Fore­clo­sures, NPLs and debt restruc­tur­ing fo­cus of next Troika mis­sion in July

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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