Approval of insolvency credit positive for banks: Moody's.
The enactment of the hotly-debated insolvency framework into law last Saturday was credit positive for Cypriot banks because it lays the groundwork for large-scale loan restructuring and improves the banks' recovery prospects, Moody's ratings agency said on Thursday.
A key effect of passing the insolvency bills was implementation of tougher foreclosure legislation drastically cutting the time it takes to foreclose and auction real estate collateral to 18 months -- down from over a decade -- which had been blocked by the Cyprus parliament since last October until the insolvency framework was introduced.
"Implementation of the foreclosure bill […] lays the groundwork for large-scale loan restructurings and improves the banks' recovery prospects," Moody's said.
Local banks suffer an unprecedented level of non-performing loans, which exceeds half of total loans.
Uncertainty over the final provisions of personal and corporate insolvency legislation, as well as the suspension of the law on foreclosures, helped exacerbate the problem as borrowers increasingly "adopted a wait-and-see attitude".
"The enactment will provide incentives to individuals to seek restructuring of their loans and discourages strategic defaults."
"This will help banks tackle the volume of non performing loans."
Other positive externalities, according to Moody's, include the resumption of Cyprus' bailout adjustment programme review, which -- along with the disbursement of the next loan tranches -- had been frozen by the Troika of international creditors (European Union, European Central Bank, and International Monetary Fund) when the Cypriot legislative suspended implementation of the new foreclosure rules.
"If positive, the review's conclusion paves the way for the next tranche disbursement," the agency said.
But just as important, a positive review will also "allow the country access to the ECB's quantitative easing plan".
"Under the plan, Cyprus' government bonds will become eligible for direct purchases by the ECB, which will improve bank liquidity and support modest lending," it added.
The insolvency bills amend the corporate bankruptcy framework by introducing creditor protection for 120 days to allow for company reorganization.
They also legislate the licensing of insolvency practitioners in Cyprus and introduce a social safety net by providing protection against foreclosure on primary residences if certain criteria are met.
This will allow courts to impose loan restructurings in case the negotiations between the concerned parties fail, and allow the write-off of individuals' unsecured debt under certain conditions.
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|Publication:||Cyprus Mail (Cyprus)|
|Date:||Apr 23, 2015|
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