At least one Greek-speaking country is in the International Monetary Fund’s good books, as the fund Friday approved the disbursement of almost €280 million to Cyprus in the latest instalment of the island’s bailout and praised its government for pushing through difficult reforms and returning the economy to growth.
The IMF board decision came after Cyprus adopted new foreclosure and insolvency laws designed to help the island’s banks work through a massive pile of non-performing loans still left two years after a banking crisis led to a €10 billion international bailout.
The decision also took Cyprus another step closer to what is anticipated to be an end to its three-year EU and IMF bailout before parliamentary elections next year.
That stands in stark contrast to nearby Greece where the government is locked in a high-stakes and acrimonious stand-off with creditors including the fund and faces a possible default within days. Many investors and policy makers see capital controls introduced in 2013 by Cypriot officials as a potential model for Greece.
Cyprus’s European creditors decided this week to disburse €100 million after a successful review of the island’s progress. The European Central Bank has said Cyprus will become eligible for its quantitative easing programme as a result of passing health checks by its creditors.
David Lipton, the IMF’s first deputy managing director, said the fund-supported Cyprus bailout continued to “produce positive results.
“Economic and fiscal outcomes have been better than expected, with growth turning positive in the first quarter of 2015 and public finances exceeding targets,” he said. According to the IMF the Cypriot economy grew at an annual rate of 0.2 per cent in the first three months of this year after shrinking 2.3 per cent in 2014
Both the liquidity and solvency of the banking system had improved, he said. But the “high level of non-performing loans” were still an “urgent priority”, Mr Lipton added.
The IMF said Cyprus’s core domestic banks now have a non-performing loan ratio of 59 per cent. One of the main reasons, staff argue, is that in the absence of foreclosure and insolvency laws there has been no way for the banks or their customers to work out problem loans.
A central bank list leaked to the media last month showed 13 of 56 members of parliament had non-performing loans worth €35.3 million with the Bank of Cyprus.
Beyond those, the IMF argues, a significant portion of the non-performing loans are the result of “strategic defaults” by people and businesses who have the ability to make payments but have chosen not to because of the economic situation.
Cyprus’s economic rebound faces risks. Looming elections could cause the government to slow the pace of reforms. Public debt remains high and the IMF says the island needs more reforms of the way the government manages its budget and further action to improve the business environment and reduce unemployment.
There is also a risk that a Greek default and subsequent turn into an even worse economic crisis could hit Cyprus. The main conduit for that would be via the island’s banks, with 15 per cent of the market still controlled by subsidiaries of Greek lenders which are the focus of questions at home.
But the IMF remains confident that any impact from a Greek default would be manageable and that the Cypriot subsidiaries would not be hit as hard as their parent banks.
Source: The Financial Times
