By George Markides
Last Thursday, Bank of Cyprus shareholders approved the lender’s much needed capital increase with an overwhelming majority of over 87 per cent. The bank may now pass the ongoing European Central Bank stress tests, or will it?
The ball is now at parliament’s court (unfortunately). The foreclosures bill is still pending with opposition parties playing petty politics trying to capitalise on any misfortune that befalls the island — not the government.
Touting their unjustifiable mantra of “primary residence protection” opposition parties reject all and every attempt to speed up the foreclosure process, which is notoriously slow in Cyprus.
Unjustifiable because had our MPs been genuinely preoccupied with protecting the weak members of society, they would have put all their efforts in updating bankruptcy laws early on, by voting in legislation that would protect the weak and punish those who can, but do not, service their mortgage Instead opposition parties proposed a blanket protection of all primary residencies regardless of the owners’ financial condition.
Bankruptcy laws and especially those found in countries such as the USA are a beautiful piece of legislation. In particular, the USA has specialised courts that deal only with bankruptcies, speeding up the process, and in many cases afford creditor protection and debt restructuring to allow debtors get back on their feet and prevent creditors from being saddled with huge losses.
Our MPs had nearly two years to deliberate and deliver such a piece of legislation, especially since the foreclosures caveat was introduced as a Troika modality in the first draft for the Cypriot adjustment programme back in November 2012.
Instead, MPs spent two years not discussing foreclosures/debtor protection and now they are out in force scaring people witless that the evil Troika is after their homes, when in fact it will be their fault if it comes to that.
On August 25, the Central Bank of Cyprus published the Non Performing loans held across all banks on a consolidated basis.
The numbers are startling; more than 46 per cent of all loans are non performing and with no foreclosures and personal bankruptcies laws, banks, are shakier than ever.
For reference, banks in Greece with more than 25 per cent unemployment, two bailout packages and six years in deep recession had NPL’s close to 31 per cent at the beginning of the year (Cypriot banks had 43 per cent).
The situation has a sense of urgency when we look at Bank of Cyprus half year results (from January till end of June 2014) where close to 58 per cent of all loans are Non Performing.
If there is no foreclosures bill before the conclusion of the ECB’s stress tests in October, the four systemic Cypriot banks (Bank of Cyprus, Cooperative Banks, Hellenic Bank and Russian Commercial Bank) will have to report that the cure time — the time necessary to foreclose on property when all else fails — for an NPL is essentially unknown. This will have serious consequences.
It doesn’t matter how many guarantees — be it mortgaged property or other — are attached to those loans. If those mortgages cannot be foreclosed they might as well not exist. The Central Bank governor has warned that if no foreclosures bill is voted in, all guarantees held by Cypriot banks will have zero value.
In this scenario if the ECB does not fail the four systemic Cypriot banks and thereby forcing them to go the way of Laiki , they will definitely demand additional capital buffers to weather the storm.
This begs the question: what kind of investor will pour money post October into a banking system that has suffered a haircut where money does not flow freely in and out of the country and where the largest bank barely managed to attract €1.0 billion of fresh capital just three months prior?
Dr. Christopher Pissarides has suggested it is best to vote in the foreclosures bill and then make all adjustments necessary in order to protect those who were servicing their loans but due to loss of income are unable to continue doing so.
At this stage I am forced to agree with him, however, as I have said earlier Cypriot politicians knew two years in advance that there is a requirement to speed up the foreclosures process and had a lot of time to come up with an elegant solution to protect the weaker members of society, instead they sat on their hands and did nothing.
George Markides, BSc and MBA, is an economics researcher