With the Troika back in town it was inevitable that the long-term problem of non-performing loans would be on the agenda. The foreign technocrats would have noted that very little had been achieved since they were last here as the politicians continue dragging their feet, delaying legislation, opposing proposed solutions and pandering to borrowers’ pressure groups that have become quite influential.
This, however, is not a problem that could be solved in a few weeks or months, as the spokesperson of the Central Bank, Aliki Stylianou, pointed out earlier this week, putting the matter into perspective. “International experience suggests that the course of non-performing loans peaks a year or two after a financial crisis and it then takes some time until a substantial decline in the ratio begins,” she said. The peak may have passed as a tiny fall in the ratio has been recorded by at least one bank, but the key is how the problem is managed now.
There have been reports that the banks had been very tough in restructuring negotiations with customers – this was admitted by a bank chairperson – but are now showing much more flexibility and agreeing to extend repayment periods to make loans viable again. Some credit for this should be given to the more responsible pressure groups that had been justifiably criticising the inflexibility of the bankers.
Troika technocrats met representatives of the three banks last week to hear how NPLs were being dealt with as well as to review their capital adequacy and liquidity situation. Today they are scheduled to meet the governor of the Central Bank and finance minister, presumably to discuss the matter.
Many have been asking why so much importance was being placed on tackling NPLs. A recent IMF report explained that the existence of a high number of NPLs restricted growth and economic activity as they tied down bank capital, which could have been used to expand credit, limited bank profitability and increased financing costs, thus restricting bank loans.
While the banks have started doing their part, economic conditions will not improve unless the majority of NPLs are removed from their balance sheets. Any attempt to do this has met with opposition from the political parties, which supposedly want to protect people’s homes and small businesses. The passing of the foreclosures law last year was turned into a soap opera that dragged on for many months and was finally resolved by the Supreme Court. The regulations accompanying the law were only completed a few months ago so the obstructionism was pointless.
It was an indication of the parties’ determination to prevent a proper solution being implemented. When the previous central bank governor had proposed the creation of a bad bank to take over the NPLs the parties would not hear of it. When the government started preparing legislation that would allow the banks to sell their loans to funds, parties again started protesting, arguing that only Cypriot funds should have been allowed to buy NPLs. This would have made the law unconstitutional.
Now DIKO leader and chairman of the house finance committee, Nicholas Papadopoulos, has come up with another dubious proposal – the borrower should have the option to buy his loan at the price the bank was offering it to a hedge fund. But why would any borrower agree to the restructuring of a loan if he would be given the option to pay it off with a 30 or 40 per cent discount? It does not occur to him that such a provision would be rewarding people who are refusing to repay their loans, despite having the funds (if they can afford to buy their loan surely they should have been making repayments).
Last month he came up with another idea, which he discussed again on Monday – the establishment of a national asset management agency along the lines of the one operating in Ireland. This agency would be state-funded and take the NPLs from the banks. This seems to be the bad bank Papadopoulos had vehemently opposed in the past. Where the government would find the funds to finance such an operation he did not say.
And even if the funds were available, who would trust a state-controlled agency to become an efficient loan recovery instrument? Would the politicians not interfere and order it to do favours to borrowers? So far, all actions by the parties seem geared towards helping borrowers not repaying their loans and it is more than likely an asset management agency run by the state would serve this purpose at a huge cost to the taxpayer. And what will happen to the economy in the years it would take to set up such an agency?
There have been enough delays caused by the parties and the truth is that the economy cannot afford to wait any longer for a solution to the NPL problem.