Skip to content

What lies beneath? Truth and Lies about the Cyprus Economy

Posted by (Author) on October 21st, 2015 - 46 Comments
avatar

We hear a lot about how the new law regarding the packaging and selling of bank loans will finally help in dealing with the enormous problem of non-performing loans in Cyprus.  I like to keep an open mind even when it is rather hard to identify how and from where the added value will come from.  What do we know for sure?

The loans, mainly non-performing but not only, will be sold at huge discounts. Some experts go as far as predicting that the price to various funds and other anxious takers will be even below the amount provided for by the Banks.  That in itself is very alarming as this will inevitably create further losses which will need to be covered by new capital. But the huge paranoia is with regard to the general belief that is put forward by some politicians in particular which suggests that if only we could somehow sell off the non-performing loans we will also get rid of the problem. What they fail of course to point out is that loans (whether non-performing or not) are assets that the banks hold and which secure the repayment of deposits and other obligations they have.  It is not serving anyone, least of all the tax payers who will inevitably be called to recapitalise a failed bank, to allow the current shareholders of our banks to sell off these assets at will and without regulating the price so as to ensure maximisation of value for the bank.

The other huge misconception is with regard to how people tend to look at non-performing loans (NPLs). Politicians and “experts” such as the Troika or even Credit Rating Agencies keep referring to the mounting NPLs in Cyprus Banks as the cause of the problem for our economic predicament. NPLs are nothing more than a symptom. The real problem is a choked economy mainly because of a massive private debt which emerged following many years of granting bad loans based on collateral and security considerations rather than a proper assessment of repayment capability. These loans were levied by the Cyprus banks on the shoulders of unsuspecting, or at the very least, blissfully ignorant customers. The end result was that the equity base of most business enterprises was eradicated and consumer demand stifled, factors which are not conducive to new capital investment that the country now badly needs.

To be fair to the banks, they were not the only culprits. The Central Bank of Cyprus (CBC) was at best neutral if not actually encouraging rather than controlling and managing the inflow of deposits into Cyprus and also failed to identify the risks and to regulate the huge by the standards of a small island economy expansion of our banks into unknown territories abroad. The legislators also are up there in the list of culprits as they have facilitated legislation which encouraged rather than contained the uncontrollable money expansion from abroad.  Other than the bankers themselves, some lawyers and accountants also have a primary share of the blame as they pursued their own and their clients’ very narrow interests irrespective of the collateral damage they were inflicting on the economy.  A number of lawyers and accountants, who went by the popular name tag of “introducers”, were instrumental in establishing and maintaining a “corrupt”, but thanks to the absent and pathetic stance of CBC, a largely legal system of funding inefficiency and waste in the grass roots of the Cyprus Economy.

Pretending that the problem is the symptom is not helpful in finding a solution. Even if one puts aside the “who is to blame” game, facts are facts: Fact 1, the economy is struggling. Fact 2, our businesses have no real net worth since they owe all they have (and sometimes more) to the banks. Fact 3, many of these businesses have invested the enormous flow of loan funds coming towards them so easily from the banks into land and unproductive uses. Fact 4, there is a very weak and feeble demand for goods and services which impedes viability of existing and new businesses.

With the above situation analysis what are the possible solutions then? For a start, pretending that throwing more loan funds into the economy will help is an illusion. The banks already have excess liquidity. What they don’t seem to able to come up with are viable financing proposals.  It is this that we need to solve in order to get the economy started again.  Why then is it so hard to find viable projects in Cyprus since the bail-in?  The simple answer is that the economic agents (both at the corporate and the household level) are drowned in debt with hardly any savings to fall back on.  One may very well ask, but why is this so, since the “deposits by locals” in Cyprus banks are reported to be very high?  The answer is simply that despite the fact that they are presented as local deposits, these in truth are mostly foreign owned. Since 2011 the deposits by Cyprus companies which are foreign owned are considered for statistical purposes as local. Moreover, these foreign owned companies, if not just vehicles of convenience and therefore dormant, hardly conduct any of their business activities in Cyprus. And that reveals the true magnitude of the mismatch between the loans held by the banks as assets which are almost exclusively weighing on Cypriots and the deposits which are predominantly foreign owned.

