Thorn to the side the packetization of loans – Borrowers are troubled

Thorn to the side the packetization of loans – Borrowers are troubled

Nicosia,  June 8, 2015/ Independent Balkan News Agency

Numbers prosper, but the people are yet to feel a difference

Austerity to continue until 2018

By Pandelis Diomidous of MAXHnews

The difficulties that are in front of Cyprus, despite the praise from international lenders, including the Commissioner of Finance, reveals the Strategic Plan Fiscal Policy tabled by the Finance Ministry to the Cabinet and regarding the course of the economy up to 2018. Essentially, the conclusion is that despite the prospect of development – albeit at a small pace – austerity policies will remain until 2018. Suffice to say that the government spending will be restrained even further and will be significantly reduced compared to what was the case last year.

The figures

In 2016, the year Cyprus that will emerge from the Memorandum, the expected government spending is estimated at EUR 6.050 mil from EUR 5.950 mil In 2015, marking an increase of only EUR 100 million. And the increase in costs by 2018 will reach € 6.150 million . That is the expenditure two years 2016-2018 increased by 1.65%.

If one closely examines the fiscal policy plan, then it immediately becomes obvious that the Ministry of Finance, despite what is said about leaving the crisis behind, it does not show willingness to succumb to the pressures (mainly from trade unions) to start the reinstatement of benefits, wages and benefits.

The economic team of the government for the next three years, sets very specific and strict spending limits per ministry, without giving any right of derogation.

There are risks

One can certainly wonder why continue down the path of austerity, if there truth behind what the government publicly stated on an exit from the Memorandum in ten months that will mean the end of the crisis. The Ministry of Finance answers to this question as well, since there is a special analysis in the fiscal policy plan to the dangers that are still looming over the economy.

Specifically, there is mention to the ongoing liquidity challenges the banking sector is faced with due to the high rate of non-performing loans, while there are also the contingent liabilities/State guarantees the state has created in previous years to the state-owned companies, state agencies and local governments.

Finally the Ministry clarifies that the greatest risks are external. “The economic environment in the EU and eurozone continues to be unstable, including uncertainty about Greece, with possible impact on the Cyprus economy. Also, geopolitical developments in the Russian-Ukrainian crisis are still fluid, causing uncertainty about the course of the Russian economy and the trend in the euro-ruble exchange rate”, are among the risks that are highlighted.

Thorn to the side the packetization

The not-so-rosy situation in the economy has to go through the coming days an even greater hurdle, which based on the present reactions may blow up everything that has been built in the last two years. We refer of course to the bill that is currently being formed on the packetization and sale of loans from banks to investment funds.

The Central Bank has reportedly completed the bill, which based on the memorandum obligation, should pass by the Cabinet by the end of the month. The packetization is considered, together with the laws of divestitures and insolvency, the most powerful weapon of banks to reduce NPL, which based on the financial results of banks remain at stratospheric levels. Specifically, the NPL are as follows:

Bank of Cyprus: 63% or EUR 15.2 billion

Greek Bank: 59.5% or EUR 2.7 billion

Cooperative: 57.4% or EUR 6.9 billion

Borrowers begin to worry

The packetization and selling NLP creates intense and perhaps legitimate concerns among affected borrowers. It seems, however, based on latest discussions that in most cases of loan sales, the bank continues, through an agreement, to manage the loan portfolio and borrowers for the benefit of investors. Something that is also covered by the law on divestitures, which provides that “the borrower, in the case of sale of the loan, will retain all rights, such as the restructuring of the loan or the resort to the Ombudsman”.

Given this, the economic team of the government and the banks consider that the packetization has a lot of positives to offer to the economy, which are:

* It is considered as a clean solution for banks that will cleanse their balance sheets of the NPL and will enable them to proceed with new loans

* They will  bring NPL close to zero, as currently even after restructuring they are considered non-performing for a year.

* Banks will draw in a very short time large liquidity, which under certain conditions can be channeled into the real economy.

It is common practice in loan packages to also include some “good” loans, to make them more attractive to potential buyers.

Message to the banks

Meanwhile, just yesterday the Insolvency Service announced the reasonable living expenses (RLE) for the purpose of implementation of the Framework of Insolvency.

For households with one person aged 15-64, the RLE are set at EUR 733.60. Moreover, EUR 366.80 are added for each person aged 15-64 and EUR 220.08 for each child under 14 years of age”.

In the calculated RLE are not included any rental costs are included for home ownership purposes.

Economist told MAXHnews that the definition of the RLE is of enormous importance not so much for personal insolvency plans, but for loan restructuring purposes. Specifically, they explained that this is a weapon in the hands of borrowers in negotiating the restructuring of their loans. In particular, they will be eligible to ask for the determination of their installment at such a level that the family income remains at the level determined as RLE, based on the composition of their household.