House prepares to define good and bad borrowers

The distinction between responsible and irresponsible borrowers is at the forefront of heated debate this week, with Presidential Palace and Parliament scrambling to strike balance ahead of a crucial vote.

The Finance House committee is meeting Tuesday to discuss a residence protection scheme dubbed “Estia” in an effort to pass measures that would exempt primary residences from foreclosures concerning borrowers whose home loans are in the red.

The Estia plan is being discussed one day following a crucial meeting where centrist opposition Diko leader Nicholas Papadopoulos met President Nicos Anastasiades and Finance Minister Harris Georgiades to seek common ground.

Some of those measures in the plan include adjusting the amount owed to the bank based on the actual home value and not the higher debt amount of the loan itself, according to local media reports. Proposals also call for creditors to write off roughly 32% of a debt on average, with the state paying 1/3 down of the rest of the amount and 2/3 spread over payments by the borrower.

But ruling party Disy president Averof Neophytou, who also chairs the finance committee, warned that protection should apply only to responsible borrowers and not strategic defaulters who are capable of paying but choose not to do so for a number of reasons.

Disy does not have enough votes to pass a bill on state protection schemes, and as a result, MPs have gained footing in the debate, asking for provisions on foreclosure and bankruptcy laws in exchange for voting in support of the legislative package.

But Neophytou called for the criteria in the Estia plan not to cover high-priced homes, saying that otherwise future generations would be footing a much larger bill if the plan does not provide creditors sufficient debt recovery.

Although there are restructuring and refinancing mechanisms for borrowers to get back on track with their loan repayments, those tools have proven largely ineffective in Cyprus, with borrowers failing to agree on new payment terms and bankers often accused of being inflexible.

The government now is racing against the clock to push for added legislation on Non-Performing Loans (NPL) within a comprehensive lesiglative package that would also make it possible for a co-op deal to go forward.

The healthy part of the Cyprus Cooperative Bank, an institution which is burdened with NPL at 60% (nearly €7 billion), is being taken over by Hellenic Bank, essentially absorbing co-op banking operations and assets except bad loans and toxic assets.

But Hellenic has demanded state guarantees for absorbing potentially high-risk loans in the co-op takeover, turning the entire deal into a make or break moment for banking and the Cyprus economy at large.