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Restructuring, Foreclosure, Insolvency or What?

Posted by (Guest Contributor) on August 4th, 2014 - 33 Comments

The various stake holders in the financial sector program for Cyprus be that the Troika, the Government, the Parliament, the Central Bank of Cyprus and now the International Institute of Finance all agree that the biggest challenge facing the economy of Cyprus is the size of NPLs. The Cyprus case is unique in history as the Troika agreed to the establishment of three internal bad banks to manage the financial sector crisis and seem to be challenging the best minds of the IMF who until recently were informing us that the levels were within the PIMCO extreme case and not unexpected.  For the past year we saw various options considered including an asset management company, a bad bank and of course the development bank to asset manage these NPLs. It seems that after the successful equity raising by two banks there will be no bad bank for NPLs across the banking system and the borrowers will have to be managed by the letter of the law.  In the view of the author this may be part of the story as I attempt to explain below.

We know that restructuring of loans has been the preferred course of action of the Government, the Troika and most of the establishment in Cyprus.  I do not think there is anyone who would not favour this option to deal with NPLs but as the Central Bank Directive sets out the restructuring of NPLs had to be under taken so that the restructured debt was sustainable.  In other words the debt repayments were possible over the term of the loan under the new terms of the loan and not as in the past to extend and pretend.  The big problem facing the borrowers and lenders alike has been that very few NPLs were able to be restructured in a sustainable manner especially where the NPL was used to acquire a land bank which produces no revenues.  Where there are operating businesses they may be over leveraged and hard to service the debt by extending repayment period and lowering interest rates.  In many of these cases the lender, and rightly so, would expect a partial repayment to reduce the debt before the lender restructures the debt.

Another option, which is hotly debated in Cyprus, is the easing of foreclosure by banks in Cyprus whereby the long time it takes banks to enforce their collateral is expedited and done privately as opposed to via the Land Registry.  The Troika must have insisted on this as they now know better how the private market works with greater efficacy than the public sector given their experiences in program countries.  Is the real danger that the banks will go to the extreme case of foreclosing en masse on the big borrowers? In my view not really and the judicial process is not the one is efficient based on the Vienna initiative neither the government and Parliament.  It must certainly not be the preferred route for the banks since if such sales were to take place the underlying collateral value of the whole banking system would suffer and the banks would probably require more equity to cover their security deficit as the collateral value is a major determinant of the level of provisions required.

Hence the Troika has come up with the need to reform the in solvency law in Cyprus which is outdated.  The threat and ease of insolvency, to force delinquent borrowers to produce funds to repay their loans, is something the IMF likes to see in program countries as it focuses minds of the borrowers so that they pay up. It is expected that instead of foreclosure of property the threat of insolvency, and loss of their property, borrowers could be led to insolvency otherwise why such urgency by the Troika to have this law in place. Here again this might work in Anglo Saxon countries but in my view it is hard to believe that a bank in Cyprus will file for insolvency if one of it major borrowers, who provides a lot of employment, will be happy to undertake.  It is not just a matter of reputation and procedure but a social issue of creating more unemployment at a time when the job market is bad and also the political interference can expect.  Nevertheless, there are those who are in the hope that this will magically make borrowers be able, despite their troubles to fund and develop projects, let alone sell, and be able to repay their loans.  This is possible but we need to see how it works in practice; I remain to be convinced.

If all the above are hard to achieve the desired result for banks to get repaid, what is the way out that is left?  Well the answer must lie in the type of ends that will take a major equity’s take in the Bank of Cyprus; this holds for any bank that has hedge funds as investors.  Typically these funds have an exit strategy which on average is three years, sometimes if markets are not favorable to five years.  Whatever hedge fund managers say their objective is to make money for their investors and of course for the owners of the hedge funds;”Our goal is to provide a solution that represents an opportunity to deliver risk-adjusted returns for our investors.”, the famous words of a leading hedge fund owner.  Why not one might ask when they take the risk?

So if it will be hard to foreclose or bankrupt a delinquent borrower why are such investors taking risks which seem to be very calculated ones in Cyprus?  The simple answer is that if delinquent borrowers do not face up to their responsibilities within the next six- nine months with the new investors on the boards of banks in Cyprus there is no law that will prevent the banks from selling NPLs at a large discount.  Once the NPL coverage of the banks reaches a level which will enable the banks to incur a small loss banks may prefer to sell the NPLs as it will free up capital that is expensive and no provisions will be required in future.  The key thus is at which price can NPLs be sold so that these sales minimize the loss that is crystallised.  If the new funds raised will address the stress test concerns of the ECB it must be the case that the NPL coverage will be increased  to what is regarded in the EU as more prudent which is 50%. The equity raised is not for on lending but meeting the requirements that will emanate from the asset quality review

