By Angelos Anastasiou
WHILE DEPUTIES gear up to vote on an ambitious bill that would protect defaulting debtors’ property from foreclosure, the incoming governor of the Central Bank made a dramatic plea to wait as the looming impact on banks could be disastrous – again.
Traditionally, banks in Cyprus have had it rough when it came to dealing with non-performing loans (NPLs). The judicial system is notoriously slow – foreclosure cases took an average of 10 to 12 years to adjudicate – and the legislative framework allows plaintiffs to drag the process out with endless objections and other legal tricks.
Outgoing governor of the Central Bank Panicos Demetriades summed it up nicely in an interview on Wednesday.
“It’s still the case that the banks are not able to basically carry out any repossessions in any meaningful timeframe,” he said.
Demetriades should know. According to an April 1 International Monetary Fund staff report, non-performing loans (NPLs) have increased dramatically, approaching 50 per cent of total borrowing – €22 billion or 135 per cent of GDP – and pose a “key challenge” to economic stability. One of the reasons is that there is no immediate consequence to non-payment, resulting in the emergence of so-called ‘strategic’ defaults – instances where debtors intentionally refrain from making repayments even though they can afford to.
“There’s a lot of strategic default happening,” Demetriades said. “Borrowers need to know that there’s a consequence when you don’t pay.”
Of course, combating strategic defaults wasn’t helped much last December, when Demetriades reportedly told journalists at an informal gathering that “debtors who are genuinely unable to repay their loans will see them partially written off.”
Still, the rational conclusion would be that banks must be allowed to credibly wield the threat of repossession if defaulting is to be genuinely disincentivised, and that is precisely what the ex-governor was advocating. In this, he is by no means alone: the IMF and Finance Minister Harris Georgiades have stressed the need to “help the banks towards more effective collection”, and of course the banks themselves can’t wait to have their hands untied – though they all hasten to clarify that they have no appetite for mass foreclosures.
But though things appear straightforward, the picture becomes murky in part because lenders are not without blame in granting loans to people who didn’t have the means to repay them in the first place, but also because the politically sensible thing to do is side with the little people fighting the big, bad banks.
To this end, MPs employed their political prowess and prepared a bill that would allow defaulting debtors who find their primary residence or small-to-medium business premises under threat of foreclosure to seek a temporary court-ordered moratorium on repossession proceedings. Though the bill does provide that such cases can only be referred to court if all the loan restructuring options offered by the bank have been exhausted, it is hardly creative to envisage a scenario where debtors intentionally refuse restructuring proposals with a view to securing a suspension of repayment.
“We are trying to create a tool to be used when all restructuring options have been exhausted,” said DIKO deputy Angelos Votsis. “This would allow the court to determine whether a particular default is a result of the financial crisis or not, so that abuse can be prevented.”
The bill had been announced to be put to a plenum vote on April 10, much to the dismay of Georgiades and various other stakeholders including the associations of banks and employers. The latter’s head, Michalis Pilikos, unleashed a vicious attack on the bill.
“This issue has been heavily politicised, and when that happens it becomes very hard to resolve,” he said.
“It’s not possible that all loans relate to primary residences and poor toilers. Some borrowers are perfectly capable of repaying their loan, but all this debating and uncertainty serves nothing but to discourage them from doing so.”
Meanwhile on Friday, in a dramatic last-minute intervention, governor-designate of the Central Bank Chrystalla Georghadji asked the House legal committee to forego pressing ahead with the bill until she has had time to study the issue in detail. Georghadji cited operational risks that could induce recapitalisation needs for banks in light of the upcoming European Central Bank’s stress tests and gently played the troika card, while assuring the deputies that she would work with them to address their issues.
“Don’t do it now, the timing is not good,” she told the committee, implying the existence of a point in the future when the timing would be good.
But her pleas fell on deaf ears, and the committee voted to put the bill to the April 10 plenary vote.
Earlier in March, Georgiades had tried to warn off the committee in a letter arguing that protecting borrowers while jeopardising lenders’ viability constitutes a dangerous half-measure. He informed the deputies that the government is preparing a comprehensive bill that would address insolvency as part of the overhaul of the banking sector, and described a roadmap that included the staffing of the Financial Ombudsman’s office – tasked with bridging disputes between lenders and borrowers out of court – by the end of March, following which the insolvency bill would be put to a House vote.
But March is over and, although the Ombudsman himself has been appointed, he has no staff to work with, drawing irate comments from Votsis and Costas Melas, head of the borrowers’ association. The two argued that the government needs to go after the big fish, namely the few corporations that have billions’ worth in NPLs, before chasing small borrowers.
“The state needs to render its citizens able to repay their loans”, Melas said. “It has been said that the big borrowers must pay first, and rightly so.”
“The banks are supposedly reviewing the government’s insolvency bill, which still hasn’t come to the House,” Votsis protested.
The political world in Cyprus also introduced a strange proposal on Wednesday, when it came out in favour of the Central Bank negotiating with the troika a revision of the definition of NPLs so that their number can be reduced. DIKO leader and chairman of the House finance committee Nicolas Papadopoulos qualified the need to redefine NPLs by arguing that “what constitutes an NPL in the rest of the world cannot possibly constitute an NPL in Cyprus, due to the particular economic conditions prevalent here,” an argument made by all parliamentary parties with the exception of ruling DISY.
The timing of this concerted call seems suspicious. To an outsider, it might look like a rogue strategy to deal with NPLs, where step one is ensuring that any other plan to resolve the problem – facilitating the seizure of assets – is rendered unfeasible, and step two is getting everyone to agree to ignore NPLs by not calling them that – fudging the numbers. Step three is the million-dollar question, but it’s not clear what it is yet, or even if it exists.
The political call to redefine what constitutes an NPL had Pilikos fuming. “Wishful thinking and political dribbles”, he said, serve only as time wasters.
“Changing the definition of NPLs will not help,” he argued. “The risk to the banks and our economy is real, and if loans aren’t repaid in real terms, we are in great danger.”
There are no easy fixes or painless ways out of the NPLs’ noose which threatens to suffocate the banking system and, by virtue of the domino effect, the economy as a whole. Something has to be done, but the Parliament’s proposal flies in the face of this very basic tenet: it seeks to stop anything from being done, freezing the frame in hopes of a deus-ex-machina miracle solution. It’s instantly recognisable as the same old wishful thinking attitude that brought us here in the first place. The sentiment behind the proposal is certainly valid – though driven more by populist politics than any measure of economic sense – but the damage it is bound to cause is equally certain.