Fiscal Coucil: Reduce NPL stock or end-up w/ "zombie banks"
Cyprus’ Fiscal Council President Demetris Georgiades underlined the need to reduce the non-performing loan stock in the Cypriot banking system, warning that if the problem is not solved “we will end up with zombie banks.”
In March 2013 Cyprus and its international lenders (the EC, the ECB and the IMF) concluded on a €10 billion that averted the collapse of its banking system. The bailout featured an unprecedented conversion of deposits over €100,000 to equity to save the island`s largest lender, whereas Cyprus second largest bank went into liquidation. However in the backdrop of almost three-year recession the NPL stock has risen up to 60% of the system loan portfolio, hampering the provision of credit to the economy.
“If the problem (of NPLs) in the banking system is not solved we will end up having zombie banks,” Georgiades warned during a press conference to present its spring report.
On the issue of loan sales, a tool believed to assist banks write off distressed assets from their books, Georgiades said all stakeholders should assess the pros and cons but wondered whether we should leave our banks as zombies for another decade.
“The banking sector should be able to start lending into the economy. The rest are details,” he said.
Too early to exit the adjustment program
In his remarks, Georgiades said “it may be too early to say when we will exit our adjustment programme.”
Noting that being under a programme a country has less flexibility in taking decisions, but pointed out that Cypriot bonds are still below the investment grade.
The Cypriot program covers Cyprus`s financing needs until the first quarter of 2016, as the island`s sovereign bonds remain below the investment grade. However
Cyprus has been consistently outperforming its fiscal targets and has concluded two bond issues in the international capital markets, prompting politicians to say that the island could exit its programme earlier.
“The politicians should answer the question whether exiting the program is worth the risk of increasing Cyprus` borrowing cost simply for the sake of saying we are out of the MoU,” he said.
The Council, he added, believes that in case Cyprus creditworthiness remains to the non-investment grade after the programme termination, there is significant risk Cyprus` financial institutions will lose access to ECB funding which would affect the broader financing of the economy.
Georgiades welcomed the new updated fiscal targets set out for Cyprus as well as the reform effort in the broader public sector with linking the productivity with wages.
Furthermore, he said the Council continues to believe that redesigning and reforming the pension system is imperative
He said that Cyprus central government absorbs 10% of the island`s revenue compared with the EU average of 7%, noting that such issues require political decisions.
Georgiades noted Cyprus welfare spending amounts to 11.9% of GDP compared with the EU average of 20%, whereas Germany that is not in recession, spends 19% of GDP in welfare spending.