The reform of the legal framework on repossessions should be expedited in a bid to assist the commercial banks pressure borrowers to repay their loans, senior bankers have told an economic congress.
Cyprus has received a €10 billion from the EU and the IMF to avert the meltdown of the island`s oversized banking system. However, following the bailout the economy has been characterized by rising non-performing loans which reached €26 billion. Debt restructuring is considered by Cyprus lenders as an important element in the success of the island financial adjustment programme.
“The NPLs in Cyprus are the worst in Europe by a mile, they are greater than 40%. NPLs might represent the single impediment to the recovery of not just the banking sector but the economy,” said John Patrick Hourican, CEO of Bank of Cyprus, which has been bailed in in order to cover its capital shortfalls.
Calling for the frontloading of the reform on the law on repossessions, Hourican said “we would not and could not and should not repossess collateral and flood the market with it that would cause a death spiral,” adding “it is important in order to create moral hazard.”
“We need to put that in place because that is an important part of a proper functioning arrangement between customers and their lenders,” he added.
George Appios, CEO of Piraeus Bank Cyprus, said the Central Bank of Cyprus has issued a directive on the management of arrears and the approach to debt restructuring, but the banks have no robust repossession legislation at their disposal.
Furthermore he said that one of the imbalances of the baking system is the funding gap. With only €62 billions in loans and €46 deposits the funding gap reaches €16 billion, which combined with the liquidity reserves the banks have to keep increases the liquidity gap to 25 billion.
On his part George Georgiou, Managing Director of the Alpha Bank Cyprus, said Banks need to focus on NPLs, adding this is not an easy challenge. “You cannot easily restructure 50% of the banking sector portfolio, it is a process that will take time”, he said.
Marios Clerides, CEO of the Cooperative Central Bank, which has been bailed out by the Troika with €1.5 billion, blamed the politicians for the small restructuring of bad loans.
“The political system is selling protection to the borrowers. Who is going to pay for those loans. Will the guarantors, will the bailed in depositors of BOC have to bear these losses, or are we suggesting new haircuts?” he asked, adding “political decisions have been taken without proper analysis of the full impact.”
Referring to the stress test to be carried out by the European Banking Authority, Hourican noted that this is ill time for Cyprus.
“Ii is like having a patient in ICU and putting him on a treadmill,” he noted.
Hourican acknowledged that in 2013 Cyprus went through a shock, noting that there were times of trouble in the economy many years before.
He noted however that Cyprus is a small country capable of “snap recovery” and referred to the hydrocarbon reserves discovered in Cyprus` offshore blocks.
