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Expert Opinion on Cyprus’ New Borrower Incentives to Reduce the Islands NPLS

July 24, 2018

The Cyprus Ministry of Finance has released a statement regarding the IMF (the International Monetary Fund) & the European Commission is recommending Bills regarding the islands longstanding issue with Non-Performing Loans.

The Head of the Finance Ministry’s Financial Stability Directorate has spoken about his personal thoughts surrounding the efficiency of the new Bills, the controversies and their likely implementation. The framework is very likely to be deemed effective by the Parliament (the EC’s condition for implementation) regarding the dialogue with them on the proposed changes, this means that expectations are being made regarding the repossessions from the current longstanding and highest NPLs.

At the moment, extreme assumptions are being made which has led to unnecessarily large capital requirements; hopefully future collections will not have to be as drastic, which means the requirement for provisions within is predicted to come down.

The bills give some incentives in order to entice borrowers to repay their loans of their own accord; while punishments will be handed out to those who ignore their responsibilities to the banks and introduce incentives at the negotiation table and novelties such as electronic auctions. They give banks more effective tools, including incentives at the negotiation table.

The Stability Directorate stated that while it may be difficult to predict the immediate impact the bills will have on actually helping banks recover the loans; with sceptics looking at the huge €22B NPL debt the only way to gage what will happen is by looking at whether the existing framework has been improved. The preferred resolution would be for new legislation to lead to more restructurings and introduce the right incentives; which would ultimately address the strategic default within Cyprus.

Parliament’s approval of the new bills, which aim at addressing gaps in existing legislation are a condition for the European Commission’s sanctioning the deal signed by Hellenic Bank and the Cyprus Cooperative Bank earlier this week, transferring the latter’s operations and deposits to Hellenic.

The need for the deal resulted after stricter supervisory rules made a further increase in in the provisions for loan impairments by the state-owned lender necessary. The bank, which received a capital injection of almost €1.8B from the government back in 2014 and 2015 and was unable to find new equity from the market while facing a NPL ratio of roughly 60% compared to 40% of the islands loan repayments.

Sceptics have cautioned that if following the parliament’s approval, the new framework is considered insufficient to assist banks with the recovery and collection of their debts; Cyprus will then continue witnessing recommendations for capital increases which create the problems currently being witnessed incase Co-op related to its capital requirements.

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