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Finance ministry willing to consider allowing borrowers to bid for own loans (updated)

By Angelos Anastasiou

As the Central Bank of Cyprus continues to resist the idea, the Finance ministry is open to considering a proposal to allow borrowers the right to buy their loan back at a discount before it is offered for sale to an investment fund, lawmakers heard on Thursday.

Addressing the House Finance committee, the ministry’s Economic Policy director Andreas Charalambous warned that “we are very close to crossing the line of what is acceptable [to the Troika of Cyprus’ international lenders]”.

DIKO leader Nicolas Papadopoulos has stated that his party will vote against a government bill allowing banks to sell loans to investment funds unless the borrower’s right to submit a buy-back offer first is inserted.

In addition to DIKO, EDEK and the Greens also backed the proposal, while DISY argued that solutions can be found to accommodate all sides without victimising any of them.

Charalambous said that the only way for such a clause to be included is with a short deadline attached.

“But we are talking about a very short window, like one month,” he said.

“Any longer than that will effectively mean a prohibition of the sale.”

In contrast, the Central Bank of Cyprus left no wiggle room, and argued against the clause.

Oversight Director Yiangos Demetriou rhetorically asked how a defaulting borrower could come up with the money to buy it back, and raised the question of how the discount on a loan’s sale price could be determined.

He noted that a bank will sell bundles of loans – featuring both good and bad ones – and allowing borrowers to bid for their loans would impact the bundling process, which would feature a discount on the total of the loans and not per individual asset.

“If this were allowed to happen, why would a borrower continue to repay the loan and not wait to buy it back later at a discount?” he said, reformulating the key ‘moral hazard’ argument.

Demetriou also proposed that the offer to borrowers to bid for their loan be made six months prior to the implementation of the loan-sales bill.

Another Central Bank representative said the right to bid for the loan could be afforded to borrowers that have repaid over 50 per cent of the money they borrowed, a proposal rejected right off the bat by Papadopoulos, who argued that restructured loans are technically considered new ones and very few – if any – would have been repaid to such an extent.

The clause is also resisted by the Bank Association, citing the moral hazard involved, as well as the complex procedures that will discourage potential investors.

The bill distinguishes between loans under €1 million from larger ones, placing more stringent sale rules on the former.

Demetriou said that 96 per cent of all loans in the Cypriot banking system are for under €1 million, and only 5.250 individuals have loans over this threshold.

At the session it was clarified that the €1 million benchmark refers to a borrower’s total loans with a particular bank, and not necessarily individual loans.

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