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Cyprus

Around 13,000 eligible for debt defaulters’ scheme

Approximately 13,000 delinquent borrowers will be eligible for the government scheme Estia, which is to kick in on January 1 next year.

Estia is designed to help debt defaulters repay part of their bank loans.

The controversial scheme is effectively a 50 per cent haircut on the loans of debt defaulters.

Those eligible will only have to repay 50 per cent of their loan, with the government – the taxpayer – covering about a third of it, while the bank will take a 20 per cent loss.

Beneficiaries will also benefit from an extension of their loan repayment to up to 25 years, depending on their age, and will be guaranteed low interest rates of between 2.5 and 3.5 per cent.

The scheme covers mortgages on primary residences valued up to €350,000.

Debtors will not be asked to put up additional collateral or guarantees over and above existing ones. The scheme provides that the Cyprus Land Development Corporation will pay one-third of the instalments, on condition that the debtor continues to pay the remaining two-thirds.

According to Phileleftheros, the aggregate savings to debt defaulters over time could reach as high as €850m; a large chunk of those ‘savings’ would be transferred onto the backs of taxpayers.

Citing data from the finance ministry, the daily said there are 13,070 primary residences with a current market value of up to €350,000 and whose owners are delinquent on their loans.

This represents approximately 85 per cent of all primary residences that are mortgaged and fall within that price range – meaning that almost nine in 10 delinquent borrowers with mortgages on their primary residences are eligible for the scheme.

The scheme is not mandatory on banks, but any bank choosing to offer it must do so for all its customers.

Via a specific mechanism, a bank or a debt management entity will be obligated to restructure loans by an amount that equals the lesser of the difference between the outstanding debt at the date of restructuring and the market value of the primary residence.

In this way, Phileleftheros said, banks will be able to effect an average reduction on outstanding loans of 32 per cent. The reductions increase proportionally in cases where the market value of the mortgage is smaller than the outstanding debt.

On paper, the finance ministry forecasts that the scheme will allow lenders to recover at least 70 per cent of their non-performing loans.

Estia kicks in where an insolvency process between a lender and a borrower has reached a dead end.

The scheme has been fiercely criticised for effectively rewarding strategic defaulters.

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