Another aspect of this unstable foundation of our banks is that the deposits are solid and “cast in stone” while the assets (loans mainly) are toxic and are deteriorating by the day. This is a very unhealthy base on which to build and grow the economy from. An investor, whether local or foreign, will have to consider the country risk emanating from such unsteady economic foundation. This is not one problem that can be easily fixed. And yet, it is one that our Government has brushed aside. Possibly on the wrong advice by special interest groups, the Government has rushed into a campaign to attract new capital investment to Cyprus, ignoring the fundamentals of our situation and wishfully thinking that potential investors will follow suit. But the truth is that no potential capital investor worth having will be one who does not carefully study and takes into consideration the risks involved. To be over-eager to attract foreign investment by lowering the hurdle and in essence to be willing to “bribe” potential investors to do a project that is less than average is not the way that a prudent Government pursues economic development.

We have to get serious in order for others to take us seriously. Sound investments are not undertaken over a drink or through Government PR events. It reminds me of the pathetic attempts by President Christofias to close a deal for a non-viable hotel and resort project next to the Hilton in Nicosia.  Another tragic example we are still living through is the natural gas investment scenarios put up and changed every few months by the Government. Where does it end?  When will we finally get our house in order and try to understand what are our options and what is really at stake before we start talking to others about it?  As Theodore Levitt wrote in his classic paper “Marketing Myopia” (paraphrasing from Lewis Carroll’s Alice in Wonderland) “if you don’t know where you are going, any road takes you there“. Perhaps our Government intentionally or unintentionally prefers such vagueness and ambiguity rather than being confined to be pursuing what is right and then to be held accountable if it fails to achieve it.

Which brings me to the main problem bugging the Cyprus economy, which in project finance terms is called “market risk”. As mentioned above, economic agents in Cyprus (corporate and individuals) suffer from the same over-borrowing syndrome.  This manifests itself in under-capitalised enterprises and a feeble demand in the local market for most goods and services other than perhaps necessities such as food, beverages and medicine. Any new capital investment, whether from home or abroad, has to have a healthy supporting infrastructure of products and services  which will enable it to be competitive but even more importantly a strong and sustained demand for its products or services.  The latter is probably a much bigger obstacle to potential viability and therefore a deterrent to new investment.  There is however a possible way out of the low demand trap by focusing first and foremost on tourism and export oriented projects.  This will likely generate demand that spills over to local businesses, ones that provide supporting products and services, and will also increase local income  through employment which will improve demand in general.

But in order to boost the supply of tourism related projects and others which do not primarily rely on local demand it is necessary to address the private debt problem which is suffocating the industry and also manifests itself as the bulk of the non-performing loans in our banks.

To this effect, I have been proposing, for two and half years now, the creation by the Government of a special Development and Investment Bank (DIB) to deal with the need to restructure big projects in distress and to foster and accelerate the pace of economic development.  The DIB will provide for the need to have equity and quasi-equity instruments in place to support the need to replenish the depleted equity capital base of potentially viable businesses. The new institution will be manned by experts from Europe and Cyprus in project finance solutions and will assist commercial banks and their existing customers to reach amicable and economically viable solutions in newly formed special purpose companies.

It will probably be necessary to also create a National Asset Management Company to hold and manage the bank assets which cannot be done within a bank.  The asset management company will manage the assets and the recovery process as well as to act as a repository of components (building blocks) which the Development/Investment Bank will use to put together new viable SPVs to be spun back into the economy with a strong equity base and with a manageable debt to carry.

Why has not a major repair job at the core of our ailing economy happened yet? The truth is that the Government is more concerned with the shop window rather than the shop itself.  It is building up fake hopes by projecting false expectations, such as the quick exit from the memorandum of understanding with Troika and/or the return to Government borrowing from the markets as indicators of their own success. And because politicians in Cyprus have a long history of not caring to go beyond what they think they can get away with, once again, they choose the easy route out. Pursuing the substance is at best a secondary objective which is only adopted if it comes at zero cost and most importantly does not put in doubt the “economic miracle” fantasy they are building up towards. In all my attempts to push for these ideas with the Government, we always hit a brick wall when it comes down to their willingness to fund these initiatives. The saddest thing is that it seems to me that the main reason the Government did not buy into these proposals was not because they were not convinced that they would work but rather because it is rather unlikely for such ventures to bear fruits soon enough for a political gain and the cost of funding them may derail the accomplishment of their pseudo aims which will help them claim economic success with the voters. Déjà vu!

