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12° Nicosia,
01 December, 2022
 
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14 billion euros of loans on ice due to the suspension of foreclosure sales

A bigger issue exists in credit purchase companies and KEDIPES

Panayiotis Rougalas

The three-month foreclosure sales moratorium, which will last until the end of January 2023, affects non-performing loans worth €12-14 billion. The House of Representatives decision to suspend divestments on non-performing loans secured by a primary residence worth up to EUR 350 thousand, commercial property loans worth up to EUR 750 thousand, and land parcels worth up to EUR 100 thousand is expected to have a greater impact on credit acquisition companies and KEDIPES and less on Cyprus' banking institutions.  40–50% of the loan portfolio of credit purchasing companies are expected to be impacted, according to data gathered by "K" on how much each type of institution will be impacted. As a result, KEDIPES will also experience an impact on 40–50% of its loan portfolio because KEDIPES's loan quality characteristics are similar to those of credit acquisition companies' loans, whereas the loan portfolios of Cypriot banking institutions will experience an impact of 20–30%.  In terms of numbers, it is estimated that credit purchasing companies have loans worth EUR 8 - 10 billion, banks have loans worth EUR 600 - 1,000 million, and KEDIPES have loans worth EUR 2,9 billion. The figure of 2.9 billion euros was confirmed by KEDIPES' Chairman of the Board of Directors, Lambros Papadopoulos, during the presentation of its financial results.

The legislative amendment of the foreclosure framework favors strategic defaulters, who take advantage of Court delays.

The Parliament's decision to extend the divestment suspension, as implied, poses a major challenge for credit buyout firms. K is in a position to know that the companies that purchased the problem portfolios from the banks are very uncomfortable because, in essence, they are unable to fulfill the purpose for which they were "born" for about 50% of their portfolio. Due to the size of their parent companies, the Cypriot subsidiaries are under a lot of pressure to make these decisions quickly so that their goals can be accomplished. On the other hand, banks are perhaps more at ease regarding something related to loans than ever before.  This is due to the fact that there is now only 2.85 billion euros worth of non-performing loans, down from 28 billion euros in 2014, following the substantial sales of problem loans and the write-offs that have been made. When presenting the bank's financial results for the first nine months of 2022, Bank of Cyprus CEO Panicos Nikolaou made a statement that was typical of the industry: "Yes, the decision to continue the suspension of divestments is tragic for the Cypriot economy as a whole, but for Bank of Cyprus in particular, there is no significant impact."  Finally, in the case of KEDIPES, even though there is no regulatory pressure or pressure for positive results, as an organization that has made an investment anticipates, it will still have reduced cash flow. As Mr. Papadopoulos stated during the presentation of the Agency's financial results, such interventions will reduce cash inflows and negatively impact the Agency's ability to fully repay state aid.

Loans of $80,000 or more

According to data from the Central Bank of Cyprus's Financial Stability Report, at the end of 2021, the Credit Acquisition Companies were managing 80,192 loans with a maximum total contractual balance of EUR 19.2 billion. Hellenic Bank also completed a EUR 0.7 billion sale in 2022, known as "project starlight," allowing the Credit Acquisition Companies to manage loans totaling EUR 20 billion in Cyprus.  The three largest firms now hold 80-90% of all problem loans. According to Central's data, which excludes "Project Starlight" loans and focuses on the distribution of the loan portfolio held by these companies at the beginning of 2022, 50% of the total contractual balance of the loans was related to loans to individuals, 47% to loans to non-financial corporates, and 3% to other loans. At the start of 2022, the amount of collateral value as a percentage of the loan portfolio held by the Credit Acquisition Companies, excluding the "Project Starlight" elements, was 52%.  In terms of collateral breakdown, the borrowers' primary residence accounted for 32% of the total collateral, while other properties accounted for 65% of the total collateral. Other collateral made up about 3% of the collateral. As Central points out, these companies own a large number of properties that were acquired either as part of the purchase of bank portfolios or through debt-for-property swaps between the companies and their borrowers. The Credit Acquisition Companies held 5,679 properties worth a total of EUR 978 million at the start of 2022. (excluding the Starlight transaction). The majority (in terms of number) of the properties held by the Companies were residential plots, accounting for 29% of the total properties.  Residential units accounted for 22% of total real estate, followed by agricultural land (21%), other real estate (19%), commercial real estate (7%), and commercial land (2%).

False reasoning

When Parliament is debating whether to suspend divestments - and this is not the first time this has happened - the banks make arguments, some of which have been refuted. In the case of the divestment process, the lack of a legal framework and stability causes issues. However, banks and other stakeholders affected by such decisions claim that such decisions jeopardize the Cypriot economy's credit rating.  Since 2018, Cyprus has only been upgraded by rating agencies and has not been downgraded, nor has the 'outlook' of the ratings changed. The Cyprus rating will either be upgraded or the "Outlook" will remain stable and positive. So, because this is not the first time the divestment process has been halted, and it has been several times, the timeline has demonstrated that it is unaffected by the divestment law's three-month "freezes."

'Strategic defaulters'

The management of non-performing loans is one of the most pressing challenges and priorities for the Cypriot economy, as the volume remains high despite being outside the banks. The culture of non-repayment of loans is where banks and institutions are correct, and perhaps where they should focus more rather than the credit ratings of the Cypriot economy. The legislative amendment to the divestment framework, as stated in an earlier "meme" that reached Parliament, favors strategic defaulters who take advantage of court delays, creates a culture of non-repayment of loans and obligations, and increases the risk of this culture spreading to punctual borrowers who service their loans.

 [This article was originally published in Greek on Kathimerini's 'Oikonomiki']

TAGS
Cyprus  |  foreclosure  |  loans

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