Moody’s sees ex­pand­ing job mar­ket re­duc­ing toxic debt moun­tain

Financial Mirror (Cyprus) - - CYPRUS -

Rat­ings agency Moody’s be­lieves Cyprus’ i mprov­ing labour con­di­tions is credit pos­i­tive for banks be­cause the growth in house­hold in­come fa­cil­i­tates the re­struc­tur­ing and grad­ual re­pay­ment of stock­piled non­per­form­ing house­hold loans.

Ac­cord­ing to Euro­stat data, Cyprus’ un­em­ploy­ment rate de­creased the most in the EU, down 2.8 per­cent­age points from a year ago to 7.4% as of Septem­ber 2018.

Although the job­less rate is still higher than be­fore the global fi­nan­cial cri­sis and above the euro area av­er­age of 6.7%, the rate in Cyprus de­clined to its low­est level since April 2011, and salary growth has ac­cel­er­ated.

Most job cre­ation has taken place in trade, travel and ac­com­mo­da­tion, although there has also been some job cre­ation in the con­struc­tion sec­tor, which has been through a boom and bust cy­cle and is now re­cov­er­ing.

“We ex­pect a fur­ther de­cline in un­em­ploy­ment and improve­ment in labour con­di­tions over the next year and fore­cast strong GDP growth in Cyprus of 4.0% for 2018 and 3.7% in 2019,” said a Moody’s anal­y­sis.

“Hav­ing made sig­nif­i­cant progress in ad­dress­ing their stock of cor­po­rate NPEs, the do­mes­tic banks, and par­tic­u­larly Bank of Cyprus, have shifted their at­ten­tion to smaller and more gran­u­lar prob­lem­atic re­tail and small and mid-size en­ter­prise ex­po­sures,” it added.

But de­spite an NPEs de­clined by EUR 11.6 bln (59% of 2017 GDP) since their peak in 2014, to around 36% of gross loans for the largest do­mes­tic banks ac­cord­ing to Moody’s, “the to­tal stock of trou­bled debt held by Cypriot banks re­mains high at around 50% of the coun­try’s GDP”.

It said the re­duc­tion in NPEs was achieved or­gan­i­cally by re­struc­tur­ings, write offs, debt for as­set swaps and ac­cel­er­ated with BOC’s sale of an NPE port­fo­lio of around EUR 2.7 bln and the liq­ui­da­tion of Cyprus Co­op­er­a­tive Bank, which re­moved an ad­di­tional EUR 6 bln of prob­lem loans from the bank­ing sys­tem.

Although Moody’s has its reser­va­tions over the gov­ern­ment’s Es­tia res­cue scheme for mort­gage de­fault­ers, it said there would be an im­pact on re­duc­ing bad loans.

“Be­sides im­prov­ing house­hold in­come, the gov­ern­mentsub­sidised scheme Es­tia, although at the risk of cre­at­ing mo­ral haz­ard, will fa­cil­i­tate the re­pay­ment of non­per­form­ing mort­gage loans.”

The scheme is slated to get un­der­way in Jan­uary 2019 and aims to tackle NPEs backed by pri­mary ac­count for the bulk of re­tail NPEs.

Ac­cord­ing to the terms of the scheme, for mort­gages that were non­per­form­ing as of Septem­ber 2017 and re­late to pri­mary res­i­dences up to EUR 350,000, the gov­ern­ment will con­trib­ute one-third of the mort­gage re­pay­ment and the loan amount will be writ­ten down to the cur­rent mar­ket value of the prop­erty, which is al­ready re­flected in banks’ bal­ance

res­i­dence, which sheets.

Bank of Cyprus ex­pects that around 17% of its NPEs will fall un­der the Es­tia plan, although this es­ti­mate may change since the terms of the scheme have not been fi­nal­ized yet, said Moody’s.

Mort­gage NPEs fall­ing un­der the Es­tia plan will be­come per­form­ing af­ter a 12-month pe­riod of reg­u­lar monthly loan re­pay­ments.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.