September 29, 2017 / 1:41 PM / a year ago

UPDATE 1-High NPLs weakest link in Cypriot economy, say EU, ECB

(Updates throughout)

NICOSIA, Sept 29 (Reuters) - Cyprus’s economic recovery following a meltdown in 2013 remains robust, the European Commission and the European Central Bank said on Friday, but stubbornly high soured loans in its banking sector are a key vulnerability for the euro zone country.

Cyprus required a 10 billion euro international bailout in early 2013 which saw one bank wind down, and a second financial institution seize uninsured deposits and convert funds to equity to recapitalise itself, a first in the single currency area.

The economy grew by 3.6 percent in both the first and second quarters of the year, buoyed by tourism arrivals which rose 20 percent in 2016, and 15 percent over the first eight months of 2017.

Authorities expect output to expand by 3.6 percent for the whole year after a 2.8 percent uptick in 2016.

“Economic recovery has gathered further strength, but sustaining growth over the medium term will require renewed reform momentum, continued fiscal discipline and acceleration in resolution of non-performing loans (NPLs),” the two institutions said in a news release.

Non-performing loans weighing down banks exceed 40 percent of their total loan book, among the highest in the EU. While the stock of toxic loans was declining, it was still high and weighed on bank profitability, it said.

Restructuring was becoming more challenging, partly mirroring an uneven approach across the banking sector on resolutions and highlighting the need for more efficient legal foreclosure and insolvency processes, the institutions said.

The crisis in Cyprus was a combination of fiscal slippage and a banking system which virtually imploded from heavy exposure to Greek sovereign debt - written down by Athens’s international lenders to make that country’s debt mountain more sustainable, but subsequently rolling over to smother the Cypriot banking system. (Reporting by Michele Kambas; Editing by Andrew Bolton)

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