While commenting positively on Cyprus’ economic growth, Eurogroup chief Jeroen Dijsselbloem stressed that non-performing loans (NPLs) are still a worry and that they present a possible risk to the fiscal outlook.
Fiscal budgets – meaning state spending and revenues from taxes and bonds – now include a contribution and weight from the banking sector because Bank of Cyprus and the Co-operative banks were taken over by the state.
“We trust that the Cypriot authorities will continue their vigorous efforts to tackle these issues and to keep up the structural reform effort,” said Dijsselbloem.
The possible reunification process in Cyprus would also bring its own positive economic effects but there is a lot of preparation to be done, he added.
“There is a lot of work ahead of us, if and when that process becomes successful in the coming months. We will come back to that topic in a timely manner,” said Dijsselbloem.
Not consumers’ fault
Out of a total of 52.3 million in loans, 25.09 million are non-performing and 18.8 million are past due by over 90 days, according to the latest statistics from the Cyprus Central Bank. Foreclosures are not helping the situation because the market isn’t robust enough to sustain strong investment conditions, given that many people had their cash taken in the 2013 depositor bail-in that saved the Bank of Cyprus. The resulting cash flow drain means that few can afford to buy foreclosed properties.
The total collapse of Laiki Bank will have long-term effects on investment confidence in the real world and there are still court cases underway by the people who lost their savings. In addition, unemployment is still relatively high.
So the root causes of the NPLs hardly lie with ordinary borrowers but rather with the banks which over-exposed themselves with Greek Government Bonds. The banks simply refuse to accept this, it appears, choosing instead to use pressure tactics and force consumers into impossible situations, either by taking them to court or by legal squeezing.
New ideas needed
A more innovative approach is needed, which starts with the banks accepting that consumers are in a tight situation and working with them respectfully. Other options could be explored, ones that avoid the top down cracking of borrower’s heads which will only bounce back on the bank itself because of considerable legal exposures.
If someone has a non-performing loan, it could be paid off in stages that use a different interval than a monthly payment – for example, a bi-monthly payment at no interest for a year – giving people breathing space. Or taking ownership of a borrower’s home and then converting the outstanding debt to rent, with an option for the borrower to buy back the home at a later date on favourable terms. Solutions, not pressure, are needed, especially in the short term.
For those who doubt that innovative solutions can be found, the fact that depositors’ cash was miraculously converted to almost-worthless bank shares should serve as an example that they can be found when necessary.
Can the banking system really update its thinking to the current realities and accept that NPLs cannot be paid off when the stone has no blood left? Surely there are some bright financial minds out there who could advise on new approaches to debt, after all, if the financial sector doesn’t adapt, it can’t survive.
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