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Moody’s warns of CHF moral hazard

Moody's CHF moral hazardFORCED conversion of Swiss franc mortgages would create a moral hazard and make restructuring of non-performing loans (NPLs) more challenging, Moody’s ratings agency said on Monday.

According to a Central Bank report submitted in parliament, conversion of these mortgage loans to euros at the proposed rates, would cost Cypriot banks €250mln in losses.

“But the bigger credit negative is the moral hazard that the proposal creates among borrowers of the much larger amount outstanding of euro-denominated mortgages,” the agency said.

The proposal makes the banks’ restructuring of their high stock of NPLs more challenging as it would encourage all mortgage borrowers to delay loan restructuring in hope of more debt relief.

It would also delay the recovery of Cypriot banks’ profitability since they would likely continue to be loss-making for a fifth consecutive year, Moody’s said.

Cypriot banks face a large stock of problem loans, with the ratio of NPLs to gross loans as of June 2015 at 52.7 per cent for Bank of Cyprus and 54.9 per cent for Hellenic Bank

The Bank of Cyprus, with a €1 billion portfolio of Swiss franc loans, has the highest exposure among banks operating in the country.

Bank of Cyprus would face losses of around €147 million and Hellenic Bank around €11 million

Given the relatively high median net wealth of individuals, which was €266,900 in 2010 – the latest data available -, according to the European Central Bank, and the high savings rate in the country averaging 19.7 per cent before the financial crisis, “we believe 10 per cent to 20 per cent of delinquent small and midsize enterprise and retail borrowers are strategic defaulters that have the capacity to repay but opt not to do so.”

The banks’ progress in restructuring NPLs has been slow, and although Moody’s expects that the recently amended legal framework expediting auctions of foreclosed assets will support banks’ restructuring efforts, the framework has not been tested yet.


  1. So who is expected to bear the cost of all the mis-sold mortgages in Cyprus then? Oh! I know the banks clients who were mis-sold the loans in the first place.

  2. So this latest transaction shows the bank of Cyprus can easily afford to amend its fault!

    Makes Moody’s statement look pathetic.

    BoC reduces dependence on ELA

    (Editor’s comment: The banks are still having massive problems with NPLs – here are the latest figures:


  3. Given that Cypriot Banks failed to comply with EU law the courts will eventually have to force this outcome on them as has happened in other jurisdictions.

    The choice the banks have is to accept the inevitable now or add further legal costs and damages claims to the consequences of their self inflicted moral hazard.

  4. ..and the lie goes on and on. How exactly will the banks face such a loss? They throw a number (i.e. 250 million) and expect us to believe it?

    I totally agree with Gary’s comments but the thing is, I don’t believe that the banks will have any losses if they convert the loans. It is impossible for them to have a loss!

    They – have – secured – their – loan – instalments – and – already – pay – at – the – rate – that – was – applicable – when – they – have – taken – the – loan.

    The banks, will just lose their double profit. They profit from the interest (bank’s profit margin) and they profit from the difference of the exchange rate that they receive and the exchange rate that they pay, which is ILLEGAL.

    I don’t care if they assumed they will be receiving this EXTRA ILLEGAL profit indefinitely. It’s not a loss. Their profit will just be the normal and legal profit that the banks should receive.

    Just think of a simple example for Christ’s sake:
    My instalment is CHF 1,230 per month – EUR 1,150.
    500 is their profit margin/interest, 400 is the over and above payment of the exchange difference and 250 is capital payment.

    And I ask the following: If they stop receiving the 400 of the difference of the exchange rate will they still be receiving their interest/profit margin of 500 per month?

    Of course they will be receiving it.

    Since their instalment has not changed from the date that they have granted me the loan (as they have secured it), how exactly will they have a loss?

    They use so many lies that they end up believing its the truth when building their next lie.

  5. ““But the bigger credit negative is the moral hazard that the proposal creates among borrowers of the much larger amount outstanding of euro-denominated mortgages,”

    OK – two questions:

    i) What does that statement mean in plain simple English? It sounds like a quote from “The Little Book of Management Bollocks“. Yes – that is a real book. And ‘Bollocks’ is a not a swear word before you censor this comment Nigel. John Mortimer Q.C (creator of “Rumpole of the Bailey”) successfully defended Virgin Records of Nottingham in the late 1970’s after they placed “Never Mind the Bollocks – here’s the Sex Pistols” posters up in their window. I remember – I was there (as the cliche goes).

    ii) Ratings agencies. Weren’t they the same folk who rated Iceland as AAA investment rating (after Iceland was granted a loan of $130bn against a national GDP of $13bn in the early 2000’s)? #likewhatdotheyknow?

  6. Why oh why have Moody’s decided to comment on this situation. There are no figures issued for Alpha Bank who are equally guilty of this mis-selling.

    Well stated ALWC for your comment but up to now no indication has been given by the banks as to which way they are going to go. Maybe they are staying quiet until the deadline of 1st January 2016 when no counter claim will be accepted against them. This will take down the legal screens and pave the way to start mass repossessions hoping this will scare people into bringing these loans up to date.

    Another situation will need to be monitored. How many of builders will be taken to court ahead of the purchasers of the properties. I do believe that Troika have more to do with this than the banks lead us to believe. The vultures are circling above ready to pick up on bargains that will be on offer.

  7. It really should be looked at as a decision, as not on how much the Banks (may lose).

    They made their decisions when they offered the packages to the unsuspecting public.

    Hence who does the fault lie with!!

    Is their no longer a right and wrong when it comes to the Banks, versus the people.

    Moral justice no more no less.

  8. Moody’s hoping to save Mr Willbur Ross a few pennies.
    Moral hazard is exactly what the banks did not care about when issuing these loans (investments) to retail customers.

    If they are worried about strategic defaulters,then simple. Start by transferring only the loans that have always been paid and Not defaulted. Then work on the default loans.

    All domestic household primary residences should be transferred back to the Euro exchange rate at the time of the issuing of the loan.

    The strategic defaulters will mostly be €1 million plus loans..not the average retail bank client.(the banks know who they are).

    I think Anyone with business loans will have to prove the banks forced or encouraged them to take out CHF denominated loans, in order to get recompense.

    I hope the lawmakers do not care about the banks losses, if they actually do have losses.

    All of the clients that have not defaulted 50% , they have been making increase margins out of for 6+ years.

    Morals, what a joke!

  9. Yes, and likewise, recalling millions of cars will hit Volkswagen financially hard. If your product is not fit for purpose then, of course, it is the product owner who should take the financial hit. This is a non-story from Moody’s and states the obvious. It also appears one-sided.

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