Foreclosures, NPLs and debt restructuring focus of next Troika mission in July
The next mission of the Troika inspectors, expected on the island on July 14 to begin the eight review of the economic adjustment programme, will focus on the implementation of the insolvency and foreclosure laws, restructuring of loans and how banks are dealing and dealing with the issue of non-performing loans (NPLs), estimated at 46% of all loans at the end of March.
IMF Mission Chief Mark Lewis said during a conference that inspectors will also look into the growing number title deeds which have not been transferred to property owners who have paid off their mortgages, complicating the NPLs issue further.
The problem arises from the inability of the property’s developer to settle loans or debts, with those properties already mortgaged.
The inspectors from the IMF, the ECB and the European Commission will also review reforms of public finances, the overall fiscal policy and reforms to improve revenue collection, tax administration, public spending management and improvement in public investment.
Other growth-enhancing issues, such as the privatisation of semi-government organisations, will also be on the agenda
Regarding the privatisation process, Lewis said that the benefits include attracting foreign direct investment or domestic investment, technology and productivity improvement and improved delivery of public services to Cypriots.
He also said that in order to achieve the primary surplus goals there was no need for further wage cuts in the public sector.
Speaking on the conclusion of the fifth, sixth and seventh reviews last week, that subsequently freed outstanding traches worth 380 mln euros, Lewis said GDP turned positive for the first time in four years and praised strong improvement in the public finances well ahead of schedule.
He added that reforms also need to continue in the banking sector, where financial stability has been restored despite the challenges and that the level of NPLs was quite high and a challenge for growth, increasing jobs and income increase.
“To get there we need credit to start flowing again from the banking system to households and business”, he said.
Meanwhile, the IMF published its official report on the completion of the three reviews of the reform programme, noting that despite the encouraging developments, the challenge is to maintain the reform momentum in the face of a difficult political environment.
“Cyprus’s Fund-supported reform programme continues to produce positive results. Economic and fiscal outcomes have been better-than-expected, with growth turning positive in the first quarter of 2015 and public finances exceeding targets. Liquidity and solvency in the banking system have improved, allowing the elimination of external payment restrictions. Going forward, it will be important to maintain the reform momentum and strong programme ownership”, said IMF First Deputy Managing Director David Lipton.
At the same time the IMF notes that risks to the programme are “manageable”, but the challenge is to maintain the reform momentum in the face of a difficult political environment. It adds that the political obstacles to adopt the new private debt restructuring legislation were overcome, although at the expense of some deviations from international norms.
“Going forward, it will be crucial that vested interests and reform fatigue do not derail the reform efforts. Otherwise, this could threaten the recovery and the consolidation of financial stability, and hinder Cyprus’s efforts to raise a trajectory of slow growth”, the report said.
It added that solving the NPL problem is essential to ensure financial stability and boost growth.
The report also notes that further efforts to strengthen banking supervision and restructure of banks are needed and that the Central Bank should continue to strengthen its supervisory capacity.
Moreover the report suggests that the reform of the public administration should ensure “the sustainability of the wage bill after the expiration of the programme and enhance government efficiency.
“The authorities should also move forcefully to address weaknesses in the business environment to support growth prospects.”
Based on an assessment by the banks, the NPLs that could be eligible for the insolvency process could range between 1 and 3 bln euros (6-7% of GDP). The estimates suggest that the insolvency process could bring about a debt reduction in the private sector of about 0.5-2.1 bln euros with an impact of 0.2-1.1 bln on the banks’ capital due to additional provisioning under the different scenarios.