MPs want Central Bank to resolve CHF loans problem

Parliament told the Central Bank of Cyprus and the commercial banks that they have ten days to come up with a solution that would allow the conversion of Swiss franc loans into euros, otherwise they would adopt legislation of their own.

With housing loans in CHF estimated at EUR 1.05 bln as at the end of August, Central Bank officials said such a forced conversion would hamper local banks with a further EUR 250 mln in losses.

CBC official Elena Gregoriades told the parliamentary Committee of Financial and Budgetary Affairs on Monday that the Bank of Cyprus would suffer losses of EUR 147 mln, Hellenic Bank 11 mln and Alpha Bank Cyprus 10 mln. She added however that Alpha Bank would suffer higher losses as its calculations concerns only primary residence and not all housing loans.

“The CBC believes that any government-imposed remedy would yield significant losses to the banking institutions with negative effects to financial stability in a period the banks are recovering from the problems of the past, entailing a significant legal but also moral hazard,” a document submitted to the Committee said.

Gregoriades also said that in case a law providing the conversion of only housing law is approved, perhaps other borrowers that received loans in Swiss franc for consumer could appeal to the Court against the Republic for discrimination.

She advised against settling the issue by law noting that the CBC should be given time to consult with the banks so that they improve their already offered solutions.

However, Committee acting president Angelos Votsis said the banks should absorb the losses from the loan conversion.

Last week, analysts George Mountis and Costas Zeniou of Delfi Partners said that around 11,000 borrowers will be affected, with the total in CHF denominated loans estimated at EUR 2.58 bln as at the end of August, more than double the Central Bank estimates.

However, this figure has been dropping steadily, with January data suggesting the total loans stood at EUR 3.62 bln.

Currently, borrowers in Swiss francs have seen their loans inflate as a result of the Swiss currency gaining significant strength against the euro. At present, a euro trades at less than 1.1 Swiss francs, whereas some borrowers have borrowed at rates above 1.6.

On September 21, Members of Parliament asked the Central Bank of Cyprus (CBC) to investigate the cost to local banks to convert mortgages in CHF to euros at their original exchange rates.

“The significant volume of CHF denominated loans in the Cyprus is suggestive of the banks’ foreign currency loan selling practices in previous years,” Mountis and Zeniou said in a joint article.

“It’s not too difficult to estimate the full extent of the damage. The billion euro question concerns the legality of these loans, particularly whether Cypriot banks were transparent in communicating risks involved. There is already a precedent set for CHF loans in Croatia, Greece and Hungary, where the banks bear the FX hit.”

“This is not the only case where a European court has ruled in favour of the consumer when it comes to foreign denominated loans. A recent court decision in Athens called for the banks to pay for the full extent of the foreign currency hit. The court cases stress that European consumers are protected against dubious selling practices that banks evidently engaged in.”

Mountis and Zeniou said that “some banks have handled the CHF issue more responsibly than others. Most banks are willing to share at least some of the burden of foreign currency loans and our restructuring practice has forced banks to negotiate up to 100% of the foreign exchange loss, especially in the case of mortgages or personal loans. Whereas some banks deal with each case individually, others employ universal policies of 5-12% write-offs. The Greek subsidiaries appear to be more advanced at dealing with these types of cases, settling at much higher write-offs.”