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OUTGOING Central Bank governor Panicos Demetriades said on Wednesday that banks must be allowed to seize assets, and borrowers who intentionally fail to repay loans must be penalised.

Wading into the increasingly polarised fray over non-performing loans (NPLs), the governor supported an IMF report on Tuesday which argued in favour of facilitating asset seizures by banks as an effective remedy. The report diagnosed the issue of NPLs as a “key challenge” to the economy, reporting that they have reached 50 per cent of total loans – at €22 billion, or 135 per cent of GDP.

In an interview with Bloomberg published on Wednesday, Demetriades, who will be replaced at the helm by Auditor General Chrystalla Georghadji on April 10, said addressing NPLs must be the top priority.

“There’s a lot of strategic default happening,” Demetriades said from Athens. “Borrowers need to know that there’s a consequence when you don’t pay. It’s still the case that the banks are not able to basically carry out any repossessions in any meaningful timeframe.”

While political parties said yesterday they agreed on the need to tackle NPLs they resisted Demetriades’ view that facilitating foreclosures was the way forward.

DIKO head and chairman of the House Finance committee Nikolas Papadopoulos argued in favour of extending the non-repayment period that qualifies a loan as non-performing, and proposed that the Central Bank initiate a renegotiation of the definition of NPLs with the troika of international lenders due to the specificities of the economic situation in Cyprus.“What is considered an NPL in the rest of Europe cannot be considered an NPL in Cyprus, and that is precisely the point we need to drive home – that right now the extraordinary economic circumstances prevalent in Cyprus do not allow for the usual definition,” he said.

“We need to change the definition.”

Opposition parties AKEL and EDEK positioned themselves along the same lines, but ruling DISY’s MP Kostas Mavrides said that borrowers have been offered sufficient time to restructure their loans.

He also said that banks could be in a position to raise additional capital, adding that this could be achieved by the creation of a bad bank that would handle all troubled loans and attract investors, a scenario that would also help boost liquidity.

Mavrides said that while the definition of non-performing loans cannot be amended, certain assumptions could be changed so that the number of NPLs can be reduced.

“The economic assumptions made when identifying the bank recapitalisation needs – the property market crash, the increase in unemployment, etc – had set the bar extremely high, which meant that increased NPLs were projected and ultimately recapitalisation needs for the banks were higher,” he said.

Mavrides added that “the definition of NPLs is the same across Europe and can’t be changed.”

“But perhaps some of the hypotheses made could be amended,” he concluded.

The parliament is preparing to pass legislation that would allow temporarily insolvent borrowers to request a court-ordered suspension of loan repayments if their primary residence or small-to-medium business premises came under threat of seizure, but only after all other loan restructuring options have been exhausted.

The bill, to be put to a plenum vote on April 10, has been publicly opposed by Finance Minister Harris Georgiades due to the risk of mass appeals to courts by distressed borrowers, with crippling effects to both the banking and judicial systems.

In public statements, Georgiades has conceded that appropriate protection of the primary residence must be provided for, but has also warned of the risk of compartmentalising the issue of NPLs.

In a letter dated March 4, the finance minister informed the House legal committee that a comprehensive government bill is being prepared as part of the reforms mandated in the MoU, which will address all the concerns relating to foreclosures and offer appropriate protection. The bill, Georgiades said, will be finalised and put to a vote later in the year.

By Angelos Anastasiou