In the case of other program countries the sales discount has been as high as 65-70% but it is very unlikely in Cyprus it will be so high.  Given that some of the land which is the collateral of loans is located by the seaside it is likely that the secondary market of such NPLs will be closer to50%.  If this were to be right then it is more conceivable that there will be good reason to see such sales which will not have an immediate impact on land prices as NPL coverage will increase to meet the stress tests.  Should sales take place to hedge funds these type of buyers can hold on to these NPLs for a few years and then demand repayment of their loans at a lower discount of say 20% or in full.  That is 100%. If the borrower can not pay the hedge funds would be legally entitled to enforce their security or sell the NPLs to another Fund. The only way to prevent this from happening is for the Central Bank of Cyprus to forbid the secondary market trading of NPLs.  If they have such a Directive it is good for the public to know.  If there is no restriction then the clients of the banks and the public at large should be told.

In closing, an alternative the Government may wish to consider is to set up a Fund itself where by the Fund will have first refusal on such NPLs.  Such a Fund could be supported by local institution all investors, who could be given tax incentives, and overseas investors such as long term funds with return expectations around 10-12%.  Sovereign wealth funds which have increased/and are increasing their exposure to real estate(bond yields are very low and at all time low in Germany last week) could be invited to participate as investors.  In this way the upside in land prices in the medium term will provide a profitable investment to the government and not to hedge funds from overseas.  It is thus up to the government to explore such a financial structure with the EU agencies and local as well as international institutional investors’ where such.  Investors have a long reinvestment horizon of seven to ten years. Such a Fund will do more to provide certainty for the consequences of easing foreclosure and in solvency and dampen the cries of imminent collapse in real estate prices if such prudent legal measures are introduced.

Categories → Οικονομία

  1. avatar
    Economist on August 4, 2014 - (permalink)

    First of all, we should thank the author for his interesting article on the currently most media-favourite topic.

    Second, lets emphasise one point:

    its the THREATof foreclosure that is expected to rectify to an extent the problem, NOT THE FORECLOSURE ITSELF.

    The act of foreclosure-firesale will benefit nobody, neither the bank nor the borrower.

    Secondly, they ALL have to understand, including politicians, banks and borrowers, that WE ALL SLEEP UNDER THE SAME BLANKET. IF SOMEONE PULLS THE BLANKET TO COVER HIS BODY, SOMEONE ELSE WILL BE LEFT UNCOVERED. SIZE OF BLANKET-COVER CANNOT CHANGE. Bottom line is that its very hard-impossible to achieve win-win situations regarding the loan restructuring. Somebody will be left somewhat worse off.

    And YES, under extraordinary situations like this, with the imposition of deposit haircuts, resolution of an insolvent bank(laiki) and the creation of a new systemic mega-bank, mega-problematic,BOC, and all the problems this created, banks have the obligation to see their borrowers more with sympathy. Leave some blanket for the rest….

    Personal opinions of an ex-mandarin.

    • avatar
      Erol Riza on August 6, 2014 - (permalink)

      Dear Economist,
      While one would generally agree that the threat of foreclosure would focus minds and get some restructuring done with new funds invested it seems that the insistence of the Troika on reforming the insolvency process, given their experience in other countries and better understanding of the judicial system in Cyprus, the threat is not enough. In fact it is more efficient to bankrupt a company than seek to foreclosure, at least this is the inference we take for what is published in the press. Hence this comment has a caveat as we do know the final version of the foreclosure bill nor the insolvency bill due at the end of the year. Begs the question why not have the two together?

  2. avatar
    The Invisible Hand on August 4, 2014 - (permalink)

    Dear Erol

    You have covered all choices available to “solve” the NPL problem. But if the banks decide to sell their NPL on to third parties at a 50% or more discount why not selectively offer a lower write-off (say 40%) to the current debtors first, in exchange for early payment of their reduced balances? This will reduce the bank’s losses and most likely will make most big NPL debtors viable businesses again which can carry on their activities, employ labor, pay taxes and which can then easily raise money to pay the reduced balance.

    Yes, I can hear the cries of outrage against “give-aways” to the bad, bad developers and hoteliers who live in bigger houses and drive nicer cars than the rest of us. But envy should not be the guide to economic policy. And, of course, the same policy should be applied to “first home” homeowners as well.

    • avatar
      Savvakis Savvides on August 4, 2014 - (permalink)

      There is a level of debt, in any business, beyond which it is not possible to repay no matter how good/viable it may be. I agree with Invisible that many of our business enterprises have surpassed that critical point. When this happens, there are only two things you can do to save the economy and spare the country from a deep economic depression (and a huge re-distribution of wealth – I should perhaps point out).

