CBC Gov­er­nor op­ti­mistic about econ­omy and bank­ing sec­tor

Financial Mirror (Cyprus) - - FRONT PAGE -

Cen­tral Bank Gov­er­nor Chrys­talla Ge­or­gadji has said she is op­ti­mistic about the course of both the econ­omy and the bank­ing sys­tem, as the is­land edges closer to its exit from its three-year eco­nomic ad­just­ment pro­gramme, which ex­pires in March.

In an in­ter­view with the Cyprus News Agency, Geoghadji said the first signs of a re­duc­tion in the high stock of non­per­form­ing loans have started to ap­pear and added that the im­prove­ment of the mar­croe­co­nomic en­vi­ron­ment which in turn will con­trib­ute to a re­duc­tion in the NPLs con­sti­tutes an es­sen­tial pre­req­ui­site.

Ge­orghadji said the econ­omy con­sis­tently out-per­formed the pro­jec­tions of in­ter­na­tional lenders, reg­is­ter­ing GDP growth of 1.6% in 2015, to be fol­lowed by growth which may ex­ceed 2% in the cur­rent year.

“The re­cent eco­nomic de­vel­op­ments were bet­ter than those an­tic­i­pated by our in­ter­na­tional lenders, par­tic­u­larly con­cern­ing the growth rate of 1.6% in the pre­vi­ous year and an ex­pected growth rate above 2% in 2016,” she told CNA.

Ge­or­gadji said the growth rate in­crease will have a pos­i­tive im­pact both on the labour mar­ket as well as on the re­duc­tion of NPLs, which in turn will ben­e­fit eco­nomic ac­tiv­ity, as bor­row­ers are re­lieved and con­sump­tion is strength­ened, im­prov­ing the banks’ bal­ance sheet which will have big­ger in­cen­tives to pro­vide new credit and fi­nance the econ­omy.

On the bank­ing sec­tor, Ge­or­gadji said that fol­low­ing the events of 2013, Cyprus’ ma­jor bank­ing in­sti­tu­tions have passed the 2014 EU wide stress test and en­joy to­day “a strong cap­i­tal” base, adding that the banks have in­creased the cov­er­age ra­tio with­out hav­ing to raise cap­i­tal, whereas the Co­op­er­a­tive sec­tor re­ceived ad­di­tional state aid of EUR 175 mln, af­ter the state cap­i­tal injection of EUR 1.5 bln in 2014 from bailout funds.

“The level of NPLs re­mains the big­gest prob­lem fac­ing the banks,” Ge­or­gadji pointed out, adding that apart from the cre­ation of in­ter­nal re­struc­tur­ing units in the banks, the im­prove­ment of the macroe­co­nomic en­vi­ron­ment, which re­mains as an es­sen­tial pre­req­ui­site, is ex­pected to grad­u­ally ease the prob­lem.

She noted how­ever that de­spite the fact that the NPL ra­tio re­mains at high lev­els, “signs for the im­prove­ment of the sit­u­a­tion through re­struc­tur­ing has be­gun to emerge.”

Ge­or­gadji pointed out that loan re­struc­tur­ing reached EUR 4.7 bil­lion in Novem­ber 2015, adding that re­struc­tur­ing started to pick up pace as both lenders and bor­row­ers fa­mil­iarise them­selves with the rel­e­vant pro­ce­dures and the new in­sol­vency frame­work.

The Cen­tral Bank Gov­er­nor pointed out the CBC has set new tar­gets to the com­mer­cial banks for the first quar­ter of 2016, amount­ing to EUR 1 bln in pro­posed and vi­able re­struc­tur­ing so­lu­tions and an ad­di­tional EUR 1 bln in agreed re­struc­tur­ing.

She dis­missed sug­ges­tions that the banks are op­er­at­ing as as­set man­age­ment com­pa­nies rather than banks, point­ing out that in 2015 banks pro­vided new credit amount­ing to EUR 1.7 bln, of which EUR 1.2 bln in cor­po­rate loans and EUR 0.5 bln to house­holds “which is a re­spectable amount con­sid­er­ing the size of Cyprus.”

She re­it­er­ated that pre­lim­i­nary stud­ies by the Cen­tral Bank have shown that 10-20% of house­hold NPLs are at­trib­uted to strate­gic de­fault­ers, bor­row­ers who opted not to re­pay their loans al­though they have the ca­pac­ity to do so.

As re­gards re­struc­tur­ing the cen­tral bank, Ge­or­gadji said the CBC board ap­proved a study car­ried out by Roland Berger con­sul­tants fo­cus­ing on three pil­lars: the or­ganic struc­ture, the in­ter­nal pro­cesses and stan­dard­ised prac­tices, as well as is­sues of hu­man re­sources and gov­er­nance.

The new struc­ture should be im­ple­mented by the end of 2016.

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