THE LATEST assessment of the performance of the Cyprus economy by the IMF Executive Board, inevitably, highlights the risks posed by non-performing loans, noting that “political and social acceptance of strategic default continue to undermine financial intermediation.” Executive directors stressed “the urgency of reducing NPLs in a decisive and durable manner.”
This was the only blemish on an otherwise positive assessment, which welcomed the strengthening economic recovery, sustained decline in the unemployment rate and the “sizeable fiscal surplus.” Yet all the positives could be overturned by the systematic failure of the politicians to allow the banks to tackle delinquent loans and remain adequately capitalised and provisioned.
For five years now, despite being fully aware of the big risks involved in allowing the problem of NPLs to fester, the politicians have refused to provide the banks with adequate legal tools to reduce the number of loans. Resorting to the traditional populism, they claim to be protecting the first residence of people who had fallen on hard times and could not repay their housing loans.
The banks could not be allowed to repossess the houses of these people, insisted our caring politicians who, after much foot-dragging, approved a toothless foreclosures law to protect the so-called first residence. Encouraged by the political parties, several groups to protect loan defaulters were set up, creating the impression that people who did not repay their loans were victims.
This was what the IMF was referring to in noting the “political and social acceptance of strategic default.” In Cyprus, people that refuse to honour their contractual obligations, such as repaying their loans, are considered to be in the right and in need of protection. Even people that could afford to repay their housing loan stopped doing so as the banks could not repossess a first residence. This resulted in people repaying loans on holiday homes, which could be repossessed, while refusing to repay the loan on their home – first residence; others stayed in 500 square metre palaces while refusing to repay their housing loans.
On Thursday representatives of the political parties were invited to the finance ministry to be briefed about the amendments the government wanted made to the foreclosures law so that it would become more effective. They were also told that the European Central Bank would get tougher on Cyprus’ banks if NPLs were not drastically reduced. Leaving the meeting the representatives of the parties, except Disy’s, said the proposed amendments were heavily weighted in favour of the banks, “aimed at facilitating the foreclosures procedure and giving more tools to the banks so they could proceed to express foreclosures.”
Express foreclosures is exactly what is needed if we are to avoid another banking collapse. We have had warnings from the IMF, ECB and the European Commission about the dangers of not reducing NPLs and we should be heeding them. The first residence populism must end now.