      1. What Invisible is suggesting. But there again, I doubt whether there are enough margins available in the Cyprus banks (particularly BOCY) to make that possible and not leave the bank in ruins. Be that as it may, this option would be better than selling the loans abroad at hugely discounted prices as it would at least preserve the value of the assets within the country.
      2. One needs to start looking not at existing loans as such but in re-formulating/redefining from the existing stock of enterprises that are highly leveraged. These should be examined as stand-alone projects which can be viable and should be re-financed as new SPVs off-balance sheet and on strict project finance terms and criteria.

      The latter would have been the prime job of a Reconstruction/Development Bank. Such a professional/specialised Bank would most importantly lead by example and direct financing into the right projects (as CDB did after 1974). Unfortunately, we wasted almost a year and a half doing nothing.

    • avatar
      Erol Riza on August 4, 2014 - (permalink)

      Dear Invisible hand,

      I think that no regulator would want to encourage such write offs because of the issue of moral hazard. Secondly, there is a limit to how much a bank can write off since the preference would be to get rid of these NPLs, especially if not viable businesses, clean the balance sheet and enable a bank to,resume lending.
      In many cases we have seen all over the world there is a bad bank created, see Banco Espírito Santo today, or banks chose to,sell Real,estate NPL s, and non real estate ( these At huge discounts) to hedge funds and private equity). One possibility is for the banks to take equity and reduce the debt but there is a limit by the regulator as to how much equity can be held which if my memory serves me well is 10% of equity. There would be a case of such equity stakes being repackaged and sold off as securities but this would require a mature capital market with risk capital.
      The clean solution is one preferred by regulators and banks

    • avatar
      The Invisible Hand on August 5, 2014 - (permalink)

      Erol and Savvakis, thanks for the comments. I can see that a write-off of, say, 40% of a loan would require additional capital for the banks, but this would be less than if the loan is sold at a 50% discount. Hopefully the regulator is smart enough to realise that. And I was not suggesting an equal 40% for all debts! Simply write off less than the discount necessary to sell the loan, provided that the debtor becomes viable and is able to raise sufficient funds to pay the remaining balance.

      Incidentally, before I am accused of helping the dirty dozen fat cats, may I list the estimated Loan-to Value ratios of the Bank of Cyprus by sector:

      Corporate 83.1%
      SME 95.4%
      Retail Housing 123.6%
      Consumer and other 89.2%
      Total 93.4

      From the above it is clear that the debtors in most need of some adjustment (moral hazard or not!) are the small/ medium house owners followed by the small/ medium enterprises. If the above statistics are correct the fat cat corporates would require much less assistance.

      • avatar
        Erol Riza on August 5, 2014 - (permalink)

        Invisible hand

        Quite clearly from the figures you present the SME businesses and small home owners would require restructuring and possibly some equity for the businesses, probably from the EBRD or EIB facilities which will be in place. The problem, as has been repeated many times, are the major businesses which have real estate as collateral and which may not be viable in the short term estimated to owe banks billions. These may be subject of foreclosure, insolvency or sale of the loans. The sale would be more attractive as it frees the banks from any additional provisions if collateral values fall further but more importantly it frees capital and improves tier 1.
        Now the banks are in better shape and the question is who will benefit from the manner in which the banks will asset manage the NPLs. The depositors who were bailed in, the new depositors or also the tax payer. In my view it should not be just the new depositors.

      • avatar
        Anonymous on August 6, 2014 - (permalink)

        I think we can all agree that the optimal solution here will be decided on price, and the truth is that we do not have a solid number to work on.

        The loan-to-value ratios that Invisible provided are informative (source by the way?), but the numbers would need at least an additional level of disaggregation to reveal the true picture. Relevant info would be under which category do real estate developers fall and who else is in that category, the breakdown between commercial and residential real estate collateral, the basis on which the value was calculated particularly in light of the differences in liquidity between different sectors of the real estate markets that would impact price discovery, etc… Repayment ability would also be relevant as we only care about loan-to-value ratios for non-performing loans, as well as potential/desire for strategic defaults (I think Invisible touches on this later on). Clearly I am not suggesting that Invisible or anybody else should do this work, but inference based on the above numbers is a bit of a stretch.

        Now regarding whether the sale is a better alternative as regards Tier 1 capital, the minute you write down a loss capital would be lost either way, but wouldn’t Tier 1 capital only be safe if the provisions were already high enough to take in the whole loss? Or is the argument more about the same capital providing for a smaller asset structure? In any case, anything that is better for the banks one would expect to be not so great for the purchasing institution so if we are talking about sophisticated investors then it is doubtful that these potential benefits would not be priced in accordingly and wipe out capital gains.