Savvakis C. Savvides is an economist, specialising in economic development and project financing.  He is a former senior manager at the Cyprus Development Bank and has been a regular visiting lecturer at Harvard University and more recently at Queen’s University, Canada. Author page: http://ssrn.com/author=262460.

Categories → Οικονομία

46 Comments
  1. avatar
    Andreas Sergides on October 21, 2015 - (permalink)

    Dear Savvakis, your analysis is excellent. You really exposed the underlying malaise that bedevils our economy. It is really a great pity that your recommendations have not been taken up so far.I personally suspect pressures from some Funds which are waiting to pounce on the poor banks.The ideas of setting up a National Asset Management Company as well as a Development and Investment Bank appear as the only sensible solution. Please ,however, expand a little more on the funding of these two institutions.

  2. avatar
    MM on October 21, 2015 - (permalink)

    Excellent article and spot-on!

  3. avatar
    Παναγιώτης Σαββίδης on October 21, 2015 - (permalink)

    Το πρόβλημα με τα μη εξυπηρετούμενα δάνεια είναι ότι οι υφιστάμενοι τραπεζίτες δεν ξέρουν πως να διαχειριστούν τι εταιρείες ή τους ιδιώτες που έχουν τα δάνεια.

    Αν τα ΔΣ των τραπεζών δεν προσλάβουν στελέχη τα οποία να μπορούν να διαχειριστούν εταιρείες, είτε εντός των τραπεζών είτε σε μια Asset Management Company, οι οποίες εξυγιανθούν μέσω καλύτερης διαχείρισης, πρόσβασης σε νέα κεφάλαια κίνησης, υποδομών και δίκτυα πωλήσεων, μέσω συγχωνεύσεων και πωλήσεων περιουσιακών στοιχείων τα οποία δεν είναι στην καρδιά των επιδιώξεων της επιχείρησης, με στρατηγικές εξόδου είτε στο χρηματιστήριο είτε σε επενδυτές, οι τράπεζες δεν θα πάρουν ποτέ πίσω τα λεφτά τους.

    • avatar
      Savvakis C Savvides on October 21, 2015 - (permalink)

      Dear Panagiotis,

      What you say is necessary but not sufficient. If the banks acquire the right training and expertise they will surely be more effective. But it is not a complete solution, given the current state of the economy and some of the realities I outline in the article, such as low demand, depleted equity and the unstable foundations in our banking system. It will surely be a move in the right direction, one which I was advocating even years before the crisis broke out (See my article for example on “Corporate lending and the assessment of Credit Risk”). We need to sort out the fundamentals and this cannot happen by selling off the loans or by a Government that is not willing to invest in and take bold steps to halt the decay and reconstruct the economy.

      • avatar
        Παναγιώτης Σαββίδης on October 22, 2015 - (permalink)

        Maybe I was not clear in my comment.

        If you look at each bank’s balance sheet and the ration between NPLs and Performing loans, they are basically, asset management companies with a banking division.

        If banks sell their NPLs, at minimum, the shareholders will lose 100% of their equity.

        Long term sustainable and profitable banking needs high paying jobs. Otherwise Greece, Bulgaria and Romania would have been the powerhouses of growth in Europe. Currently, the government is not doing anything about creating high paying jobs.

        What then a bank does? Wait its fate, hoping for the best and other mumbo jumbo?

        They go out and create high paying jobs who will then become their customers.

        They go out and restructure their assets, and then find investors from outside who will buy and develop further those assets.

