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Audit boss calls for checks and balances on bank-loan guarantees

CNA

The Audit Office on Thursday called for stronger checks and balances for where the state will be guaranteeing bank loans of up to €2 billion, in relation to an emergency scheme aimed to boost liquidity amid the economic slump related to the coronavirus situation.

The auditor-general’s office was providing feedback to the House finance committee, which is currently assessing a government bill on the state-guaranteed loans.

In a statement, the Audit Office said the proposed amount of up to €2 billion in state-guaranteed loans “needs further substantiation, taking into account that according to the latest data…at the end of the second quarter of 2019 private debt in Cyprus stood at 267 per cent of GDP, the second highest in the EU.”

Flagging the possibility of moral hazard, the Audit Office said it’s particularly wary of provisions in the legislation which would allow the state to guarantee loans that aren’t backed up by collateral.

“In our view, were the House of Representatives to agree in principle to the granting of loans without collateral, this should apply only to self-employed persons or very small businesses, and a cap should be placed on the amount of the loan without collateral.”

The watchdog further drew attention to the clause in the bill allowing the state to cover up to 70 per cent of potential losses to the banks.

As it stands, the bill states that this parameter (the 70 per cent coverage) can be amended, and that any such change requires only a decree issued by the finance minister.

The Audit Office disagreed with the finance minister being given this leeway.

For comparison purposes, it also cited data on similar state-guaranteed loan schemes promulgated by other EU countries.

Cyprus’ €2 billion in state-backed loans accounted for 9.5 per cent of GDP. France’s €300 billion accounted for 12.75 per cent of GDP; Germany’s €500 billion for 14.95 per cent of GDP; and Spain’s €20 billion for 1.66 per cent of GDP.



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