The Troika of international lenders said that Cyprus continues to make further progress in structural reforms and that the banking and finance sector seemed more stable, but stopped short of chastising the government on the delay to pass a new law on foreclosures that will help banks recover non-performing loans.
The bill, discussed late on Thursday night with the Troika heads of mission and President Nicos Anastasiades, is expected to be submitted to the Council of Ministers for approval on Monday, endorsed and then tabled for a vote at the House of Representatives by the end of July.
The crux of the dispute is repossession of properties in order to pay down loans at a time when banks themselves are facing liquidity issues due to debts piling up, with the rate of NPLs at the commercial and Cooperative banks now estimated at the dangerous 50% level in their loanbooks.
There was political pressure on the government to preserve the “primary home” policy, whereby a family’s residence could not be repossessed.
Concluding the fifth review mission to Cyprus, after which some €436 mln of bailout money from the European Stability Mechanism and the IMF will be paid in September, senior European Commission sources said on Friday that “putting in place without delay an effective legal framework for foreclosure and insolvency is essential to ensuring adequate incentives to borrowers and lenders to collaborate to reduce the level of NPLs.”
“Reversing the rising trend of non-performing loans is critical to restoring credit, economic growth and the creation of jobs,” which has reached record levels, but seems to have stabilised, according to the Troika report.
“he debt-restructuring supervisory framework needs to be further strengthened, while the ongoing efforts by banks to proactively raise capital in the private markets are welcome,” the EC sources said.
Bank of Cyprus aims to raise some €1 bln in fresh capital from foreign investors in return for an equity stake, in order to cover its cash shortfall and manage the nearly €9 bln in European Liquidity Assistance (ELA) debt it acquired when it took over the operations of the now defunct Laiki Popular Bank.
The bank also needs to maintain a safety cushion in its liquidity levels in time for the Europe-wide stress tests of 128 systemic banks in October.
But, former shareholders who saw their deposits written down as part of the bail-in rescue imposed by the Eurogroup of Eurozone finance ministers in March 2013, as well as new shareholders that came out of the deposits-to-equity plan, are up in arms that adding new shareholders will further dilute their holdings and are seeking legal action.
The Troika report on the fifth review added that “the authorities have continued to meet the fiscal targets with significant margin in the first half of the year, as a result of prudent budget execution. In the financial sector, banks are advancing with their restructuring plans and capital raising while supervisory monitoring of their actions and operational capacity to address NPLs has been enhanced.”
“Structural reforms are proceeding: the authorities have implemented a welfare reform providing a guaranteed minimum income for all those in need, have commenced the integration of the revenue administration, and have strengthened the administration’s powers to fight tax evasion.”
The report said that the macroeconomic outlook remains broadly unchanged compared to the fourth review. Output in 2014 is expected to contract by 4.2%, with growth in the tourism sector cushioning weak activity in other sectors. Unemployment remains very high, although signs of stabilisation are emerging. Growth in 2015 is projected at 0.4%, with the recovery constrained by the high level of private sector debt. Risks remain significant, related to constraints to the supply of credit, as well as to the ongoing crisis in Ukraine, it added.
The Troika review concluded that banks and the Cooperative sector “should continue to implement their restructuring plans. Further reducing operational costs, ensuring stable funding, strengthening arrears management capacity and processes, and improving governance are key ingredients for a healthy banking sector that can support the economy and allow for the gradual relaxation of capital controls according to a revised milestone-based roadmap. To prevent vulnerabilities from re-emerging and preserve the integrity of the financial sector, the authorities need to further strengthen supervision and regulation and step up the implementation of the Anti Money-Laundering (AML) framework, in particular with respect to AML supervision of banks.”
A privately-held bank was seized last week by the central bank after reports from the US Treasury Department suggested the bank had been aiding money laundering operations linked to Hezbollah, a claim the bank has vehemently denied and suggested it was all a ploy by the government in a hostile takeover bid.
On fiscal policy, the Troika warned that “next year’s budget needs to be based on conservative assumptions, ensure the fiscal neutrality of the new welfare reform, and help achieve a smooth path towards the medium-term primary fiscal surplus target of 4% of GDP in 2018 that will put public debt on a sustained downward path,” adding that “timely implementation of the privatisation plan is necessary to increase economic efficiency, attract investment, and reduce public debt.”
So far, Cyprus has received four disbursements from the ESM/IMF totalling €5.77 bln.
