By Elias Hazou
PARLIAMENT on Thursday gave the nod to a bill governing the sale of loans by banks to third parties – passage of which was a precondition for the release of the last aid tranche to Cyprus.
The item passed by 26 to 25 votes thanks to the ‘ayes’ from ruling DISY and opposition DIKO. Voting against were AKEL, EDEK, the Greens, EVROKO and independent Famagusta MP Zacharias Koulias.
Under the new law, loans may be sold only to investment or hedge funds licensed and registered in the Republic, and thus subject to all local laws and the jurisdiction of Cyprus courts.
In addition, the Central Bank may at its discretion forbid the transfer of debt to third parties, for reasons of national security – a clause inserted to allay fears that Turkish concerns may gain a claim on Cypriot assets.
The new law affords debtors the right to bid to buy back their loan at a discount, after it has been deemed non-performing by the lender, but before it can be sold to third parties like investment funds.
But a debtor’s bid shall not be binding on the bank, according to a last-minute amendment.
Individual borrowers will be notified of the bank’s intent to sell their loan – this also applied previously – and given 45 days to make the bank an offer to pay back their loan.
Following notification, a borrower may make an offer only once.
In a professed bid to protect debtors, DIKO had earlier toyed with the idea that a bank should be forbidden from transferring a loan to a third party at a price lower than that quoted by the borrower.
In addition, such a proposal might have been seen as state interference with contracts between two parties – the debtor and the lender – in the private market.
Cyprus’ international lenders, known as the troika, opposed the loan buyback scheme, arguing it would lead to moral hazard, encouraging even those who can afford to repay their loan to let it go unserviced so they can then buy it back at a discount.
DIKO – which held the swing vote in the House – had warned they would vote against the bill as a whole unless debtors were given a say on the sale of their loans.
Re-jigging the wording of the amendment – where a bank is now not bound to accept the debtor’s offer to pay back a loan – allowed DIKO to maintain the pretence that some protection is still afforded to borrowers.
It remains to be seen if the final version is to the troika’s satisfaction.
The island’s international creditors had made it clear what without the bill Cyprus would not be eligible for the next – and most likely last – bailout tranche.
Having passed his party’s amendments, DIKO leader Nicholas Papadopoulos offered a pragmatic analysis:
“We in Cyprus are champions when it comes to non-performing loans. We are here today because we want to exit the economic adjustment programme in May 2016, not May 2026.”
The bill stipulates that the sale of loans to third parties is governed by existing foreclosure-related legislation, which affords debtors several ways to challenge repossession proceedings.
It’s understood that on selling loan packages, banks will be able to bundle good loans along with the bad – as a means of making their package more attractive to investment funds.
Some object that borrowers who are consistent with their payments will thus fall prey to speculators.
But one MP, speaking on condition of anonymity, told the Cyprus Mail this should not be a concern because the same terms of the initial loan agreement will apply once a loan is transferred.
“So if you’re already servicing your loan, what does it matter if you’re dealing with a Cypriot bank or a foreign fund?” he said.
For the troika, the primary driver is slashing the high-level of non-performing loans – accounting for about half of all debt – thereby boosting banks’ liquidity and allowing them to recycle some of the freed-up cash back into the economy in the form of consumer loans.
At least that’s the theory.
But as the same MP conceded: “We’ve gone through the motions. Now we’ll see how it plays out in the real world. Will foreign investment funds now come in and scoop up all the bad loans, as many claim?
“With so many bad loans out there, and with the housing market in a slump… let’s just see.”
The bill also provides for the potential – this being the operative word – establishment of a national asset management agency (NAMA). But that is more likely than not a damp squib, as the text of the bill states that the creation of a NAMA, which requires a great deal of capital, must not be to the detriment of public finances – raising the question as to how well it would be funded.