Moody’s warns of ‘moral hazard’ in forced conversion of CHF loans
Moody’s has warned of a moral hazard in case the Cypriot parliament forces a conversion of housing loans issued in Swiss francs (CHF), noting that such a conversion would make restructuring of the banking system’s high stock of non-performing loans more challenging.
Last week, the House Financial and Budget Affairs Committee gave the Central Bank of Cyprus a two-week deadline to formulate options that will reduce the debt burden of borrowers who received mortgages in Swiss francs, warning that otherwise the committee would propose to retroactively fix the exchange rate to the prevailing rate when the loans were granted, mainly between 2008-10. The CBC warned that forced conversion would cost Cypriot banks EUR 250 mln.
“But the bigger credit negative is the moral hazard that the proposal creates among borrowers of the much larger amount outstanding of euro-denominated mortgages,” Moody’s noted, adding “the proposal makes the banks’ restructuring of their high stock of nonperforming loans (NPLs) more challenging. It would also delay the recovery of Cypriot banks’ profitability since they would likely continue to be loss-making for a fifth consecutive year.”
According to Moody’s, “the plan encourages all mortgage borrowers to delay loan restructuring in hope of more debt relief.”
Cypriot banks face a large stock of problem loans, with the ratio of NPLs to gross loans as of June 2015 at 52.7% for Bank of Cyprus and 54.9% for Hellenic Bank.
“Given the relatively high median net wealth of individuals, which was EUR 266,900 in 2010 (the latest data available), according to the European Central Bank, and the high savings rate in the country averaging 19.7% before the financial crisis, we believe 10%-20% of delinquent small and midsize enterprise and retail borrowers are strategic defaulters that have the capacity to repay but opt not to do so” Moody’s adds.
Bank of Cyprus, with a EUR 1 bln portfolio of Swiss franc loans, has the highest exposure among banks and would face losses of around EUR 147 mln and Hellenic Bank around EUR 11 mln.