Attention to the transformation of KEDIPES into a “bad bank” is recommended by the technocrats of the Commission, seeing moral dangers and the possibility of disorder by the strategic defaulters.
In its report on the 10th post-memorandum audit of Cyprus, the Commission technocrats state that “such an initiative should be carefully considered and have the necessary inherent characteristics, to ensure the proper management of assets on an equal footing with the practices private investors to minimize the risk to taxpayers and ensure the sound recovery of assets. “
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The success of this initiative, they note, will also depend to a large extent on a well-functioning insolvency and divestiture framework. In addition, the expansion of the range of assets managed by KEDIPES may delay the repayment of the state aid granted in the context of the liquidation of the Cooperative Bank of Cyprus in 2018. Regarding the planned sale of serviced or informed loans by 1 billion, also known as “Ledra”, the Commission notes that it is planned to be made in installments, starting from the second quarter of 2021.
The Commission notes in the report that KEDIPES is in the final stages of completing the loan management agreement with Altamira, but staffing and data clearance issues have not yet been resolved. The operation of KEDIPES faces obstacles due to the pandemic, cash inflows decreased in 2020 compared to 2019, but began to recover in the last quarter of 2020, the report said.
With regard to the general banking environment, the Commission technocrats note that banks may need further provisions for bad loans, acknowledging that the coverage rate for non-performing loans is higher than the European average. The report notes “while the overall coverage ratio continues to exceed the European average of 44.9% (at 45.9% Cyprus) at the end of 2020, this reflects the significantly lower quality of the remaining NPLs (in Cyprus)”. He also points out that the coverage ratio for loans in Phase 2 of the Financial Reporting Standard (IFRS 9) is low, noting that a particularly important risk factor is the amount of loans coming out of the installment moratorium and forecast levels. While acknowledging that the first signs after the moratorium are over are encouraging, “the outlook is uncertain about the flow of new NES”.