Cyprus’ ESTIA scheme subsidising borrowers with toxic mortgages is failing to generate the expected interest with less than 3% of loan defaulters applying for government help.
ESTIA was launched in September in an attempt to reduce Cyprus’ bad debt mountain.
Analysts attribute the failure of the government plan to a large number of strategic borrowers who chose not to take part in the scheme as they feel no substantial risk of losing their primary home.
The rescue scheme drawn up by the Ministry of Finance enables struggling borrowers to repay their loans by subsidising part of the repayment of a restructured loan.
The ESTIA scheme covers borrowers that had non-performing loans up until September 30, 2017. The plan only covers vulnerable borrowers whose market value of their home does not exceed €350,000.
However, according to analysts, favourable legislation in place to protect a borrower’s primary home and the continued political pressure to loosen the already weak criteria make integration into the ESTIA scheme unnecessary, rendering the project a failure.
According to data quoted by online news site Stockwatch, so far, only around 350 borrowers, out of the estimated 12,000 who meet the criteria, have applied.
These 350 applications which have been approved correspond loans of close to €110 mln from a total toxic reservoir of €3.4 bln worth of loans estimated to be eligible for the scheme.
Around 90% of the 350 applications come from borrowers with loans at the Bank of Cyprus and the former Co-op Bank.
University of Cyprus finance professor Sofronis Clerides told Stockwatch that limited interest in the scheme is a clear indication that it is not as attractive to borrowers as the government initially thought.
"This does not mean that the plan has to change. On the contrary, it is already very generous towards defaulting borrowers. What needs to be done is to make the alternative, which is not paying, less attractive.”
Clerides said that while the ESTIA scheme is the carrot, the stick is nowhere in sight. As he explained, the stick would be the fear of divestment of the homes of those who do choose not to join the scheme and continue to be inconsistent with their obligations.
“Otherwise few will choose to pay part of their debt when they can pay nothing,” said Clerides.
Also finding interest in the generous scheme disappointing, CIIM finance professor George Theocharides feels that the complexity of the scheme and the inadequate information provided to borrowers by the state and banks may have played their part.
However, Theocharides did note that there might be a high number of strategic defaulters who do not wish to reveal other assets.
He said more time should be given for people to understand what the scheme is about; procedures need to be simplified while introducing measures to reduce the moral hazard this scheme may pose to society.
Stavros Zenios, a professor of economics at the University of Cyprus, notes that the results are unsatisfactory, pointing out that only 3% of the NPL problem is expected to be resolved through the ESTIA scheme at this rate.
"This would mean that either the remaining 97% are strategic defaulters who are not being discouraged by existing legislation, or that the ESTIA scheme does not offer real help to those in need.”
Zenios advised the government and the finance minister to take into consideration criticism made by economists regarding weaknesses of the scheme.
“Unfortunately, my colleagues’ fears have been verified and I am very afraid that even now the finance minister will not lend an ear, as he is more concerned about proving that all is well as he prepares to depart from the ministry at the end of the year."
