Brussels, 18/06/2014 (Agence Europe) - Encouraged by the successful return to the global money markets, the Cypriot authorities are planning to get the country's banks to follow suit in the very near future - ahead of the release of the European Central Bank's Asset Quality Review and the European Banking Authority's bank stress test results in the autumn. The Cypriot government will overhaul the legal system to ensure that the banks' recovery is not hampered by excessive toxic loans and to ensure that there is enough juice in the system to finance the recovery.
The board of the country's biggest bank, Bank of Cyprus (BoC), met on Friday 27 June to draw up a strategy to raise €1 billion but did not make any major decisions. Cyprus Mail says disagreement among the shareholders forced the governor of the central bank, Chrystalla Georghadji, to intervene over the weekend and demand action. In the first quarter of 2014, the BoC maintained a 10% CET1 capital ratio.
Earlier in the week, Cypriot Finance Minister Harris Georgiades said that the four banks that are part of the European bank testing (BoC, Hellenic Bank, Russian Commercial Bank and Co-operative Bank) “should seek to recapitalise even before the stress tests, now that foreign investors are confident in the prospects of our economy”. “In the context of the amendment, the focus will be on big borrowers who are uncooperative, and will include protection clauses for cooperative borrowers,” Georgiades added.
In the first week of July, the European Commission will publish its fourth monitoring report on Cyprus, which is bound to highlight the main problem facing the Cypriot government - the high level of non-performing loans in the country's bank system.
The figures are high when compared with the size of the economy. Recent figures from the Central Bank show that toxic loans totalled €26.77 billion in March, whereas GDP is currently €18 billion. The BoC, which is meant to lead the recovery, has 40% of the toxic loans.
Two dozen borrowers hold €6 billion-worth of toxic loans between them.
The situation at the BoC speaks volumes. Nearly half of its loans are viewed as toxic. Within the government, people explain that some two dozen borrowers hold €6 billion of the non-performing loans, in other words 40% of the BoC's toxic loans. The troika says that the 30 biggest borrowers each owe more than €1 million, and together they hold 40% of the BoC's toxic loans. There is a lot of discussion about this concentration of loans, stated Prodromos Prodromou, a Cypriot parliamentarian from the ruling DISY party. A June 2013 list published by Stockwatch in May says that the biggest borrower is a construction, real estate and tourism company, which has a debt of some €500 million. The 30 biggest bad-payers are mostly influential companies. One of the companies in question describes itself as one of the biggest private sector employers in Cyprus. The local press reports on rumours that the BoC is under pressure from politicians to ease up on the pressure on these companies. Euan Hamilton, one of the people responsible for helping BoC deal with the issue, said that he was impermeable to this type of pressure. In a report in the Cyprus Mail, he took a hard line earlier this month: “If people are trying to pull strings, they're not pulling them with me. How powerful they are is irrelevant to me. They owe us money, we want it back - that's it”.
This is a tricky issue for the government. Economic activity has been hamstrung for a year by restrictions on the movement of capital and the capital restrictions remain in place for international transactions. The government hopes to lift them by the end of the year, said a diplomat. Many small businesses lost out in the bail-in raids on the investment of bank shareholders and bond-holders. The big question is the extent to which one can “squeeze” companies. At the same time, there is a credit crunch that creates a vicious circle because banks do not have the necessary cash flow.
Heavily dependent on the housing sector
Across the banking sector as a whole, 60% of the toxic loans are held by companies, half of them in construction and real estate. In its third monitoring report, the European Commission said that the collapse of the property bubble had left the construction sector one of the industries most under stress in the country. The International Monetary Fund (IMF) says that cooperative banks are very important in the Cypriot financial sector, holding 45% of the market for domestic savings and 25% for domestic loans. Their assets total 100% of Cypriot GDP. Cooperative banks are not reported to have any big borrowers, only individuals and small companies. Half of the loans in the cooperative bank sector are non-performing.
The IMF says that the high concentration of lending on secured borrowing has led to excessive dependence on real estate.
In light of shortcomings in the Cypriot legal system, the troika of lenders (European Commission, European Central Bank and IMF) urges the Cypriot government to ease the rules on repossessions and to prepare new insolvency rules before the end of the year.
Prodromou says repossession did not ever take place in the past in Cyprus because, although it exists in law, it was never put into practice. The IMF says that repossession proceedings can take up to 20 years. Prodomou explains that the political world does not want anyone to lose their house. The government does not expect there to be no change, but knows that there are limits to the benefits of continuing with foreclosure, although it wants to protect the most vulnerable. Prodomou says the government does not want banks to buy up a raft of houses because this would not be appropriate given the state of the housing market in the country. According to Central Bank figures, the property price index has fallen 23% since the last quarter of 2008. A troika source says that repossessions need to be allowed in some cases because at present there is no real threat of people losing their homes which could act as an incentive for people to abuse the system. At the BoC, Hamilton took a dim view of such soft talk by politicians because it leads borrowers to feel that the bank is powerless against them.
An idea mooted by experts and briefly mentioned by Prodromou, is for the state to buy toxic loans and then charge rent to borrowers to protect them from repossession. Another suggestion is for toxic loans to be sold on to investment funds. Once the new rules are in place, they will give banks some room for manoeuvre and one thing they might do is to advise mortgage holders to pay off their arrears so that they come out of the toxic loan bracket, explained a government source.
The Cypriot government is planning to encourage mediation for first homes worth up to €350,000 with the idea of making non-performing loans performing and avoiding clogging up the courts, explained Prodromou.
The revised Memorandum of Understanding on the Cypriot bailout plan states that by the end of June: “The legal framework in relation to foreclosures and the forced sales of mortgaged property will be amended [...] and adopted by end-June, with immediate effect for all mortgaged properties except primary residences (for which provisions will enter into effect by end-December, in line with the adoption of insolvency legislation), to allow for private auctions to be conducted by mortgage creditors, without interference from government agencies”. “In the context of the amendment, the focus will be on big borrowers who are uncooperative, and will include protection clauses for cooperative borrowers,” Georgiades said.
People penalised by bank bail-ins
The government will not be able to help in some cases, such as those harmed by the bail-in. Under EU banking rules, savings of up to €100,000 are protected, but in the 2013 Cypriot bank bail-in, 47.5% of assets above €100,000 were converted into bank shares and the figures were even higher for Laiki Bank, which was later wound up. Protection was provided for borrowers who lost out in the bail-in, but only if their borrowing and savings were held in the same bank.
There are examples of people who were not able to be helped by the government, such as a mortgage taken out by an individual at Hellenic Bank to build a house. The borrower paid the money into an account at Laiki. After the Laiki bail-in, the borrower found himself with a massive debt still but having lost the money he'd borrowed to build his house. Similarly, another individual lived outside Cyprus for so long that he was no longer covered by the Cypriot social system and lost all his savings upon his return to the island. Such extreme cases are said to be limited. Prodromou said that, in the future, if possible, the government would have the moral obligation to provide compensation for bail-in losses. (EL)