The European Commission on Monday approved, under EU state aid rules, Cyprus’ controversial Estia scheme to support private households and small businesses that have encountered difficulties in repaying mortgage loans and risk losing their primary residence.
The scheme, which the commission said has an annual budget of around €33 million, sets strict eligibility criteria in terms of the value of the primary residence and income of the borrower to ensure it is targeted at those in need.
Earlier this month the cabinet gave the nod for minor tweaks to the scheme to appease detractors but the EU and the International Monetary Fund (IMF) said within the past few days the scheme still contained a ‘moral hazard’.
Finance minister Harris Georgiades, said the tweaks, related to the eligibility criteria did not alter Estia’s substance or philosophy, but made it “fairer and more functional”.
To be eligible, a household’s annual net gross income must not exceed €60,000 for couples with four dependents or more; €55,000 for a couple with three dependents; €50,000 with two dependents; €45,000 with one dependent; €35,000 with no dependents; and €20,000 for single persons.
Previously, all households (irrespective of dependents) with an annual income of up to €50,000 had been eligible. Additionally, under the updated criteria, a household’s net assets, excluding the primary residence, cannot be more than 80 per cent of the market value of the primary residence. The cap on the value of the other assets is €250,000.
During the first seven years of repayment of a restructured loan, a floating interest rate will be charged, based on the six-month Euribor rate plus 2.50 per cent. The aggregate interest rate (six-month Euribor plus margin) of a restructured loan cannot be greater than 3.5 per cent.
If the borrower stops servicing their loan, it is foreseen that the bank initiates the foreclosure of the property. All participating banks will have to restructure the loans of eligible borrowers along the same requirements defined by the state.
The EU Commission said on Monday it concluded that, with respect to individuals and micro companies, the measure did not involve any state aid.
With respect to the banks that issued the loans, the Commission found that the scheme would provide an indirect advantage because it increases the amount of repayment the banks are likely to receive from the non-performing loans.
At the same time, its assessment showed that this indirect aid “would not create undue distortions of competition because the aid is limited to what is necessary to achieve its objective of ensuring that borrowers do not lose the house in which they live”.
Moreover, since all mortgage lenders established in Cyprus were able to participate in the scheme, it was non-discriminatory among banks, it added.
“The Commission has therefore concluded that the scheme is well-targeted and limited in time and scope as required by EU rules,” a statement said.
“Finally, the scheme is expected to contribute to reduce the high burden of non-performing loans in the Cypriot banking sector.”
Despite not constituting state aid under EU rules, the Estia scheme’s detractors say it will benefit strategic defaulters. Those detractors still include the IMF, which issued its latest review on Cyprus earlier Monday. In it, the IMF recommended that to limit moral hazard, Estia should be better targeted and based on appropriate assessment of borrowers’ capacity to repay.
Similar sentiments were expressed by the European Central Bank and the EU Commission itself only last Friday in Cyprus’ Autumn report.
The Commission and the ECB warned that despite the amendments to the eligibility criteria “there are still concerns about moral hazard and fairness, in particular concerning potential strategic defaulters.
“The proposed Estia scheme raised a number of concerns. First, it rewards borrowers for non-payment in the past. Second, some borrowers with sufficient wealth to cover their past-due loans might be eligible. Third, the scheme did not distinguish between households with different incomes. Fourth, a similar temporary scheme was introduced in 2016, undermining the credibility of the claim that the current scheme is one-off,” the report said.
“Putting these together, there is a concern that certain borrowers may interpret the introduction of such a generous scheme as a reason to stop paying, or continue not paying (i.e. moral hazard).”
To further mitigate such concerns, it was crucial that the foreclosure procedure was promptly initiated upon re-default under the scheme and towards the remaining defaulted borrowers outside the scheme, the report said.
On the other hand, it added that the introduction of such a scheme was seen by both the authorities and the banks as instrumental to increasing banks access to the borrowers’ information, as the applicants will have to disclose their wealth and income position, and allow banks to enforce their payment claims by making use of the foreclosure procedure and by overcoming stigma issues, and also ultimately helping Cypriot banks with NPLs resolution.