performing debt is regarded as unrecoverable. While the Troika choose to cover 100% of the non-performing mortgage loans, the EU feels that some of the debt need not be covered because it can be recovered by the sale by the bank of the mortgaged property. Was the EU not supposed to be sympathising with the poor folk who have been duped into paying for a property with a developer’s mortgage on it and could now lose their homes?

  10. @UBoat. A couple of weeks or so ago, on another forum, I questioned the safety of holding amounts of money larger than that needed for daily living in Cyprus & got slated for scaremongering.

    In my opinion, anywhere, other than the Southern areas of the Eurozone, is preferable.
    Germany is the country of choice for me, although opening a deposit account for a non resident is not easy, but is possible.

  11. “The island’s negotiating team”
    ..”the deliberations with the Troika”
    I hope they do not set too harsh terms for the Troika!!!
    Arrogant to the end.

  12. If the developers pay the €7b owed on none-performing loans Cyprus will only need €3b from the Troika.

  13. It’s one thing for the Troika, or anyone else for that matter, to suggest the sale of an asset to recover a single non-performing debt secured against that asset, but it is an entirely different prospect to suggest sale of an asset with 2 loans secured against it, one of which is performing and the other which is non-performing.

    Especially if that asset turns out to be someone’s home and that someone is up to date with their loan repayments, but the Bank and the Developer have colluded to secure a second charge against the same asset which is now non-performing.

    Interesting dilemma.

    Interesting times.

  14. Debt to GDP figures for the first period of 2012 for Cyprus are shown at Cyprus government debt stands at 74.6%.

    It is clear, that if the bailout amount required by Cyprus is say, midway between the €10 billion & €15 billion figures mentioned, then Cyprus will have a debt ratio on par with Greece.

    I cannot see the Cypriot government being any more co-operative in turning the situation around, than the Greeks. In my opinion Greece is rapidly heading for the Euro exit, closely followed, (if not led) by Cyprus.

    A return to the Cyprus pound, immediately devalued, would be the only alternative. I did not think such a move would be likely during the Cypriot EU presidency, now I’m not so sure & I am taking the necessary precautions.

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