By Angelos Anastasiou
Incoming Central Bank Governor Chrystalla Georghadji yesterday called on deputies to refrain from submitting a bill protecting primary residences and small to medium sized businesses from foreclosure, at least until she takes office on April 11.
The House Legal committee was scheduled to convene this morning in order to finalise the draft bill so that it could be put to a plenum vote on April 10. However the fear among financial authorities is that if banks cannot claw back non-performing loans (NPL) they would be put at further risk.
Georghadji’s appeal follows the same line of thinking of her outgoing predecessor Panicos Demetriades who said this week that banks must be allowed to seize assets, and borrowers who intentionally fail to repay loans must be penalised.
Demetriades’ comments echoed an IMF report on Tuesday which argued in favour of facilitating asset seizures by banks as an effective remedy. The report diagnosed the issue of NPLs as a “key challenge” to the economy, reporting that they have reached 50 per cent of total loans – at €22 billion, or 135 per cent of GDP. The IMF also called on legislators to put in place a “strong legal framework to facilitate foreclosures”.
Yesterday, in a presentation on the implementation of the European Central Bank’s single supervisory mechanism during a meeting of party leaders and later leaked to Stockwatch website, Georghadji argued that the asset quality review to be performed during the European Central Bank’s stress tests this Autumn would be adversely affected by any legislation hindering efforts to reduce of asset seizure periods – like the bill proposed by the House.
Further, Georghadji cited the government’s commitment to reducing asset seizure periods per the terms of the Memorandum of Understanding (MoU) agreed to between Cyprus and its international lenders – the European Central Bank, the European Commission and the International Monetary Fund – in March 2013 in exchange for a €10 billion emergency rescue loan.
Lastly, the Central Bank noted that housing and SME collateralised loans form a big part of the balance sheets of banks and cooperative credit institutions (CCIs), which will be impacted heavily in case the bill is voted into law – especially for CCIs, the impact is deemed “potentially disastrous.”
According to Stockwatch, Georghadji appealed to the parties to refrain from submitting the bill to the plenum, at least until she assumes her duties, and once she has had a chance to familiarise herself with the issue.
But Georghadji’s intervention appeared to have left committee members unimpressed.
AKEL MP and committee member Yiannos Lamaris said that no meeting could dictate the actions of the House Legal committee, and argued against Georghadji’s assertions of risk to Cyprus banks’ prospects of passing the ECB’s stress tests.
“This bill aims to prevent banking institutions from performing mass foreclosures,” he said.
Lamaris clarified that when banks’ internal loan restructuring mechanisms had been exhausted, borrowers who were not satisfied with any of their bank’s proposals would be able to resort to the court, disclosing all their financial information.
“How does that translate to encouraging them to stop repaying their loans?” Lamaris asked.
He added that the arguments against the bill were stunts pulled by the banks, which had been allowed to act with impunity for years.
EDEK MP and fellow committee member Nikos Nicolaides said that the bill’s aim was to protect neither borrowers nor intentional defaulters.
“The bill on the protection of the primary residence and business premises aims to keep families from homelessness, and businesses operational,” he said.
Nicolaides argued that no borrower who was able to make loan payments or had not exhausted all restructuring options would be offered protection.
“The prospect of mass foreclosures must be averted, certainly without risking the viability of banks or CCIs in any way,” he concluded.
Meanwhile, talk of creating a ‘bad bank’ to handle these toxic assets – NPLs – resumed yesterday with DIKO MP Angelos Votsis and academic Theodore Panayiotou coming out in favour but Employers and Industrialists Federation (OEV) chief Michalis Pilikos deeming such discussion irrelevant.
“Large NPLs being handled by a ‘bad bank’ allows options and practices that aren’t normally available to a commercial bank,” Votsis said.
Panayiotou lambasted the Bank of Cyprus management for inaction and described a tripartite system of resolving the issue of NPLs.
“The bank has done nothing for six months,” he said. “We’ve been talking about a good and bad bank for months, and nothing has been done. How do they expect anyone to repay their loan if no one knows what is going to happen? This decision should have been made overnight.”
“The problem needs to be solved by three parties: the borrower, the banks and the government. The cost has to be borne by them.”
But Pilikos was unyielding in his criticism, arguing that whether the loan portfolio remains with the BoC or is moved to a bad bank is irrelevant as non-performing loans will eventually need to be serviced one way or another.
“The risk to the banks and the economy is real,” Pilikos said. “If the loans aren’t repaid in real terms, we are in great danger.” “If we split the BoC into a good and bad bank, we’ll just have one healthy bank. But ultimately some assets will need to be seized, either way.”
Another issue exacerbating the situation is the non-operation yet of the financial ombudsman’s office, which was to begin work at the end of March.
The borrowers’ association has complained that the failure to render it operational was causing further distress to insolvent borrowers.
Speaking on state radio, the association’s head Costas Melas was unable to offer an explanation for the delay.
“The memorandum of understanding [MoU] terms stated that the institution of the Financial Ombudsman should have been operational by the end of March,” Melas said. “Why isn’t it? The man is there, he has been appointed, but his department has not been staffed.”
The ‘man’ Melas was referring to is Pavlos Ioannou, appointed in June 2013. The office is tasked with mediating disputes between lenders and borrowers and is considered crucial in addressing NPLs.
Votsis said the bill governing the functioning of the office was being held up by the banks. “So far the banks have been saying they want to review the bill but we still haven’t seen it,” he said. But his claim was rejected by both Melas and by Pilikos.