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Moody’s: Cyprus' High Loan Payment Deferrals Reflects Strain On Economy

Moody’s: Cyprus' High Loan Payment Deferrals Reflects Strain On Economy

In their bi-weekly outlook report, Moody’s analysis on the payment deferrals for borrowers will reduce the probability of acute asset quality stress for banks this year, it still presents a high percentage that asset quality deterioration will very likely happen next year.

 

Moody’s analysis came after the Central Bank of Cyprus published data showing around one-third of Cyprus bank’s gross loans had payment deferrals as of June 5.   

 

“The deferrals will reduce the extent of any deterioration, but their ultimate effect will depend on the depth and duration of the economic downturn,” the credit agency published.  

 

The tourism sector will take significantly longer to recover, the analysis went on. “We expect Cyprus' economy to contract by 7.5% this year before recovering in 2021, when we expect it to grow by 6.0%.”

 

High private sector debt is exacerbating the strain on borrowers and Moody’s expect the policy response measures by the relevant authorities to alleviate the immediate strain on creditworthy borrowers' cash flow and increase the likelihood of the recovery and longer-term viability of their loans. The measures include a broad loan payment throughout 2020 available to all borrowers with previously performing obligations who request it.

 

“With total loans with deferrals of €11.4 billion as of 5 June, we estimate banking system loans with deferred payments at around a third of gross banking system loans. Loans with payment deferrals are in addition to nonperforming loans, which comprised 28% of system-wide gross loans at the end of 2019. We estimate that loan deferrals make up almost half of the banking system's performing loans,” the report stated.

 

The high level of loan deferrals mirrors the strains on Cyprus' economy, but also the broad and protracted payment deferral framework. Deferrals for tourism-related loans account for 81% of gross loans and 89% of performing loans.  “Other confidence-sensitive sectors such as real estate and the troubled construction sector also have high percentages of deferred loans. Combined, the three sectors account for more than 60% of loan deferrals for nonfinancial companies,” the report ended.

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