THE STRONG growth boosting the Cypriot economy has failed to produce the expected reduction of the high stock non-performing loans (NPLs), hampering the island’s banking system, IMF representative in Cyprus, Vincenzo Guzzo, has said.
“We have clearly a strong economic recovery but that has not produced the reduction of NPLs that someone could have expected and certainly that reflects the weak payment discipline,” Guzzo told the 5th Cyprus banking forum.
Despite three years of GDP growth after the 2013 crisis, Non-performing Loans amount to 46% of total loans in the Cyprus banking system, placing the island second after Greece in the EU.
Guzzo noted that strategic default, borrowers who have the capacity to repay their loans but refrain from doing so, is associated with the lengthy inefficient procedure in enforcing legal claims and also “a perceived blanket protection of primary residence.”
He also referred to the World Bank’s data, according to which contract enforcement takes 1,200 days in Cyprus, while foreclosures take 10 years, which is the longest in the EU.
“Weak enforcement preserves poor preserves, poor payment discipline as the dominant strategy for many borrowers,” he said.
He called for an ambitious strategy to tackle both NPLs and high private debt, stressing that growth alone is not sufficient to reduce NPLs.
On his part, George Syrihas, Executive Board Member of the Central Bank of Cyprus, agreed that the pace of NPLs reduction is slow relative to the Cyprus growth rate, but cautioned that one should not press for fast NPLs reduction.
“The pace we restructure NPLs is critical,” he said.
“We made progress. We had €6 billion reduction but progress is not fast enough given the progress of the economy,” he said.
But he underlined that “the pace with which we restructure loans is critical. We need to do much more because the economy is growing but there is a level on how fast we reduce NPLs.”