International credit rating agency Moody’s has warned that a mass conversion of housing loans taken out in Swiss franc may negatively impact ongoing efforts to resolve the banking sector’s high levels of non-performing loans.
This statement follows the Cypriot Parliament’s recent discussion of the issue; on October 12, the Parliament’s Financial and Budgetary Affairs Committee gave the Central Bank of Cyprus (CBC) a two-week deadline to formulate options that will reduce the debt burden of borrowers who received mortgages in Swiss francs. If the CBC cannot find an appropriate solution, it said, the Committee would propose to retroactively fix the exchange rate to the prevailing rate when the loans were granted, mainly between 2008 and 2010.
The CBC subsequently warned that forced conversion would cost Cypriot banks some €250 million.
Despite this possible monetary loss, “the bigger credit negative is the moral hazard that the proposal creates among borrowers of the much larger amount outstanding of euro-denominated mortgages,” Moody’s said in a statement.
The proposal, it explained, makes the banks’ restructuring of their high stock of nonperforming loans (NPLs) more challenging. “It would also delay the recovery of Cypriot banks’ profitability since they would likely continue to be loss-making for a fifth consecutive year,” the agency warned.
In fact, according to Moody’s, “the plan encourages all mortgage borrowers to delay loan restructuring in hope of more debt relief.”
Cypriot banks face a large stock of problem loans, with the ratio of NPLs to gross loans as of June 2015 at 52.7% for Bank of Cyprus Public Company Limited (Caa3 stable, caa33) and 54.9% for Hellenic Bank Public Company Ltd. (Caa2 stable, caa3).
“Given the relatively high median net wealth of individuals, which was €266,900 in 2010 (the latest data available), according to the European Central Bank, and the high savings rate in the country averaging 19.7% before the financial crisis, we believe 10%-20% of delinquent small and midsize enterprise and retail borrowers are strategic defaulters that have the capacity to repay but opt not to do so,” Moody’s added.
the Bank of Cyprus, with a €1 billion portfolio of Swiss franc loans, has the highest exposure among banks operating in the country would face losses of around €147 million and Hellenic Bank around €11 million.