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Our View: pain-free ways of reducing NPLs do not exist

Despite the transfer of non-performing loans (NPLs) from the Cyprus Co-operative Bank to the public sector, NPLs for households and companies remain high said the European Commission

LAST WEEK’S failed attempt by a bank to auction off a repossessed property has opened up the debate about non-performing loans (NPLs) once again. On Wednesday, after meeting President Anastasiades, the governor of the Central Bank of Cyprus (CBC) Chrystalla Georghadji said the regulator was considering changing the targets it has set the banks regarding NPLs in 2015. These targets, agreed with the Troika, no longer served the purpose for which they had been set, said a statement issued subsequently by the CBC.

“The aim is to boost banks’ efforts to reduce their stock of non-performing loans,” said the statement without elaborating. It is apparent that the pace at which delinquent loans are reduced is extremely slow and the CBC, probably under pressure from the European Central Bank, is considering ways of speeding up procedures, which are full of legal obstacles imposed by political parties on the grounds they wanted to protect a borrower’s first residence.

Meanwhile, presidential candidate and Diko leader, Nicolas Papadopoulos, yesterday brought up the idea of setting up a bad bank that would buy all the NPLs from the three local banks, thus ridding them of the problem. Just like that. Interestingly, Papadopoulos and the parties supporting his candidacy were strongly opposed to the creation of a bad bank when it was first suggested four years ago and drafted legislation preventing banks from selling bad loans to foreign companies.

Now, they have decided the creation of a bad bank is the solution to the NPL problem and one that will save the Co-op Central Bank about which all our politicians have a soft spot. Papadopoulos proposed that 50 per cent of the shareholding should be held by the state and the rest by a firm with expertise in dealing with bad loans. He did not stay where the state would find the €10 billion needed to fund the bad bank. Nor did he explain what foreign company would invest such an amount in country in which the legal framework makes the recovery of loans extremely difficult.

Then there is the possibility a bad bank controlled by the state would end up doing favours to party members and achieve very little in terms of recoveries. The banks may have healthier balance sheets as a result, but the state would head towards bankruptcy. Pain-free ways of reducing NPLs do not exist and politicians like Papadopoulos are not being entirely honest suggesting there were. Bad banks also repossess properties and sell them when the borrower refuses to repay a loan.

 

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