THE EUROPEAN Commission may have ruled that the controversial Estia scheme to assist strategic defaulters with the repayment of their loans was not a state subsidy and could therefore go ahead, but just last it week it described it as a moral hazard. This was the view of the ECB and it was also repeated in the IMF’s review of the Cyprus economy. The commission’s report listed the following objections to the scheme:
“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. 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).”
In a way, Estia is perfectly in keeping with the line taken by the majority of the political parties on the foreclosures bill, which they initially refused to approve and in the end, under pressure from the Troika, approved a version that was ineffective. As if this was not bad enough, the declarations by the parties about protecting people’s primary residence encouraged many not to repay their housing loans. The foreclosures law was finally amended earlier this year, but the government came up with the Estia scheme as some type of incentive for strategic defaulters to finally repay their loans.
Everyone welcomed this unfair scheme, the only official expressing reservations about it being the governor of the Central Bank Chrystalla Georghadji, who quite rightly pointed out that a person who only paid off a small part of a housing loan was not the owner of the house. The real owner was the bank that had paid for it, and it was absurd to regard a person who had paid 10 or 20 per cent of the value of a house as the owner who had to be protected when loan repayments were not being made. Rationality is always the first casualty of the populist pronouncements of the political parties.
Now the banks are receiving calls from angry customers, who had previously been persuaded to restructure their bad loans, complaining they would have paid much less under Estia that envisaged a loan discount and assistance from the state. And this would happen even if the defaulter had assets just below 80 per cent of the value of the primary residence. Someone with assets of €240,000 will still get state assistance to repay a €300,000 loan as a reward for not making any repayments.
This is not just moral hazard, it is state-sanctioned injustice, which has given rise to another absurdity. An equivalent amount to the €33 million spent annually on Estia will now be given to borrowers who were repaying their loans, so they do not feel like idiots. Perhaps an additional €30 million should be put aside for the idiots who have paid off their loans in full.