Bad loans a 'challenge' as Cyprus exits bailout

Cyprus is finally about to exit its three-year bailout program, in which savers and bond-holders had to "bail in" their banks , but with bad loans still a worry, the finance minister of Cyprus told CNBC he was not complacent.

"We remain very focused and very committed on maintaining the reform effort and maintaining fiscal disciplines and keeping a watchful eye on our banking sector," he said, adding that "no one can say the challenges have gone either for Cyprus or for the European economy," Finance Minister Harris Georgiades told CNBC on Friday.

For the last couple of years, Cyprus has battled an economic slump which was compounded by the collapse of its financial system in 2013 which saw the Cyprus Popular Bank wound down and another – the Bank of Cyprus – recapitalized by measures including the controversial seizure of depositors' uninsured savings above 100,000 euros ($120,000).

The country secured a 10 billion euro ($11.8 billion) bailout overseen by the so-called "troika" – made up of the European Commission, European Central Bank and International Monetary Fund – and after undergoing strict austerity measures and reforms, has returned to growth and will exit its bailout program in March.

Georgiades said the country had "come a long way" but that fiscal discipline would continue.

"Yes, we are ready to safely exit the support program, we are back in growth," he said.

"We entered the program whilst in recession and now we're having growth rates around 1.5 percent. We have completely eliminated the deficit…so that's well ahead of expectations and of course we have stabilized the banking sector so there has been good progress on all fronts and we can take it from here."

"So we don't need the program but this does not signal the termination of the discipline and efforts we have been making during the last three years. In fact, our own reform agenda goes above and beyond the troika program," he said.

Georgiades said by continuing with its current stance on reforms and fiscal discipline, Cyprus would be "safe" and would be able to convince markets "that Cyprus is back on track."

Despite the success of the country's bailout, non-performing loans (NPLs) remain a thorn in the side of the Cypriot banking system. The latest data from the country's central bank released last month showed that the NPL ratio dropped to 46.1 percent in November last year, the lowest since January 2015, and down from 48 percent in October. In all, the total number of bad loans fell to around 27.4 billion euros.

Georgiades said the Cypriot banking sector was "well-capitalized and well-provisioned" but that the level of bad loans on banks' balance sheets remains a "challenge."

"They are high, they are a leftover of the boom and bust of the previous decade but here too I am confident that we will be seeing progress. The de-escalation will not show immediately given the handling of NPLs where you have to be keep them on the red column (of accounts) for a year after they have been restructured but viable restructurings are happening and the fact that the economy is growing again helps."

"So even on this front I am confident, without being complacent at all, that we shall be able to bring them down."

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