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Bailed out Cyprus vows to tackle bad debt

31 July 2014, 10:59 CET
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(NICOSIA) - Bailed out Cyprus has pledged to tackle its mountain of bad debt after the cabinet approved proposals to reform legislation on foreclosures as instructed by international lenders.

A troika of lenders has put new pressure on Nicosia to agree delayed controversial legislation on foreclosure procedures for bad loans as part of a multi-billion-euro rescue package.

Opposition MPs argue that changing the law will lead to Cypriot families being made homeless in a country already battered by austerity, unemployment and liquidity-dry banks.

In a television address late Wednesday after the cabinet decision, President Nicos Anastasiades said there was no way to avoid painful decisions to reduce bad debt and would have to reform antiquated legislation.

"An additional complicating factor is unfortunately very high levels of non-performing loans due to the legal and institutional framework for recovery of debts which remains obsolete," he said.

Anastasiades said proposed legislation -- which needs to be approved by parliament in September -- would ensure that the reasonable interests of both borrowers and lenders are upheld.

"Under the current system, forced sale of a property is time consuming, it actually encourages inconsistency. Decisions on forced sales in 1997 have still not been implemented today."

But he gave assurances there would be safeguards for "primary homes", not allowing banks to evict vulnerable groups.

Anastasiades said that as a result of lax laws, Cyprus has the highest level of private lending of all EU states, with money owed to banks exceeding 60 billion euros ($80 billion) -- more than 300 percent of GDP.

He urged "calm and sober" dialogue on the emotive issue of home repossessions to ensure Cyprus exits bailout constraints.

Legislation for the calling-in of non-performing loans contracted during the island's credit boom and crash that prompted the international bailout of March 2013 is a precondition for the next instalment of emergency funding that is desperately needed to rescue state finances.

The urgent call for the new law came as part of a fifth review of the debt-ridden island's compliance with crippling bailout terms by the troika of lenders -- the European Commission, European Central Bank and International Monetary Fund.

- Ravaged economy -

Also on Wednesday, IMF Cyprus mission chief Delia Velculescu was asked during a conference call with journalists what the Fund would do if parliament failed to pass the legislation.

Its passage is "a precondition for the conclusion of the fifth review," she said.

"If the law is not passed, the review would not be concluded and we may need to come back to Cyprus and re-discuss the issue," she added, without elaborating.

Legislation on tightening foreclosure procedures on unserviced loans has been held up as politicians fret about the impact of a swift rein-in of consumer debt on an economy already ravaged by nearly 18 months of swingeing austerity.

It is estimated that more than 50 percent of domestic bank loans are considered non-performing.

The IMF has said that Cyprus's level of non-performing loans is the highest in Europe at almost 140 percent of GDP.

In previous reviews, the troika praised Cyprus for sticking to bailout terms even at the cost of a sharp recession, but now it is insisting that the island accept more pain, even if this means home repossessions and business closures.

In return for 10 billion euros ($13 billion) in aid from international lenders, the island in March 2013 agreed to wind down its second largest bank, Laiki, and impose losses on depositors in its under-capitalised largest lender, Bank of Cyprus.

Depositors in Bank of Cyprus were hit with a 47.5 percent "bail-in" as part of the bailout package.

Cyprus needs to pass the latest troika review if it is to receive the next tranche of bailout cash scheduled for late September. So far it has been extended half of the 10 billion euros in emergency loans agreed last year.

The government concedes that the greatest challenge facing the troubled banking sector after the bailout "haircut" is clawing back bad debt.

International lenders do not expect Cyprus -- suffering record 17 percent unemployment and a credit squeeze -- to exit recession before next year.

The European Commission estimates that the economy will contract by 4.2 percent in 2014 -- lower than the initial 4.8 percent forecast.

But growth will be pegged back to 0.4 percent in 2015 rather than the previously projected 0.9 percent.

The troika review needs to be approved by Eurogroup finance ministers and the IMF for the next disbursement of 436 million euros.


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