        Moral hazard is a big thing and should be taken very seriously. Whatever banks do they should think very carefully before distorting the incentive structure for borrowers. Especially the big ones, who due to size and political/business connections can exert more leverage on the banks, leverage that individual mortgage borrowers would have to collude in the numbers of thousands to be able to reproduce (some form of collusion among retail borrowers in the interest of common representation would help them here, but would definitely be a blow on the banks).

        Regarding the sell-offs, one thing that can be done is for the bank to enter loan-sharing agreements (a la FDIC) with the purchasing institution, by perhaps taking an equity tranche in the bundle. This may sound suboptimal because through this process the bank would still retain some off-balance sheet exposure, but if the exposure is transparent and priced correctly then that is really not an issue at all. For example, if we are really considering a 50% writeoff on sale or a 40% writeoff on principal and retaining the loan, we could very well consider a 40% writeoff on sale with a 10% residual exposure for losses past the first 40% loss on principal. Those losses the bank would have had to take anyways if it retained the loan on its balance sheet.

        Debt to equity conversions are not a bad alternative to firesales, some businesses are large enough to worth considering managing temporarily and selling off to strategic investors, rental income can replace interest payments on mortgages and can give banks breathing space until a real estate rebound. Need be, the government could restrict the supply of housing stock for a bit, trading off in essence price stability for growth in the construction sector. More carefully designed policies could restrict the supply in specific sectors of real estate and promote it in other sectors to reduce the negative impact of each of these two alternatives while maximizing the benefits for the economy. Of course, as Erol and others have pointed out, there are limits to the equity stakes that banks can hold, so at the very minimum the regulatory framework would have to be amended accordingly and banks should invest in personnel with experience in these activities.

        Regarding foreclosures, we all know that banks can only cash in on the threat of foreclosure and would very much like to avoid the losses that come with actual foreclosure proceedings (direct losses in terms of write-offs at sale and indirect ones due to further value declines on existing collateral on the banks’ loan portfolios). So a regulatory environment that facilitates foreclosure proceedings is much needed and, sure, we can talk about all the ways that this exercise could go wrong but if done properly it will be a great boost to the banks and the economy.

        • avatar
          Erol Riza on August 6, 2014 - (permalink)


          A very good piece of analysis and could not have put it better. Why not reveal who you are as it seems you have a very good understanding of the issues and you should be known to the stakeholders.
          The banks could do more with such people in management or on boards.

          • avatar
            Anonymous on August 7, 2014 - (permalink)

            Dear Erol,

            Thank you for yet another excellent piece and for your kind words. I appreciate the fact that you put your name behind your posts, as this certainly makes it easier for us (the readers) to get a comprehensive understanding of your thinking around these issues. I work for an international organization that has strict policies regarding external communications and involvement in activities outside the scope of the institutional mandate, and by necessity I will have to keep my anonymity for now.

            Thanks again for your contributions to this forum.

        • avatar
          The Invisible Hand on August 7, 2014 - (permalink)

          Anonymous, you raise some good points, and of course I wouldn’t dream of carrying out (or being able to) a full analysis of the BoC picture. You can find a lot of information on the BoC Investor Relations site, oddly enough classified as confidential but everyone is allowed in. This is probably due to the ban on accessing investors in the US etc.

          My table was copied from their “Additional Info Pack”.

          • avatar
            Anonymous on August 7, 2014 - (permalink)

            Dear Invisible,

            Thank you very much for the reference and your feedback.

    • avatar
      Anonymous on August 6, 2014 - (permalink)

      “But envy should not be the guide to economic policy”
      Is this about envy or is this about how a capitalist system should work as it works in the rest of the world. Should the we reward the developer and hotelier mismanagement by forgiving them the loans . Are you serious???? They make the mistake the contributed to this crisis and we should reward them.

      If the market works they should go down and would eventually be replaced. Orphanides went down and in a year new and existing entities replaced his market share in the year.

      • avatar
        Erol Riza on August 6, 2014 - (permalink)

        Dear Anonymous
        The MOU with the EU provides for no fire sales and efforts must concentrate on maximum recovery via what was hoped would work restructuring. Now it seems this is a hotly debated issue and some politicians think the bankers have ciolated the law for. It undertaking restructuring when it was possible. Undoubtedly one would like to see if this can be legally enforcinle.
        To answer your question though not even the banks want to foreclose and sell as this would be shooting themselves in the foot by making the collateral of the whole banking system worse off. Some entity, or investor, will have to buy these NPLs with as little loss as possible. The Portuguese example of how BES was split over a weekend with EU and IMF support should remind the stakeholders of how this is done in other capitalist countries. Enough of IMF claims about debt sustainability and more solidarity from the EU/ ESM is what Cyprus requires. The Moody’s report is another wake up call.

