The opinion of the European Central Bank, signed by ECB President Christine Lagarde, on the legislative amendments to the foreclosure framework approved by the House of Representatives before the elections, constitutes a clear warning about the potential impact these changes may have on the banking system and, by extension, the Cypriot economy. In essence, the ECB rejects the entire set of legislation and recommends that Cypriot authorities conduct a thorough analysis of the possible effects of the amendments on the economy.
The opinion was requested by the Ministry of Finance. Specifically, the ministry sought feedback on the amendment proposed by AKEL and the Greens, allowing for the suspension of foreclosures until a court decision is issued, if legal action or appeal has been filed challenging the original or remaining debt, alleging abusive terms, illegality or invalidity of the contract. Ultimately, the ECB decided to assess the full package of seven laws.
Of the seven laws approved, only changes regarding the jurisdiction of the Financial Ombudsman and the ability to issue a decision suspending foreclosure for 12 months have come into force. The remaining provisions have been referred to the Supreme Constitutional Court by the President of the Republic. These include suspension of foreclosures, write-off of residual secured debt after a sale or auction, limitation of guarantor liability and suspension of interest when the total debt reaches double the original amount.
The ECB does not directly question the need to protect borrowers, but stresses that any measures should not weaken creditors’ ability to enforce their legal rights over collateral or create significant delays in enforcement procedures.
“While the amendments may aim to protect vulnerable households facing difficulties in repaying mortgage loans, they could have unintended consequences and potentially achieve the opposite of their intended goal, namely protecting borrowers in terms of access to housing. Banks are likely to offset the implied increase in credit risk by tightening lending conditions and reducing the supply of credit, making housing access more difficult and more expensive for households,” the opinion states.
The ECB expresses particular concern about provisions linking foreclosure procedures to complaints examined by the Financial Ombudsman or allowing prolonged suspension of enforcement processes. In its assessment, such measures may create uncertainty regarding the timing and effectiveness of collateral recovery, affecting the management of non-performing loans.
The ECB also identifies fiscal risks, particularly in relation to the operation of KEDIPES, whose aim is to recover state aid provided to the former Cyprus Cooperative Bank for the benefit of taxpayers. The legislation could limit KEDIPES’ ability to recover outstanding amounts, affecting state revenues.
It further warns that any weakening of the financial system may negatively affect economic activity, in turn weakening public finances. A vulnerable financial system could create contingent liabilities for the state, increasing the likelihood of public support during periods of crisis. Additionally, the perception of increased risk of negative feedback loops between banks and the state could affect the country’s creditworthiness, the ECB notes.
