NPLs reduction must remain a priority
The island’s financial assistance package may have been a success but significant challenges remain with the reduction of the high stock of non-performing loans (NPLs) considered as the top priority, a Bruegel think tank conference heard.
“This financial assistance programme was a success and I would like to stand by that. We’ve seen the economy turning around, we’ve seen better performance that we expected, we’ve seen strong results on the fiscal side, always exceeding fiscal targets but there is still a level of fragility,” Vincenzo Cuzzo, the IMF resident representative told the conference organised in the University of Cyprus.
Describing the reduction of the banking system’s hign NPLs stock, Cuzzo said “NPLs which are approaching 60% of total loan facilities are preventing banks from being banks,” noting that the attention should not only focus on the banks’ capital but also on the broader economy.
He described the approval of the insolvency framework and the foreclosure regime as a major step but noted this should not be considered as a completed task.
“A major step forward but some elements of the framework perhaps depart from what are regarded as international best practises. Is good legislation better than not having one? It is good to get started but we should monitor and take stock and to try to come back to it in the future,” he added.
Marios Clerdies, former CEO of the Cooperative Central Bank, said that NPL dynamics appears increasing in an adverse banking environment.
“We hear discussion of 60% in NPLs but if they have 100% in provisions is an opportunity, because if you manage to collect, that goes into bank profits,” the economist and former banker said.
He pointed out that low capital, the fact that the banks have entered a conservation mode, the low bank liquidity especially in banks that have to repay emergency funding as well as the private sector overleverage, makes the banks very reluctant to provide new lending.
On his part, UCY professor Michael Michael, stressed that addressing the high NPLs remains the biggest challenge facing the Cypriot economy, but noted that the economic recovery, expected to reach 1.5% of GDP in 2015, along with the stabilisation in the real estate sector will assist the NPL reduction efforts significantly.
“The politicians need to send the right messages,” he said, noting that the Central Bank of Cyprus should also help the banks to accelerate the speed of NPLs restructuring.
“As it is now it could take years to restructure all NPLs and the existing pace is very low,” he concluded.