Programme on track, challenges remain, senior European Commission source ...
Programme on track, challenges remain, senior European Commission source says
The program remains on track, but challenges remain for the Cypriot authorities, senior European Commission sources said Saturday, following the conclusion of the fourth review of Cyprus adjustment program.
The same sources said steady progress has been made towards the program objectives, which is the restoration of financial stability and fiscal sustainability and structural reforms.
According to the sources, the Troika has revised its projections for 2014, anticipating a contraction of the economy of 4,2%, instead of 4,8%, projected initially.
The economy continues to be more resilient than what we thought at the beginning of the program the source explained.
The lenders also anticipate now lower deficit for 2014. Primary deficit for this year is anticipated to reach 1,7% compared to 1,8%, forecasted during the last mission and the headline deficit is projected to reach 5,3% for 2014, instead of 5,3%, projected before.
The explanation is that projections for the interest payments have been too pessimistic the European Commission official said.
However, Cyprus lenders believe that challenges remain with regard to non performing loans (NPLs), fiscal targets and structural reforms.
According to the same sources although restructuring of the financial sector has progressed as well, addressing the issue of NPLs is very urgent as they are approaching 50% of the loan book and they are linked with liquidity.
Very simply put, if the banks are not to be paid its very difficult for them to extend credit the source said, pointing out that the need to revise the insolvency framework to make sure that both borrowers and lenders have the right incentives to come to the table and find an agreement on the restructuring of loans.
The intention remains to have a comprehensive reform of the insolvency framework towards the end of the year and the so called foreclosure law, which is planned earlier, essentially should make it less difficult for banks to repossess mortgaged assets, the source underlined.
The Troika and the Government have agreed to make a distinction between primary residence and other assets. The European Commission source said the legislation for the foreclosure of primary residency will have to be put in place at the same time as the introduction of the new insolvency framework, while the foreclosure law for other assets will have to be applied as soon as possible.
We would like NPLs to stabilise and come down the source said, stressing that NPLs hamper the possibility for banks to provide necessary liquidity to the economy.
In order to sort these problems both sides, the banks and the borrowers, need to have the right encouragement to sit at the table and work it out, and that is exactly what this new insolvency law should bring about. This is a very urgent piece of legislation the source stressed.
The same official noted that the Cypriot authorities have made good progress in addressing the budgetary problems, but still there is quite some way to go to achieve the agreed fiscal targets and the necessary surplus.
The third challenge is the need to keep up the current reform drive, the source said, pointing towards the introduction of the Guaranteed Minimum Income, reform of tax administration, privatisations, health care reform, immovable property tax and further reform of the administration.
The first steps have been in the right direction. We expect that the authorities will continue to march in the same determination the official noted.
The same source said that not a lot have happened until now in the health care reform, but this time the authorities seem that they really want to move forward with the health care reform.
The Government has provided the Troika with the cornerstones of the healthcare reform and these plans need to become much more detailed, so that is something we want to see in the next mission, the source said, adding that the two sides agreed that in first instance the national healthcare system will be implemented as single payer system and a study will be carried out to show whether is possible and if so when to open up the system to other insurances as well.
The same source verified information that the Troika has asked the Bank of Cyprus and the Coops to submit a special examination report on lending and debt restructuring practices related to former or current managers, members of the boards, directors and others, with a view to finding transactions or actions that may have cost disproportional cost to the bank.
Here there is an issue of principle. If there is a doubt as to transactions of board members that may have cost losses for the system we feel strongly that every reasonable attempt needs to be made to recoup that money for the taxpayer, the source said.
The same European Commission official estimated that Cyprus will not need more financial assistance and did not rule out the possibility for the country to return to the markets earlier than expected.
Cyprus required a 10-billion-euro bailout from lenders in March 2013 and is following a three-year economic adjustment program. - (KYPE)
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