Moratorium on NPA Auctions in Cyprus May Lead to Collapse of Local Banks

Мораторий на продажу залоговой недвижимости на Кипре может привести к краху местных банков
11 May 2021 Liza Medvetskaya

The number of problem loans in Cypriot banks may increase in the near future.

Mostly because of the moratorium on the sale of mortgaged real estate which will be in force until the end of July 2021.

As you may know, members of Parliament approved in April the suspension of the sale of property, which is used as the main residence. At the same time, it was decided that the price of property should not exceed €500 thousand. The moratorium also includes commercial premises owned by small companies with fewer than ten employees and an annual income of less than €2 million. Finally, the government froze the sale of land plots worth up to €250 thousand.

It is worth noting that since the President of Cyprus Nicos Anastasiades decided not to return the new amendments for revision, they came into force last Friday, when they were published in the country's official newspaper.

Meanwhile, senior technocrats from the national oversight body and the Ministry of Finance have announced growing discontent in Brussels and Frankfurt over the moratorium on the sale of mortgaged housing in Cyprus. In particular, the European supervisory authorities do not approve the Parliament's decision and their amendments.

The European supervisory authorities expressed the opinion that the expansion of the above criteria is not targeted to help the vulnerable groups. The European Central Bank stressed that instead of another suspension of sales, MPs should have found ways to defeat strategic defaulters and make changes that support banks' efforts to reduce problem loans. But it turned out on the contrary, that they encouraged the debtors.

Мораторий на продажу залоговой недвижимости на Кипре может привести к краху местных банков

We should also mention that the moratorium on the sale of mortgaged housing in Cyprus was introduced with the support of the country's Central Bank, and its head, Constantinos Herodotou.

Sales of mortgaged housing were frozen for the first time for the period from March to June 2020, then extended until August 2020. The next moratorium covered the period from December 2020 to March 2021, and finally, sales were suspended for the fourth time from April to July 2021.

Despite the obvious implications of such decisions, and the recent warning from the Chairman of the Supervisory Board of the European Central Bank (ΕΕΜ) Andrea Enria that 40% of banks under supervision ΕΕΜ have significant gaps in credit risk recognition, the Cyprus Parliament continues to turn a blind eye to the risk increase in problem loans.

The top management of the two large banks, as well as other financial institutions, stressed that it would be naive to believe that there will not be an increase in the number of red loans in the near future because of problems caused by the protracted pandemic crisis for the real economy.

According to them, there will be a lot of problems in the financial sector at the end of the pandemic, so it would be wiser for Parliament not to make amendments to laws, which are the only tools to reduce the number of red loans.

In turn, the head of the Central Bank of Cyprus said that banks are ready for possible negative consequences. How true this is, we will find out in the near future.

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