IF THE House does not pass the foreclosures bill the Troika’s fifth and latest review will not be considered concluded and they will come back to the island to re-discuss the issue, IMF Mission Chief Delia Velculescu said yesterday.
During a conference call following the issuing of the IMF’s report on the latest troika visit, Velculescu said: “Putting in place the necessary debt restructuring legal framework, and this includes foreclosure and insolvency legislation, is urgently needed to set incentives for borrowers and lenders to negotiate in good faith solutions to re-establish loan repayment, in line with the borrowers capacity to do so. Ultimately the responsibility lies with both banks and the borrowers to agree on sustainable solutions for the benefit of all.”
She made it clear that approval of the legislation was a precondition for the conclusion of the 5th review.
“If the law is not passed, the review will not be concluded and we may need to come back to Cyprus and re-discuss the situation,” said Velculescu.
According to the IMF report, Cyprus is likely to return to growth next year but it cautioned the outlook was tempered by tensions over Ukraine and banks’ rising bad loans.
The IMF said it expected Cyprus would require additional fiscal effort to achieve a sustainable primary surplus target of 4.0 per cent by 2018.
It said a ‘growth friendly consolidation’ should focus on fully unwinding spending increases introduced before Cyprus plunged into crisis in 2013, while protecting capital expenditures. It also said there was further scope to cut the public payroll. Pay in the public sector has already been scaled back under the bailout agreement, and a freeze on pay rises is in place until 2016.
“There is scope to further reduce the public sector wage bill, complemented by reforming the pay structure to better link pay with performance and eliminate automatic increments before the wage freeze expires in 2016. Further savings could be achieved by reforming the education sector and pensions,” said the IMF report. Responding later, President Nicos Anastasiades dismissed the notion, saying that as long as Cyprus meets its commitments.
The IMF said that while significant progress has been achieved, overcoming the legacy of the crisis will be challenging.
“Risks remain significant, related to the uncertainty about the magnitude and pace of private sector deleveraging and the ability of banks to address NPLs (non-performing loans), as well as to geopolitical tensions of Ukraine-Russia,” it said.
Cyprus has close business links with both countries, particularly Russia, and was known within the European Union to be reluctant to adopt stringent sanctions on the country because of the impact it could have on its still-fragile economy.
The island has already garnered positive assessments from its lenders in a fifth post-bailout review concluded on July 25, but lenders are demanding that Cyprus approve an improved framework on foreclosures to assist banks in paying down non-performing loans. A rising hole in balance sheets is constraining banks’ ability to provide credit, in turn stymieing growth.
Parliamentary approval of a new repossessions framework is considered a ‘prior action’ before any new disbursement of aid is offered to Cyprus this September.
The IMF said the Central Bank of Cyprus developed an arrears-management framework to guide loan restructuring negotiations, and banks had put in place structures and policies to implement it.
“Still, progress has been slow, due to weak incentives for both lenders and borrowers to come to mutually-agreeable solutions,” it said.
“A streamlined foreclosure framework is urgently needed to promote payment discipline, where capacity exists, and facilitate restructuring, where ability to pay is constrained by the downturn. This will need to be complemented by a reform of the insolvency framework, to guide the restructuring process for viable borrowers and provide solutions to address the debt of non-viable ones.”
The recent announcement by Bank of Cyprus regarding its successful raising of €1 billion in capital in the private markets was welcome, the IMF said.
“At the same time, banks and the co-op sector need to continue their restructuring efforts by further reducing operational costs, strengthening capacity and processes, and improving governance,” it added.
International lenders expect the Cypriot economy will contract by about 4.2 per cent this year, register a modest recovery in 2015, and see a gradual increase in growth of close to 2.0 per cent over the medium term.
“Cyprus has come a long way in addressing the crisis. The financial sector has been stabilised, substantial fiscal consolidation has been implemented, and sweeping structural reforms are underway,” the report said.
“The cost of the crisis has been large, and painful but necessary measures have imposed an unavoidable cost on the population. Looking forward, significant challenges remain, and they will not be resolved overnight. The authorities will need to stay focused on and committed to adopting the necessary policies to advance their adjustment programme in order to pave the way for sustainable growth.”