        • avatar
          Savvakis C Savvides on October 25, 2015 - (permalink)

          I am not sure I understand you when you say “banks create high paying jobs”. The job of a good bank is to finance (through loans) viable businesses and projects (as well as individuals). A bank is not and cannot be involved in taking equity or in managing acquired assets. Of course, it is true that if a bank is successful in financing strong and economically viable projects it will also result in higher income for all involved and the economy in general. It is not the business of a commercial bank to go out and find investors who will buy those assets. And even if it does, there is no guarantee that these will be sold anywhere near their optimum prices. Remember, there is a huge difference between an asset and a viable business. But I guess we do not disagree on the approach, which is that the Government should ensure that the conditions are in place for maximising viability and value. This is why I maintain that it is the duty of the Government to create the institutions that the country now needs (DIB and/or NAMA) in order to start repairing the damage in the real economy.

          • avatar
            Παναγιώτης Σαββίδης on October 26, 2015 - (permalink)

            As I wrote above, banks in Cyprus are asset management companies with a banking division.

  4. avatar
    Savvakis C Savvides on October 21, 2015 - (permalink)

    Andreas and MM,

    Thank you for your kind words. It is gratifying to know that you guys appreciate the effort to write this. It was something that was brewing in me for a long time and I felt it was time to express it in words the best way and as clearly as I could. I hope I did well in that respect. Also, I feel that, although it is probably a little late, a discussion and a refocus on what in my opinion are the true problems bugging the economy should finally begin. Particularly now that the threat of selling off the loans is hanging over us.

    Andreas, on your question regarding the funding of these ideas, we did not get very far as the first obstacle of having a commitment from the Government to invest and to seek additional funding from multi-lateral financing institutions could not be overcome. I can’t really discuss anything more specific. I had a similar proposal when I was on the Interim Board of Bank of Cyprus that was more detailed with actual numbers as these related to BoC at the time. Even that plan was attacked by most politicians and even the Archbishop, if memory serves me well.

  5. avatar
    Erol Riza on October 21, 2015 - (permalink)

    Savvas,

    As you know I share your frustration at inaction by all the stakeholders in Cyprus. And if I may add the biggest disappointment is that financial reform has only been limited to recapitalisation; this is not sufficient reform The laws which have been forced upon Cyprus by the Troika and which were meant to enable the banks to enforce their security have been watered down by Parliament and have failed to deliver the desired results. Every time we have an assessment by the IMF the NPLs have been singled out as the most pressing problem. Yet it was the IMF which mis calculated the problem of NPLs by reassuring Cypriots that it was within the PIMCO assumptions and the recovery of the economy would be a creditless one back in January 2014. Without sustainable economic recovery NPLs, with the new definition, will not be reduced soon and restructured loans may become NPLs again.

    It would seem that you favour a Cypriot ownership for the management of the NPLs whereby a NAMA style asset manager is set up instead of allowing the banks themselves to sell off the loans. This would be a reasonable solution if the Government stepped in with support, something which the Minister has repeatedly refused to support for his own debt sustainability reasons. This is somewhat self defeating since without reform, and economic growth, government revenues will not be sufficient to put the trajectory of debt on a downward path. Sustainable growth requires government intervention to promote financial reform as we saw in many countries of the eurozone. Likewise sound project finance would help growth if there were viable projects to invest in; as you know this will require non bank financing though and it will not be arriving soon. Have we seen any business plans of such projects attracting funding? Maybe the Chinese will come to the rescue!

    The Cypriot ownership is certainly one which the government could have supported by offering tax incentives for equity investment to domestic pension funds/AIFs and overseas institutional investors instead of tax incentives to buyers of residences for golden visas and passports; this is skewed towards a sector which is real estate development only and the two are not mutually exclusive. Such piecemeal measures may have a short term positive impact but do not make the economy financially better off as the foreign direct investment capital is not attracted to invest in Cyprus. Without a solution to the NPLs problems soon Cyprus will lose much needed foreign direct investment in the economy beyond real estate. If there was any interest by foreign investors to consider Cyprus on their investment map they would look at the quality of the banking system and its efficacy. In fact in Cyprus we have moved away from making banking efficient with Parliament legislating to make banking more difficult. If they interfere with the banking system more then further recapitalisation will be needed. Investors above all value certainty, credible institutions and stable legal environments.

