Cyprus banks face bad debts challenge

Cyprus Central Bank chief Panicos Demetriades said on Monday the main challenge still facing the country’s troubled banking sector after last year’s bailout haircut is clawing back bad debt.

“Arrears management and loan restructuring is one of the most challenging issues currently facing the banking sector in Cyprus in its path to the restoration of financial soundness,” Demetriades told a conference.

Banking sector bad loans will be on the agenda when the troika of international lenders begin their third assessment of the Cypriot economy on Wednesday.

Demetriades said Cyprus entered the financial crisis with large private sector indebtedness accumulated over decades, similar to the situation in Iceland, which faced a banking meltdown, and in fellow bailout recipient Ireland.

“Private sector indebtedness peaked at over 500 percent of GDP (gross domestic product) in Iceland, and 300 percent in Ireland. By comparison, private sector indebtedness stands at 300 percent in Cyprus,” he said.

Demetriades said the problem could be “addressed and defused” such as through a targeted case-by-case approach to debt restructuring, effective arrears management and the strengthening of the legal framework. [AFP]