Cyprus Mail

Legislating Swiss francs debacle would damage the banks, CBC says (Updated)

By Angelos Anastasiou

The problem of loans given by Cypriot banks in foreign currency to 3,000 borrowers, totalling approximately €1.5 billion, cannot be addressed through legislation, the Central Bank of Cyprus (CBC) told lawmakers on Monday.

At parliament, the finance committee resumed discussion of the issue of borrowers who took out loans in foreign currency – mostly Swiss francs – only to find themselves in dire straits after the exchange rate between the franc and the euro went against them, increasing their outstanding debt by 35 to 40 per cent for loans taken out in the period from 2008 to 2010.

The committee decided to issue a two-week ultimatum for the Central Bank to come up with options to resolve the issue.

Last month, committee members had warned commercial banks that, barring their help in resolving the issue, it would seek to legislate solutions for borrowers – artificially pegging the exchange rate to the point it was on the date the loan agreement was signed, forcing the losses since then on the lender.

At Monday’s session, the Central Bank said this was not an option, as it would deal a blow on banks’ capital buffers and create issues of moral hazard.

A more effective option, it added, would be letting the oversight authority continue to engage the banks in dialogue over improving their loan schemes to benefit distressed borrowers, which a CBC representative said “produced positive results”.

Of the 3,000 borrowers found to have received credit in foreign currency, approximately 40 per cent – €600 million in 1,200 accounts – were Cyprus residents, the Central Bank said.

According to the Central Bank’s stats report on the issue, 98 per cent of foreign-currency loans were made by the Bank of Cyprus, Hellenic Bank, and Alpha Bank.

The same report estimated that, if the loans were to return to the original exchange rate, the Bank of Cyprus stands to bear losses of €147 million, Hellenic Bank €11 million, and Alpha Bank (only from housing loans) €10 million.

Total losses across the Cypriot banking system could reach €250 million, the report found.

The losses would impact banks’ capital adequacy, the CBC rep said.

Committee members appeared dissatisfied with the CBC’s arguments, and complained that it failed to present them with viable proposals.

Borrowers’ association deputy head Spiros Spiridonos said the banks share the blame for the problem with the CBC.

“These are not loans per se,” he said.

“They are a combination of a loan with a high-risk investment product, which require specialized handling by the banks, which was never deployed. There are European court rulings vindicating our cause, even though some banks in Cyprus claim these don’t apply to them. For us, the issue is crystal-clear: the banks are as culpable for this problem as the CBC, because it had spotted these types of loans as far back as 2006, and it chose to do nothing.”

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