Skip to content

Restructuring household owner occupier housing debt with government support

Posted by (Guest Contributor) on February 20th, 2015 - 1 Comment

I am taking the liberty to propose a draft outline of government financial support which may mitigate the risks of efforts to restore trust to the financial sector in Cyprus.  We are in the midst of populist attempts by some political parties, who believe that bank bashing and introducing legislation, will achieve their ends but not without cost.  I am thus driven to consider the interests of the various parties which have to collaborate for the public interest.  The proposal will require the government to negotiate with the Troika the financial support of distressed persons. In my view the proposed support may be in the interest of the Troika as well since restoring a stable financial sector without undue legislation will be good for the economy and Cyprus at large.

In the last few months we have witnessed an unprecedented effort by some political parties to be the guardians of the vulnerable members of the population against the unsympathetic banks which will embark on massive foreclosures, or so at least they claim.  This claim, as we all know, is unfounded since the foreclosure law amendments are a tool for the banks to encourage the delinquent large borrowers to collaborate in restructuring their loans; the banks have little to gain to threaten eviction of households and sell their homes.  The real benefit for the banks is not to be gained from households but large borrowers.

In countries which have attempted to help home owners after the financial crisis there has been an element of government support.  In Cyprus the government may provide such financial incentives to banks, to households and to Parliament so that we can at least introduce a considered proposal that on merit will not be contested.  In view of the commitment of the Minister and Governor of the Central Bank in MOUs, reaffirmed every time there is a update, not to introduce measures that would impede the ability of banks to recover their loans by way of legislation it is left to government, as a measure of public and social policy, to provide the relief to households by transferring the financial burden to future tax payers.  We must all understand that government services and support come at some cost and hence the objection that taxpayers will pay the cost must not be the criterion.

In short the proposal would be as follows; the accumulated interest on household debt used for primary home purchase, both accrued and default interest, for persons who are facing financial distress and who may have their primary home foreclosed should be replaced by a government issue of a zero coupon bond for the same amount; such zero coupon could have a maturity of 10-20 years.  Hence the banks which have such interest receivables on their asset side of the balance sheet will now have a government bond; where income has been recognized and provisions made to offset the income such accounting entries could be amended with the bond replacing a receivable.  The government bond should be eligible for drawing liquidity from the Central Bank so that banks can have additional liquidity to support the economy.  The major benefit for the banks, and the financial sector, would be that there will be a greater willingness of households to have their notional loan amount solely restructured, say for 20 years with a grace period on principal of 3 years, at a fixed interest of say 2.5-3%; this rate maybe is just above the cost of funding for banks and should suffice. In this way the NPLs will be converted to performing loans benefitting the banks’ capital position and profit and loss.  The precise numbers of interest due and receivable are not published for this class of borrowers by the Central Bank and thus I have no precise number of the face value of the zero coupon bond that will have to be issued.  This can be ascertained with Central Bank information.

I appreciate that the Troika may object to the increase in the total public debt, which will be marginal, but the message must be that the important issue in matters of public debt is the debt service ability and a zero coupon bond has no short term impact on the ability of the Republic of Cyprus to service its debt.  In order to counter some of the objections of the Troika the Republic could set up a sinking fund say after 5 years and this could be funded from sale of state assets.  The Republic cannot be a hostage to the Troika for what is a social measure which also benefits the financial sector and hopefully the economy.  We cannot allow the sins of the past to determine the future of our economy and we cannot be oblivious to the comments of Joseph Stiglitz who has called the EU economies zombies.  The emphasis by the Eurogroup on fiscal austerity and the financial sector rehabilitation alone comes with a huge cost to the real economy, growth and employment. The rise of Syriza to power and Podemos leading in Spain must be a wake up call to EU and IMF officials.

In the case of the proposed government support, the issuance of government debt will require the ratification of Parliament but in my humble opinion it is well worth the effort for the Ministry of Finance and Central Bank to seek consensus and convince the political parties that such a solution could be accepted by the Troika and would accelerate restructuring of household primary home loans which are currently NPLs and run the risk of foreclosure.  For if Parliament refuses to support such ratification of debt issuance the government will show who is really an obstacle to mitigate the problem of financial distressed persons.  There will be a need to consider who will be eligible and how the forbearance involved will apply to persons in financial distress.  This I believe can be found in the European Banking Authority definition of who is a distressed person.

To summarize the benefits are as follows:

  1. No law will be necessary to force banks to restructure or write off debt owed by such financially distressed households whose primary residence allegedly is at risk;
  2. The government resolves a social issue and potential conflict with Parliament which no sensible person would want to see happen
  3. Banks should convert NPLs to performing loans by restructuring the notional amount of the loan limiting risk and potential additional provisions and at the same time receive interest on loans which banks currently recognise for accounting purposes;
  4. Households get debt relief and could possibly afford to repay loans with no risk of losing their home.  The relief is significant as the notional amount over a 20-30 year period will be much lower than if there was no relief and they would also have three years grace to pay interest only with a 2.53% rate fixed for three years;
  5. Parliament focuses on passing an insolvency law without the need to introduce supplementary legislation to protect primary homes which has been the bone of contention with the Troika;
  6. The residential property market could be stabilised as the fear of foreclosure will disappear;

The above proposal is merely an outline to address a complex issue but it is one that can be the basis for discussion with the interested parties.  For one the zero coupon bond must receive the approval of the Troika but if the interested parties in Cyprus are in agreement it is worth explaining to the Troika that social issues of this nature require the intervention of government since banks cannot be left to deal with these issues purely based on their capital adequacy criteria.  Secondly, it is my belief, having seen how severely Cyprus was treated, that Cyprus does deserve a softening of the debt sustainability definition having regard to the fact that Cyprus has suffered twice from the Greek debt haircut.

Categories → Οικονομία

One Comment
  1. avatar
    Παναγιώτης Σαββίδης on February 20, 2015 - (permalink)

    First things first, there is no Troika, because there will not be any legislative approval of the insolvency laws as Troika would like them to be passed, there will not be any legislative approval of the privatisations as Troika would like the to be passed, etc. There is no budgetary funding gap, as Charis is taxing us to cover any spending including interest payments. There is a debt repayment gap of €863 by 1/11/2015, which Charis and Troika are betting that we will not have been able to meet which will mean that on the 30/10/2015 they will go to Parliament and scare them to pass whatever amendments they like to our laws.

    Second, is this populism issue. Populism is when people say that sticking to the MOU will bring development in Cyprus. Really? All production indicators are going down while unemployment is going up, as we implement the MOU. Populism is when people say that banks need to survive for development so that they start lending again. Really? Hellenic is sitting on €3.4b cash, Coops on €2.5b, Eurobank on €2.2b and they are not lending, because eligible customers do not want to borrow money.

    So we have a budget surplus of €68m after interest payments to our huge debt, increased liquidity at banks equal to 50% of GDP and no growth prospects for 2015 and no inward investment. This is the MOU in action.

    Third, to the point of public interest. Since when public interest means saving Bank of Cyprus and its shareholders? I would say, let them go bankrupt, convert ELA into a long term loan between the Government of Cyprus and Central Bank of Cyprus, 50 years term at 0.01% interest rate and process all NPLs over a 20-40 year period, with low interest rates and no haircuts to the loans to the benefit of the Republic of Cyprus. Meanwhile, convert Bank of Cyprus, with the €13b deposits and the €13b performing loans into a business bank to kickstart the economy by activating idle capacity in labor and equipment, which is currently sitting within NPLs, to create jobs. Now, this is public interest.

Leave a Reply

Note: XHTML is allowed. Your email address will never be published.

Subscribe to this comment feed via RSS