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