      • avatar
        The Invisible Hand on August 7, 2014 - (permalink)

        Anonymous. Yes, there is an element of envy clouding our thoughts about the dirty dozen fat cats. But Erol’s reply that the banks would be shooting themselves in the foot is spot on.
        It is my opinion that the first priority is to save the bank. And if the bank’s provisions / write-offs would be less by forgiving, say, 40% of a loan rather than selling the loan at a 50% discount, I think the bank’s board would be negligent to even consider selling the loan.
        Whether the beneficiary deserves such a windfall or not is not relevant. If we jailed every Cypriot who borrowed more than he could afford, the new prisons required would revive the construction sector.

        • avatar
          Anonymous on August 7, 2014 - (permalink)

          Dear Invisible
          The provisions which effectively impact the capital adequacy of the bank are the money of the depositors. For the provisions of 40% to happen and the bank to be still alive depositors lost their money.

          Should the inefficient “fat cats” are to be rewarded for their mismanagement? What is the message that the banks project to future creditors?

          Are we making economic and government policy with the depositors money. Depositors lost their money why not the businessmen who mismanagement their businesses to loose their business and properties.

          This is Socialism for the inefficient/incompetent individuals and businesses and capitalism for the depositors. The market always corrects itself. We not just let the market work.

          Dear Erol,

          On way or another we will reach the bottom. The market will always correct itself eliminating the inefficiencies. If we choose to reach the bottom gradually (that would effectively prolong the recession) is one option. The best option is to leave the market correct itself. The beginning would be difficult but the recovery would be faster as well

          • avatar
            The Invisible Hand on August 8, 2014 - (permalink)

            1. The element of envy is definitely there, even in your reasoning. We all want the “fat cats” to be bankrupted (a not unreasonable desire in a capitalist economy) but we want to safeguard the “first home” of some guy who borrowed 300,000 but could only afford to repay 150,000. True capitalism should make no distinctions. I have actually heard of a co-op recently rescheduling one of these for 60 (yes, sixty) years!
            2. I cannot guess what message the banks want to project to future creditors, most messages from the BoC today are white noise. But I can guess what messages future creditors should project to the banks: Don’t count on inflation smoothing out valuation mistakes in a euro economy; don’t count on personal guarantees of wives, and mother in laws; and when a banker makes a mistake the creditor and the debtor both end up paying, whatever the fine print said.

          • avatar
            Erol Riza on August 8, 2014 - (permalink)

            Dear Anonymous

            I agree we need to see how the market will correct although I am not convinced we have an efficient market functioning. The workout of NPLs based on the three internal bad banks, which our IMF friends were comfortable until recently, is going to take time. The guess estimate of bank management is for 3 years unless by some stroke of lick the new laws will expedite the loan recovery and banks are able to recover NPLs quicker.
            The problem has been the choice of how to deal with NPLs and the chosen method which is dragging f or long and keeping interest rates high.
            One hopes that the stakeholders will revisit since a sharp correction in real estate prices is in no one’s interest and certainly the borrowers which have to pay up should not be the ones who are least to blame. The safeguarding across the board of small borrowers will damage the banks and one needs to find the right balance.
            My views on how NPLs should have been asset managed are well known and no need to repeat myself.

  3. avatar
    Cyprusstmp on August 5, 2014 - (permalink)

    How about a combination of what Savvakis/Invisible and Erol are suggesting: provide a grace period for NPL borrowers to repay part of their obligation. Within that deadline period, for every amount repaid, an equal (or attractive portion) of the loan will be written off. Thus, the bank (cleaning their balance sheet), borrower (relief from surpassing critical level of debt, chance to economically survive) and country (keeping assets nationally) could be benefiting.

  4. avatar
    Παναγιώτης Σαββίδης on August 5, 2014 - (permalink)

    Ας υποθέσουμε για μια στιγμή, ότι η Τράπεζα Κύπρου είναι η General Electric, η οποία διαθέτει εργοστάσια σε όλο τον κόσμο, τράπεζες σε 16 χώρες, χρηματοπιστωτικές υπηρεσίες για χρηματοδότηση από μηχανές αεροπλάνων μέχρι πλυντήρια ρούχων, υπηρεσίες, κλπ.

    Με €14δις NPLs και καθυστερημένων δανείων, με τραπεζικούς πελάτες επιχειρήσεις των οποίων οι ιδιοκτήτες δεν έχουν ακόμη συνειδητοποιήσει ότι στο μέγεθος τους και στην οικονομική τους κατάσταση δεν μπορούν να εξυπηρετούσουν σωστά τους πελάτες τους, με το Κυπριακό τραπεζικό σύστημα να πρέπει να μειωθεί στο 1/3 από το μέγεθος του 2012, η Τράπεζα Κύπρου πρέπει να γίνει ένα conglomεrate στην Κύπρο με τράπεζα στην Κύπρο και χρηματοπιστωτικά ιδρύματα στο εξωτερικό, με μερίδια σε κυπριακές εταιρείες με φιλοδοξίες για εξαγωγικό προσανατολισμό με το να αναλάβει την διαχείριση των εταιριών που της χρωστούν με την αναδιάρθρωση, συγχώνευση, κλείσιμο, και ότι άλλο μπορεί να κάνει με στόχο να φτιάξει υγιείς εταιρείες από τις οποίες θα παίρνει ένα μέρισμα ή κέρδος με την πώληση των.

