Moody’s warns of ‘moral hazard’ in forced con­ver­sion of CHF loans

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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