NICOSIA, July 12 (Xinhua) -- The European Commission has commented for the first time on the upcoming merger of two Cypriot banks, saying it will help reduce uncertainties surrounding the macroeconomic outlook of the eastern Mediterranean island, a statement released here said on Thursday.
The statement implies approval by European banking supervisory bodies of the deal under which a small lender, Hellenic Bank, will acquire the good part of the troubled state-owned Cyprus Cooperative Bank (CCB), the country's second largest lender.
A possible refusal to approve the deal, either by the banking supervisory body or the European Commission was a source of concern for the Cypriot government, as its pumping of 2.5 billion euros in bonds deposited into CCB could be construed as a subsidy, which is not permitted under EU rules.
Under the merger deal, the state acquired the bad part of CCB amounting to 7.5 billion euros of non-performing loans (NPL's), which will be assigned to a new body being set up to deal with this problem of the Cypriot banking sector.
"Cyprus's struggling financial sector, which has been a drag on the economy since the crisis years, is consolidating," the European Commission said in its summer economic forecast prepared by financial affairs commissioner Pierre Moscovici.
Separately, Central Bank of Cyprus (CBC) said in a statement that non-performing loans in the Cypriot banking system fell in March by 3.3 billion euros (3.86 billion U.S. dollars) compared with March 2017, which is the lowest since the peak of the bailout crisis at the end of 2014.
It also said that as a ratio to the loan portfolios of all banks, NPL's in March stood at 43 percent, down by three percentage points in relation to March 2017, which is also the lowest rate since the 2013 economic crisis sent non-performing loans skyrocketing.
The bulk of the reduction is related to corporate NPL's, which fell in a month by 1.5 billion euros, while that of households fell by just over 556 million euros.
CBC said the downward trend in non-performing facilities can be attributed to write-offs, increased restructurings successfully completed by the end of the period under review and reclassified as performing facilities, repayments, as well as settlement of debt through swaps with immovable property.
Restructured NPL's have to be serviced for 12 months before being considered as performing, meaning that restructured loans are actually lower than shown in the books.
Even so, banks have to make provisions for restructured non-performing loans, burdening their resources and reducing their profitability.