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‘Foreclosure suspensions exclude young and poor from lending’

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The Cyprus Fiscal Council on Tuesday said that decisions in the vein of the foreclosure suspension ultimately exclude the most financially vulnerable social groups from being able to get a loan, but also to a collective increase in interest rates.

Such a thing cannot be avoided, the council explained, as it would constitute bad pricing on the part of the credit institutions and their deviation from the rules of rational management, with all that entails.

“Given the increase in interest rates in the European economy anyway, this fact aggravates an already worsening problem for Cyprus,” the council said.

“The impact on borrowers, combined with the impact on credit, is particularly worrying in a period of increased credit risk and high pressures on economic growth,” it added.

Moreover, the council said that the costs resulting from the continuous but purportedly temporary foreclosure suspension are easily manageable for the banking system.

However, the social costs and financial ramifications are unaffordable for the vulnerable, including households and businesses, who need new loans.

As reported in the council’s statement, the calculation of the most important index of damage in case of loan default is now increased after the relevant decisions of the House of Parliament, with an adverse impact on collateral, assistance and interest rates, as banks will be forced to price in the relevant risk.

“Thus, the cost of risk in Cyprus is already high, as is the cost-to-income ratio. The cost of risk is estimated to have reached 1.34 per cent during the second quarter of 2022, against the unweighted average of the Eurozone of 0.5 per cent,” the council said.

“It should not come as a surprise, then, that there’s the possibility of an increase of that specific index after the relevant decisions were taken, pushing that index three times higher for Cyprus when compared to the rest of the eurozone”, it added.

The specific index, the council noted, is a key parameter in the pricing of lending and has a supervisory effect on the obligation of credit institutions to price the lending they provide to the economy.

With the increase in the cost of risk, the council explained, the increase in interest rates is not at the discretion of the banks, which must factor this increased cost into their interest rates.

“It must, therefore, be taken for granted that it is a major reason for the increase in lending rates in Cyprus compared to the rest of the eurozone,” the council said.

“A discrepancy is also recorded in the supervisory weightings of risk, both for business loans and for mortgages to households”, it added.

What is more, the Fiscal Council also reported that in addition to the uncertainty created by the ongoing foreclosure suspensions, macroeconomic development problems are also created, while the social problem simply shifts to new borrowers, particularly younger people, as well as small and medium-sized businesses, which have to face more difficult and more expensive borrowing.

“It shifts, that is, from social groups that have a political influence, to groups that are not organised, that don’t have a common voice, such as young couples, poor households and small businesses that are in search of credit”, the council said.

Furthermore, the Fiscal Council called for a careful analysis of the support options for vulnerable groups, not only in relation to existing borrowers, but also in relation to households and small and medium-sized enterprises that are currently or will soon be in search of credit.

“The needs of the economy will not wait until the political conditions settle at the end of the first quarter of the year after the elections have been concluded,” the council stressed.

The council requested that a detailed discussion be had, with the participation of bodies that possess the necessary expertise to find a comprehensive solution to the issue.

The most important thing, it stated, is to ensure a permanent arrangement, which does not exclude vulnerable borrowers from accessing credit, does not worsen indicators that increase interest rates and does not adversely affect credit and therefore economic growth in a year with many challenges.

“Above all, temporary but repeated decisions exacerbate uncertainty and are a serious problem, as assessments of the Cypriot economy now take into account the tendency to take measures without thorough analysis,” the council said.

“Our aim should be to protect vulnerable borrowers, but without adversely affecting important supervisory indicators, including the value of collateral, the estimate of damage in case of default and the cost of risk.”

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