    Όσο το ΔΣ και η Διοίκηση της Τράπεζας Κύπρου εξακολουθούν να πιστεύουν ότι είναι τράπεζα, τότε θα παραμένει στον φαύλο κύκλο που έχει βρεθεί και δεν θα βγει ούτε με τις εκποιήσεις. Πρέπει να αποφασίσει ότι ο ρόλος της τράπεζας έχει αλλάξει και πρέπει να μεταμορφωθεί σε κάτι άλλο.

    • avatar
      Anonymous on August 6, 2014 - (permalink)

      Panayioti, I agree that BoCY should probably enter uncharted territory for a while, in terms for example of taking over and managing some of its largest non-performing borrowers’ businesses, but they should treat this as a short-term ‘necessary evil’ rather than a longer term strategic direction.

      We got into this mess partly because retail banks expanded rapidly into sectors of finance that were simply put “out of their league” and last thing we want is to go there again. If we really want to consider more elaborate banking arrangements that move towards universal banking, etc.. we should start thinking about a safe form of narrow banking first, and structure the more risky part of the banking business in a way that minimizes the exposure of the state and depositors to the tail risk that inevitably comes with it.

      • avatar
        Παναγιώτης Σαββίδης on August 6, 2014 - (permalink)

        Anonymous, I am not talking about a bank anymore. I am talking about a company that manages assets, a national champion.

        Let’s take the example of the top 30 borrowers at BoC. They owe the bank €5,489 m, BoC has put aside €1,558 m and the collateral is €4,379 m.

        Should BoC become a shareholder against the loan amount, then the benefit to Boc will be €448m + any borrower’s going concern (€4,379+1,558-5,489).

        We need new financing structures. Specialised banks for SMEs and for micros, mortgage banks and consumer finance banks. We need new ways of classifying assets and how we give out and get loans.

      • avatar
        Erol Riza on August 7, 2014 - (permalink)

        Just would like to add to what anonymous is pointing out, and with which I agree. Banks in general are heavily regulated and the risk taking is over given the losses incurred but also because the Basel III regime to come into force will make certain lending unprofitable. In fact we see this happening already in property financing where banks no longer are interested and insurance companies are getting more involved. Moreover, infrastructure financing is also uneconomic given the duration of such loans whch are penalized for capital adequacy. In the current environment, and in the future, we see non banks lending and in particular real estate, infrastructure and SME funds being established as well as private equity providing mezzanine finance. Hence banks will end up being, as Anonymous suggests, retail banks offering housing loans, SME loans, consumer finance and short term loans for trade and other services. Banks should not be the source of long term and risky borrowing and will not. They have, globally, proved for the last thirty years incapable of prudential risk taking and this is not changing from their side but regulators imposing it. No more soft touch regulation. See the fines on banks in USA and UK

        • avatar
          Παναγιώτης Σαββίδης on August 12, 2014 - (permalink)

          Think about this for a second. Companies mostly get capital by selling shares or by reinvesting profits. Banks rely almost entirely on borrowed funds, including deposits. When a company borrows is at the mercy of the lender. Nobody forces the bank to lend the money. When a bank borrows from their largest lender, the depositors do not see themselves as lenders because their deposits up to €100,000 are secured by the government.

          Therefore, the government takes the risk, the Central Bank of Cyprus without any interference from the government, monitors the banks with governors that do not know anything about banking and bankers lend as long as they have deposits to earn their salaries and bonuses. And this is the travesty that is called banking in Cyprus.

          To save the banking sector in Cyprus, you need to break it up first.

  5. avatar
    XYZ on August 6, 2014 - (permalink)

    With all due respect but I wonder why everybody tends to turn simple and straightforward problems into complicated dilemmas. We all know by official data that the private sector of Cyprus is one of the most heavily indebted by worldwide comparisons. At the same time we equally know that the assets of the private sector in relative terms are huge. Why don’t we sell these assets to cover the funding gap? How can we do that? It’s very simple in three steps: first you confiscate the homes under non-performing loans. In the second stage you cut wages and salaries creating equilibrium in the system by making it unaffordable to service the performing loans. So indirectly you enforce the sale of about one third of homes. In the last phase, the tax authorities raise immovable tax to the level which is necessary for the rational homeowners to be incentivized to give up their property. I know it may sound unfair. But here we are talking about the future of our economic system. There is nothing more important. Who remembers today that in 1974 one third of the people of Cyprus lost their houses. It is all history now.

