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Shaming strategic defaulters may help reduce NPLs, economist says

By Stelios Orphanides

More transparency from banks and a more resolute stance of the state, which guarantees deposits of up to €100,000, may be more effective in tackling strategic default, an economist and former banker has said commenting on Hellenic Bank’s failed attempt on Thursday to auction a primary residence.

“Unless strategic defaulters are shamed, they will always have the upper hand,” said Marios Clerides in a telephone interview on Tuesday. “I doubt there is anyone willing to risk being stigmatised by taking advantage of such a situation. And a strategic defaulter is not just the one who has the ability to pay back debts but opts not to do so but also the one who has assets that can be sold but does not do so because they don’t want to change their lifestyle”.

Cypriot banks, plagued with a 46 per cent non-performing loans rate threatening their capital buffers, should provide more information about strategic defaulters and so counter the misinformation spread by strategic defaulters and their sympathisers, he said.

“The Commissioner for Personal Data Protection already allows banks to exchange information in cases won in court,” he said.

The latest foreclosure case involved a 263 square metre house in Engomi, Nicosia, constructed on a 550 square metre plot. According to a Hellenic Bank source, the family residing in the house ignored repeated attempts by the bank to enter a loan restructuring agreement, prompting it to seek a court order to foreclose the property. The court order was secured the day before.

The auction was unsuccessful as no bids were made for the house with a minimum reserve price of €459,000. Politicians of various parties had gathered at the venue ahead of the auction following an invitation from the Movement against Foreclosures to protest. A group of members of Elam, a far right organisation also assembled outside the venue.

The need for more transparency may be highlighted in the case of Akel lawmaker Stefanos Stefanou, who served as government spokesman under former president Demetris Christofias and was representing his party at the auction on Thursday, apparently not aware of details about the case.

Akel, Cyprus’s second largest party, “is not generally against foreclosures,” he said in a telephone interview adding that the communist party wants to protect debtors and property owners who regularly met their obligations before the crisis and are unable to do so as a result of the economic downturn in a targeted way.

“It is for the protection of the primary home and properties housing small businesses,” he said. “Why should a bank not turn nefarious customers who never paid back their loans. Why should I protect someone who borrowed €800,000 to build a mansion?”

Moody’s Investors Service said two years ago that it estimates that up to one in five borrowers in Cyprus may be a strategic defaulter taking advantage of the island’s legislation.

Clerides said that as the need to protect borrowers is deeply rooted in the Cypriot culture – the result of usury practices in past decades which easily obtained assets including homes and land from defaulted debtors – legislation is tilted towards protecting the latter, allowing the payment of benefits including guaranteed minimum income or subsidies to loan repayments to borrowers. He also proposed that auctions of foreclosed properties should be carried out anonymously via the internet, to avoid exposing potential buyers to threats.

“But if you want to protect the primary home you cannot apply a welfare policy at the expense of depositors and bank shareholders who in the case of Bank of Cyprus are often former depositors,” he said.

Still, the chance of seeing the state doing more to protect depositors and bank equity are slim as political parties are preparing for next year’s presidential elections, a Disy deputy said.

“The legislation as it stands makes foreclosures difficult,” Marios Mavrides who also teaches economics at the European University of Cyprus said. “But changing the law is very difficult”

“As banks cannot foreclose or sell loans, they may need fresh capital,” he said. “On the other hand, they could not constantly foreclose as property prices would fall which in turn would reduce collateral values”.


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Source: Cyprus News Agency