Moody’s gives thumbs-up to banks af­ter fore­clo­sures law is passed in House

Financial Mirror (Cyprus) - - FRONT PAGE -

Im­ple­men­ta­tion of the fore­clo­sures frame­work in par­lia­ment last Satur­day is credit pos­i­tive for Cypriot banks be­cause it lays the ground­work for large-scale loan re­struc­tur­ings and im­proves the banks’ re­cov­ery prospects, Moody’s said in a com­ment.

Last Satur­day, the Cypriot par­lia­ment nar­rowly passed five bills af­fect­ing per­sonal and cor­po­rate in­sol­vency that im­ple­ment the fore­clo­sure bill passed last Oc­to­ber.

The laws’ pas­sage also al­lows the Troika of the Euro­pean Com­mis­sion, the In­ter­na­tional Mon­e­tary Fund and the Euro­pean Cen­tral Bank to con­clude their fifth re­view of the coun­try’s sup­port pro­gramme. The re­view had been de­layed by the wait to mod­ernise the in­sol­vency frame­work and im­ple­ment the fore­clo­sure law. If pos­i­tive, the re­view’s con­clu­sion paves the way for the next tranche dis­burse­ment.

The rat­ing agency added that “con­clud­ing the re­view will also al­low the coun­try to ac­cess the ECB’s quan­ti­ta­tive eas­ing plan. Un­der the plan, Cyprus’ gov­ern­ment bonds will be­come el­i­gi­ble for di­rect pur­chases by the ECB, which will im­prove bank liq­uid­ity and sup­port mod­est lend­ing.”

Moody’s ex­plained that the bills amend the cor­po­rate bank­ruptcy frame­work by in­tro­duc­ing cred­i­tor pro­tec­tion for 120 days to al­low for a com­pany re­or­gan­i­sa­tion. They also leg­is­late the li­cens­ing of in­sol­vency prac­ti­tion­ers in Cyprus and in­tro­duce a so­cial safety net by pro­vid­ing pro­tec­tion against fore­clo­sure on pri­mary res­i­dences. This will al­low courts to im­pose loan re­struc­tur­ings in case the ne­go­ti­a­tions be­tween the con­cerned par­ties fail, and al­low the write-off of in­di­vid­u­als’ un­se­cured debt un­der cer­tain con­di­tions.

The new fore­clo­sure frame­work mainly aims to shorten the time needed to fore­close and auc­tion real es­tate col­lat­eral to 18 months from more than 10 years pre­vi­ously. Although nearly six months have passed since the new fore­clo­sure frame­work was voted into law, par­lia­ment de­layed its im­ple­men­ta­tion un­til the en­act­ment of Satur­day’s bills.

The en­act­ment will pro­vide in­cen­tives to in­di­vid­u­als to seek re­struc­tur­ing of their loans and dis­cour­ages strate­gic de­faults. This will help banks tackle the vol­ume of non­per­form­ing loans (NPLs), which were 50% of gross loans as of Novem­ber 30, 2014, the rat­ing agency said.

Moody’s said that all prin­ci­pal do­mes­tic banks, the Bank of Cyprus (Caa3/Caa3 sta­ble, caa3), Hel­lenic Bank (Caa3 re­view for up­grade, caa3) and the Co­op­er­a­tives (unrated), have long-es­tab­lished re­struc­tur­ing units ded­i­cated to NPL work­outs.

“How­ever, progress has been slow be­cause in­di­vid­u­als and com­pa­nies adopted a wait-and-see at­ti­tude given the open po­lit­i­cal de­bate sur­round­ing the im­ple­men­ta­tion of the fore­clo­sure law and the un­cer­tainty re­gard­ing the level of pro­tec­tion the new bills would of­fer to bor­row­ers,” it said, adding that since De­cem­ber 2013, only 22% of sys­tem-wide NPLs have been restruc­tured.

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