    • avatar
      Επιλήσμων on August 12, 2014 - (permalink)

      Dear XYZ,

      With all due respect, you remind me of the following attitude:

      -”They don’t have bread? Let them eat cake”

  6. avatar
    Marios on August 7, 2014 - (permalink)

    There have always been many problems with our Bank Finance system.
    One of them is the ubiquitous use of 3rd party Guarantors in almost all forms of Bank Finance even in cases where there are morgages or other collateral.
    Since they are changing the whole legal framework relating to issues like foreclosure, bankruptcy etc another relevant aspect that needs changing is that of Guarantors, at least for future bank finance.
    The banks should either be completely forbidden from getting 3rd party Guaantors (at least for physical persons) or only be allowed under very strict conditions.
    I will give a real example:
    6-7 years ago, a Bank got a 23 year old to become a Guarantor for Eur1 million in his father’s company bank finance. At the time the son had no connection with the company and had almost zero assets, ie he was not creditworthy and the bank knew it. The company has now closed and the various collateral are not enough to cover the loan. The bank has the right to go after the son, get everything he has and further make him bankrupt which because of his occupation will have serious consequences for him.

    This whole thing with guarantors is ridiculous in Cyprus, 1/2 of Cyprus is guaranting the other half and vice versa.
    Banks are not to be trusted to only ask for Guarantors and only accept creditworthy guarantors (that have the means to cover the whole of the gurantee with liquid assets) so Legislative means must be used to reduce this practise

    • avatar
      Erol Riza on August 7, 2014 - (permalink)


      You are absolutely right. If there is no ability to repay the mere fact that you have a guarantor to get credit approval is the type of banking that destroyed Cyprus’ banking system. The complete disregard to proper credit risk management is documented in the report by the Committee for the future of the Cyprus banking system which included a very prominent finance professional as David Lasceales? If there are third party guarantees from professional parties as in credit insurance this is a different matter but personal guarantees should be a thing of the past.
      In the case you mention the guarantee was unethical and in future such practices should be banned by the Central Bank of Cyprus.

  7. avatar
    Σάββας Τταντής on August 10, 2014 - (permalink)

    Μετά απο αρκετό καιρό θέλω να θέσω τις απόψεις μου για την Κύπριακή οικονομία και το μέλλον της.

    Η τράπεζα κύπρου τελικά χρειάστηκε και άλλα κεφάλαια οπως έγραφα για 1 χρόνο σε αντίθεση με αυτά που έλεγε ο πρώην διοικητής της ΚΤ.

    Τέλος του έτους αρχές του 2015 Ο Συνεργατισμός θα χρειαστεί 1 Δις παρόλο που αξιωματούχοι του λένε σήμερα οτι ο συνεργατισμός είναι κεφάλαιουχικά ισχυρος. Χάθηκαν τα 1.5 δις των φορολογουμένων. Το κράτος θα αναγκαστεί να πουλήσει μεγάλο ποσοστό αφού δεν θα μπορεί να ξαναβάλει κεφάλαια. Οι νέοι επενδυτές θα πρέπει να κλείσουν τα μισά καταστήματα και να απολύσουν τους μισούς υπαλλήλους….

    Η ανεργία τέλος του 2015 θα είναι πανω απο 20%….

    Το τραπεζικό μας σύστημα θα έχει σοβαρά προβληματα αφού τα μη εξυπηρετούμενα δάνεια είναι τεράστιο ποσο σε σχέση με τα κεφάλαια των τραπεζών. Εάν πουληθούν οι υποθήκες σε έκπτωση οι τράπεζες δεν έχουν αρκετά κεφάλαια να αποροφήσουν τις ζημιές. Εάν ξεκινήσουν εκποιήσεις οι τιμές των ακινήτων θα μειωθούν σε τέτοιο βαθμό που δεν οι υποθήκες δεν θα καλύπτουν τα δάνεια και οι τράπεζες δεν εχουν θα κεφάλαια να αποροφήσουν την ζημιά…. άρα οι τράπεζες θα ξαναχρειαστούνε κεφάλαια……

    Ακόμα συνεχίζουμε να μην καταλαβένουμε τους λόγους που τα μη εξυπηρετούμενα ειναι τοσο ψηλά…..Ψηλά επιτόκια και ΄΄ελλειψη ρευστότητας…

    Παραμένω σταθερός στην άποψη που ανάφερα πολλές φορές. Η αγορά δεν έχει ρευστότητα και σε συνδυασμο με τα ψηλά επιτόκια καταστρέφουν την οικονομία…… 4.5 δις τόκοι με ΑΕΠ 17 δις είναι μη βιώσιμοι αριθμοί…

    Θα κλείσουν πολλές ακομα επειχηρήσεις στο λιανικό εμπόριο….

