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Troika seeks to contain strategic defaults

CYPRUS’ international lenders, the European Commission, the European Central Bank and the IMF, are considering expediting the timeframes with regard to foreclosure and insolvency framework in a bid to contain strategic defaults in Cyprus.

Cyprus received a €10 billion bailout from the Troika March last year which featured a haircut on deposits over €100,000. However amid the continuing contraction of the economy and the burst of the housing bubble, non-performing loans soared above €26 billion, worsening the problems facing the banking sector.

The Troika mission, which is currently conducting the fourth review of the financial adjustment programme, will submit the updated Memorandum of Understanding containing the progress so far.

The contraction of the economy in 2013 reached 5.4% of GDP outperforming the bleak projections for a downturn of 8.7%.

Sources from the Troika said Cyprus’ lenders believe that the increase in NPLs is not justified by the macroeconomic and fiscal developments on the island. The increase in the NPLs is attributed to the current deadlines for the reform to the framework covering the seizure of properties pledged as collateral and the personal and corporate insolvency believed to enable borrowers to strategically opt not to service their loans. Under the current framework a bank may need up to 20 years to seize collateral.

The current MOU provides that the insolvency legislation will be reformed by June and the new framework also covering foreclosure will be implemented by end 2014.

“We are considering a change in the time frames and front-loading the reforms, if this is possible,” a Troika source told CNA.

The reform in the whole framework will enable the banks to pressure borrowers to start servicing their loans, alleviating the acute liquidity problem currently observed in the banking sector.

Furthermore, the same source told CNA that the lenders are considering amendments in the time frames with regard to the implementation of the National Health Scheme. However he did not elaborate on the changes to the MOU provisions as this is being discussed with the Cypriot authorities.

The updated MOU will be discussed next Friday with the Finance Minister Harris Georgiades and the Central Bank Governor Chrystalla Georghadji.

Source: Cyprus News Agency

Editor’s note

For those who may be unfamiliar with the term ‘strategic default’ – it is the decision by a borrower to stop making payments (i.e. to default) on a debt, despite having the financial ability to make the payments.