Banks in recession-hit Cyprus, reeling from a financial crisis, are struggling with non-performing loans that make up nearly half their lending and are hampering efforts to finance a cash-starved economy.
The central bank said banks’ liquidity is sufficient to absorb NPLs up to a certain point, but fast action is needed as the figure is rising, Agence France Presse reported.
The government, lenders and borrowers are seeking ways to reverse the trend without further damaging an economy forecast to contract by 8.7 percent in 2013 and another 3.9 percent this year.
The total of NPLs – defined as loans more than three months in arrears or rescheduled several times – stood at 23 billion euros ($31.08 billion) at the end of September, according to the latest central bank figures.
That is well in excess of the Gross Domestic Product (GDP) that stands at only 17 billion euros ($22.97 billion), and represents 42.3 percent of total lending.
Central Bank Governor Panicos Demetriades said the NPLs and restructuring of loans in general present “the biggest challenge facing the banking sector in Cyprus.”
The banks brought the problem on themselves, first with big holdings in Greek bonds that were devalued 74 percent, and with bad loans to Greek businesses that went belly-up, costing the Cypriot institutions 4.5 billion euros ($6.08 billion) in losses.
That forced then newly-elected President Nicos Anastasiades in March of 2013 to seek a 10 billion euro ($13.52 billion) bailout from international lenders that came with a requirement the government find savings or revenues totaling 13 billion euros ($17.58 billion) leading the government to confiscate 47.5 percent of bank accounts over 100,000 euros ($135,240).
Additional austerity measures and capital controls that have cut deeply into the ability of businesses to operate have created soaring unemployment and led many to be unable to repay the banks.
With its banks overwhelmed by bad loans, little capital to lend, and under tight financial controls as part of the conditions for an international bailout, Cyprus now wants the European Bank for Reconstruction and Development (EBRD) for a fresh injection for the ailing institutions.