    Η οικονομία πέρασε δύσκολες στιγμές , τα χειρότερα έρχονται…..

    Σάββας Τταντής Χρηματιστής 10/08/2014

  8. avatar
    XYZ on August 11, 2014 - (permalink)

    When talking about current economic crisis we must not forget that this is the result of a long-lasting souvla-party called “public sector mismanagement”. Thus, fiscal expenditure must also be decisively reduced. This can be achieved in 5 simple steps:
    1. You reduce salaries of civil servants by 75% at least. As a result civil servants are voluntarily transferred to the private sector;
    2. For further encouraging personnel mobility from the public to the private sector you set a fixed date for early retirement stating that those who decide to leave up until that date they are going to get their full (tax-free) benefits while for the rest there will be a 90%-100% tax rate;
    3. As a result, doctors will move from government hospitals to private ones. Right at that time you impose a huge med-service-tax on private hospitals specifically for the retired;
    4. As a result the average life expectancy will decisively (and legally) and sharply be reduced, only productive taxable people will be there and of course fiscal expenditure will be minimized;
    5. An additional measure is reducing the ratio of retired to new appointments in the civil service from ¼ that it is today to, say, 1/10. The smaller the number of people in the civil service, the less the damage they deliver will be. Just think about it. It does no good not to talk about reducing the public sector. It is no longer “IERH AGELADA”. Just cut it into pieces!

    • avatar
      Anonymous on August 12, 2014 - (permalink)

      Do you have any sense of how nonsensical your proposals are? On behalf of the economists who also do see the bloated public sector as a big part of the problem, please read an empirical study (or two on anything really) before having strong opinions on things you clearly have but a superficial understanding of…and do explain 4 a little bit better, given the absurdity of the rest of your comments it is easy to interpret your proposal as “age cleansing”!

      • avatar
        XYZ on August 13, 2014 - (permalink)

        I have indeed read a lot of studies. In fact I have written some of them. But it seems that my proposals went astray altogether. Do YOU really have any idea how important is to cut fiscal expenditure NOW? Do YOU have a sense how much do civil servants, retirees, Turkish-cypriots, political refugees, illegal immigrants, soldiers, etc., cost to the Cypriot economy? All these groups are economically useless, unproductive, non-taxable. They induce a fatal cost to the rest of the economy. If you wish to do “social” policy you can use your own money. You have no right to wreck the rest of economic entities just for implementing a non-sustainable social “dream”. As a matter of fact civil servants pay no taxes. For instance a civil servant who complains that he pays 2000 euro per month income tax, and he receives a net salary of 4000 euro per month, actually he has a tax-free salary of 4000 euro! His income tax (2000 euro/ month is paid by the State – thus the State gains nothing!). Does he pay any taxation? Not at all! Does he produce anything? Yes he does! He produces a net damage to the economy! Regarding retirees, why don’t they save money over their life span to secure the means that are necessary to meet their needs when they retire? Why should I pay for them? Do I owe anything to them? We are really very tired with this situation. Everyone has to pay for his own expenses. Nobody else will do that for me. Otherwise we will be talking for “the rest-of-the-economy cleansing”. Just get rid of civil servants (and their Ministers) and everything else will be adjusted by the invisible hand. Alternatively go and watch Mr. Papandreou at

        • avatar
          Anonymous on August 13, 2014 - (permalink)

          Yes, we need to cut fiscal expenditure. And that’s about the only thing that you and I agree on.

          I stand by my original remarks. Not sure what studies it is that you believe to have drafted, but they certainly never reached an audience of essence. For good reason really. Out of curiosity, do you even understand what a 75% decrease in salary is? In real life, not in a computer game or whatever version of reality it is that you live in. “why should I pay for them?”…this is not economics, plenty of other forums you can visit to discuss policy at that level, this is not one of them.

          Will not go into any detail justifying what I just wrote, because any professional economist can see right through the cracks in your arguments (if one would call what you wrote ‘arguments’). And by the way, ‘invisible hand’ type arguments are normally only used by undergrads in third tier econ programs, Adam Smith wrote extensively on the shortcomings of this mechanism (not to mention that in “the wealth of nations” he devoted nothing more than a couple of pages on it to begin with).

          And before you come back thinking that you are entitled to your own opinion, keep in mind that this is not choice of ice-cream flavor we are discussing here. On this forum you are only entitled to an opinion you can argue for and a very poor job it is that you are doing on that front. Will not come back to this again, and neither should you.

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