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Banks will lower interest rates if government pays

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Cyprus banks are willing to take up Finance Minister Makis Keravnos’ call to lower their lending rates to prevent a new toxic loan crisis, as long as the government chips in, according to reports.

Keravnos told MPs at the House Finance Committee on Monday that he had written to the Cypriot banks urging them to cut interest rates on mortgages, reduce banking charges and increase the deposit rate.

The minister argued that a new toxic loan crisis was looming after six consecutive increases in interest rates by the European Central Bank since last summer.

Following the ECB’s latest decision, the interest on refinancing operations stood at 3.5% and for deposits at 3%.

The average mortgage rate in July was 2.5%, and the maximum could reach 3%.

As reported on Thursday by the Association for the Protection of Borrowers (Syprodat), Cypriot banks are following an upward trend in terms of interest rates on loans, charging between 3.50% and 6.50%.

Phileleftheros daily quoted banking sources saying banks are open and willing to discuss a government plan to support borrowers, stressing that “social policy is the responsibility of the state and not the banks”.

As banking executives have pointed out, according to Phileleftheros, they have always supported government schemes to support defaulted borrowers.

The banks also claim they are “flexible” in the new interest rate environment.

Sources at the Bank of Cyprus state that sustainable restructuring of customer loans is one of the tools used in the era of hiking interest rates, with the main objective of reducing monthly instalments by extending the repayment period.

The government, according to Phileleftheros, is arguing in favour of a looser interest rate policy based on the general impression that banks, due to the increase in lending rates alone, are making profits while keeping deposit rates very low.

This profitability, according to the government, also adopted by political parties, allows them to reduce the cost of existing loans, to help borrowers and prevent the risk of creating more non-performing loans.