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Bad loans could sink Cyprus recovery: lenders

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(NICOSIA) - Cyprus is making progress on its bailout reform commitments but bad bank loans could derail a fledgling recovery, international lenders said on Monday.

"The authorities' commitment to the programme is bearing results in several areas, with the economic recovery starting in early 2015," the European Commission, European Central Bank and International Monetary Fund said in a joint statement.

Following a review of the EU member's economy by the "troika" of international lenders, the statement warned that bailed-out Cyprus still had obstacles in its way.

"There is tentative evidence that the slow pace of debt restructuring is picking up... The authorities are making progress on their structural reform agenda," it said.

The troika agreed that it was "essential" for Nicosia to increase the pace of change.

"Notably, addressing the excessive level of non-performing loans in the banking system remains the number one priority," said the troika.

Around 50 percent of bank domestic loans are considered non-performing.

"It is a necessary condition for a sustainable stabilisation of the banking system and will require further steps as a matter of priority," it added.

The government was urged to expedite the transfer of title deeds and to facilitate the sale of loans as soon as possible.

The authorities must also make all "necessary efforts to effectively implement the new insolvency and foreclosure legal frameworks".

"Firmly moving ahead with structural reforms,including the privatisation process and the public administration reforms, is critical to cement the improvements in public finances and restore sustained economic growth."

In previous reviews Cyprus has been praised for implementing a harsh bailout adjustment programme which it agreed with lenders.

Nicosia has said it will stick to the bailout agenda no matter how unpopular.

Cypriots have had to endure tough austerity measures which have seen wages slashed in the private and public sectors, while consumer and property taxes have also increased

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

International lenders expect the island to exit recession this year.

Conclusion of the reviews is subject to the approval processes of both the European Union and the IMF, which is expected to be initiated in September/October.

This will allow the next disbursement of 500 million euros.


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