Brussels, 25/07/2014 (Agence Europe) - On 25 July, the troika of lenders (European Commission, European Central Bank and International Monetary Fund) announced that it had reached agreement with the Cypriot authorities allowing it to end its fifth monitoring mission on implementation of the country's bailout programme.
The troika used stronger wording and lavished less praise than after previous missions. The trio of lenders warns of the “critical” importance of reversing the trend of increased non-performing loans (NPLs) in order to restore lending, economic growth and job creation.
The troika says: “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 non-performing loans”, which now account for over half of loans from Cypriot banks.
The press say that the end of the mission was delayed slightly because of disagreements between the Cypriot government and the troika over the update of foreclosure legislation, which has to be updated. As the IMF explains in its latest report, foreclosure can currently take up to 20 years. The new legislation is due to be approved before 12 September, the day that the Eurogroup will meet to endorse payment of €350 million in aid from the European stability mechanism (ESM), the eurozone's permanent bailout fund. Under the most recent update to the memorandum of understanding (see EUROPE 11111), the new rules should have been adopted by the end of June.
“Ongoing efforts by banks to proactively raise capital in the private markets are welcome”, says the troika, particularly in the light of the reports of the ECB's and European Banking Authority's assessment of the banking sector and the fact that big Cypriot banks will join the single supervisory mechanism in November. Under pressure from the government, the island's biggest bank, Bank of Cyprus (BoC), is reported to be planning to raise €1 billion. “Banks and the coop sector should continue to implement their restructuring plans. (…) 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”. This is one of the eurozone's preconditions for international aid for Cyprus.
The troika says: “The macroeconomic outlook remains broadly unchanged compared to the fourth review. Output in 2014 is expected to contract by 4.2 percent, with growth in the tourism sector cushioning weak activity in other sectors. (…) Growth in 2015 is projected at 0.4 percent, 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”. The Cypriot governent is expecting the economy to shrink by 4% in 2014 (see EUROPE 11114) and says the troika's forecasts for 2014 are over-pessimisitic.
The troika explains: “The authorities have pursued a cautious fiscal policy, which helped allow them to over-achieve fiscal targets consistently. Such prudence should continue, in light of lingering risks. In particular, 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 percent of GDP in 2018 that will put public debt on a sustained downward path”.
The troika recommends: “The authorities should maintain the structural reform momentum” and make progress in administrative reform and ensuring timely implementation of the privatisation plan.
The troika concludes: “Given still high risks, continued full and timely policy implementation remains essential for the success of the programme.”
In addition to the €350 million Cyprus is expecting from the ESM, the IMF will meet in September to decide on the disbursement of an aid instalment of €86 million. (EL)