Cyprus Mail

Reducing NPLs remains a top priority, experts say

Vincenzo Guzzo, IMF rep in Cyprus

The financial system in Cyprus is still fragile and significant challenges remain and the top priority for the recovery of the banking sector is the reduction of the high number of non-performing loans (NLPs), was the conclusion of a conference held on Monday.

The conference titled ‘Cyprus: Financing the recovery’ was organised by the Belgian think-tank ‘Bruegel’ and the Cyprus finance ministry.

“We have said on record that this financial assistance programme was a success and I would like to stand by that. We have seen the economy turning around, we have seen a better performance than we expected, we have seen strong results on the fiscal side, always exceeding fiscal targets but the situation is still fragile,” Vincenzo Guzzo, the IMF resident representative said at the event which took place at the University of Cyprus.

He deemed the reduction of the banking system`s high NPLs stock a high priority, noting that “NPLs which are approaching 60 per cent of total loan facilities are preventing banks from being banks,” and added that attention should not only focus on the banks` capital but also on the broader economy.

Guzzo approved of the insolvency framework and the foreclosure regime as major steps but said this should not be considered a finished job. “It is a major step forward but some elements of the framework perhaps depart from what are regarded as international best practises. It is better to have a legislation than not to have one, but we should monitor and take stock and try to come back to it in the future,” he said.

Along the same lines, former CEO of the Cooperative Central Bank Marios Clerides said that NPL dynamics appear to increase in an adverse banking environment.
“We hear discussions of 60 per cent NPLs but if predictions are a 100 per cent this is an opportunity, because if you manage to collect, these are bank profits,” the former banker said.
He pointed out that low capital, the fact that the banks have entered a conservation mode, liquidity problems especially in banks that have to repay emergency funding, as well as the high public debt, makes the banks very reluctant to provide new lending.

On his part, University of Cyprus professor Michael Michael agreed that addressing the high NPLs remains the biggest challenge facing the Cypriot economy, but noted that the economic recovery, expected to reach 1.5 per cent of GDP in 2015, along with the stabilisation in the real estate sector will assist NPL reduction efforts significantly.

“The politicians need to send the right messages,” he said, noting that the Central Bank of Cyprus should also help the banks to accelerate the speed of restructuring NPLs.

“As it is now it could take years to restructure all NPLs and the existing pace is very slow,” he concluded.

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