European Stability Mechanism (ESM) head Claus Regling has sounded a note of caution on Non-Performing Loans (NPLs) in Cyprus and essentially prepared the ground for the arrival of the Troika delegation tomorrow for the fourth evaluation of the Cyprus memorandum.
According to reports, international lenders are carrying take it or leave it proposals, mostly on the NPLs issue, which they consider a major obstacle for the success of structural reforms.
It’s rumoured to be the most challenging evaluation yet for technocrats and politicians alike, as they will be facing tough choices.
In an interview with Sunday’s Phileleftheros, the head of the ESM defended the haircut decision, saying that people will only realise the positives of the memorandum, once the implementation programme is completed.
“Borrowing money saves precious time for the implementation of the necessary reforms, with the countries adjusting smoothly,” he said. He criticised the fact that Nicosia borrowed from Moscow, as this “put off the necessary structural reforms and actually worsened the situation”.
It’s not easy for the public to stomach the reforms, he stressed, but they have to be willing to make sacrifices for the sake of replacing catastrophic financial policies. “This can’t be done without wage and pension cuts and higher taxes”. Cyprus has made progress in implementation is Regling’s evaluation of the first year of the memorandum, making clear that there’s still two to go.
The banking sector was the main anomaly in the case of Cyprus, Regling noted, agreeing with the Troika’s assessment that the steadily rising number of NPL’s form the highest obstacle for the smoothing out of the banking sector. He described it as a challenge for Cyprus authorities which must be addressed with great caution.
“A new banking strategy should be implemented in order to recover huge amounts of capital.” Regling confirmed that the loans may be at the top of the Troika agenda when they arrive tomorrow with very specific proposals on how to improve the situation and bring back some of this money quickly. “The Troika will be an active part of this process,” he added. Beyond this though, it was up to the government to implement the programme to the fullest, including effecting policies on NPLs. “These are preconditions for the next tranche of bailout money”.
The haircut was the only way out of “the size of the problem in Cyprus” with the island’s GDP being larger than ever before and the banking sector non-viable. A tough decision had to be made to balance out the situation. Regling did admit that five years ago, Central Bank monitoring of banks not just in Cyprus but on a wider European scale, was inadequate and fragile and this was one of the major causes of the crisis.
On the banking sectors’ upcoming stress test, the head of the ESM said there was no reason why the island’s banking institutions should fail. “I don’t expect surprises”, he added, underlining on a more general note that this process will provide much-needed credibility, confidence and trust for the markets’ sake.