    So the real question is whether the banks have sufficient NPL coverage to sell the loans to overseas investors or better still, s you would argue, to sell to a Cypriot entity with shareholders from Cyprus and overseas so that some of the benefit from recovery from distressed loans to be enjoyed by Cypriot investors and banks; banks can retain a minority stake in the Cypriot entity in exchange for their asset so in effect a debt to equity swap. This has a lot of merit since the current approach by banks of debt for asset swaps are at a huge cost to the borrowers. This debt to asset swap may seem to be attractive but if a bank agrees to write off loan against a property it will do so at the forced sale value of the market, hence another 20% discount to market price! And what will happen if banks are loaded with real estate? Is this the role of the banks? We will end up with real estate asset managers instead of banks.
    The government could have also seen what attracted investment from institutional investors in Spain and Ireland and introduced REIT legislation to make investment in property more efficient and liquid as these Trust shares could be traded on the stock exchange. It is not too late to move to financial reform of this nature which has proved that it works and the government should not be a passive spectator to the three internal bad banks set up in banks to solve the problem. It is a question of bank wide solution or individual banks seeking their own solution. We have seen the bank solution has not delivered and arguable if it will soon enough. Parliament wants to have a say in the law with respect to sales of loans!

    In the absence of financial reform that is sustainable which makes the banking system assume its role as lenders instead of debt collectors then there is no other better solution of selling loan portfolios outright to overseas investors. This may not be your preferred solution but if you were on the board of the banks, with all the obstacles facing them to enforce their security, the choice would be quite easy. Thus your idea of a NAMA style solution could be revisited to see how funding such an entity would work and since the EBRD happens to be a shareholder in two systemic banks there should be grounds for their technical expertise and support to be on the table. Is there any reason not to reopen this discussion?

    • avatar
      Savvakis C Savvides on October 22, 2015 - (permalink)

      Erol,

      Thank you for your contribution to the discussion. I know you share my frustration. It is almost two and half years since we were putting such proposals on the table for discussion which were basically thrown out as heretical. You are also right about the miscalculations of IMF regarding the NPLs and I may add the simplistic/naive approach by the Troika that with the introduction of some laws that somehow the problem will go away. We agree that without a sustainable economic recovery the NPLs problem, which is really symptom of that, will remain.

      We have often discussed the ideas of a Development Bank and that of an Asset Management Company as a good way forward. I have pressed for the need for the former and you for the latter. I think we were both right and wrong. I think we need both. As I just commented to MM, we need both a Development Bank and an Asset Management Company. They serve different and complementary needs. But the main problem is what I touch in my article and which is, that the Government is not willing to invest in this. No pain, no gain I am afraid. Inaction rules once again!

  6. avatar
    MM on October 22, 2015 - (permalink)

    Dear Savvakis,

    In order to take this small discussion forward somewhat, and also take into account the very dire circumstances of the economy, some thoughts are:-

    1. Each bank to transfer all NPL’s to its bad bank to be set-up for this purpose;

    2. Each bad bank to raise funding to pay for the NPL’s and to acquire working-capital by spin-off of 49% of its shares to investors, either say, by way of ipo or by private placement etc.

    3. Each bad bank to manage the NPL’s as you suggest where there is scope of a turnaround, or to sell, as the case may be.

    4. Each bad bank to abide by a code of conduct set by the CBC in order to set a level-playing field, and maintain a ‘balanced’ approach so that real estate values are maintained.

    The above solution (which has been stated many times by others) keeps the banks in the loop or responsibility, and maintains some degree of control. it also spring-cleans the balance sheets of the banks.

    More importantly, the politicians stay-out with this type of solution, since the ‘Private-sector’ would be in charge.

    I am sure there are many other ideas that can be explored to make this possible.

    • avatar
      Savvakis C Savvides on October 22, 2015 - (permalink)

      MM,

      Your suggestion is a little similar to the one we tried to put together for BoC during our tenure on the Board in 2013. However, you should keep in mind that a Bank (bad bank or not) cannot hold real assets for long (the law has to change for that to be possible without the Bank having to incur huge penalties). Moreover, the handling of loans and the financing of turnarounds or new business ventures should be completely separate from the management of acquired assets and the recovery process. This is why I have come to the conclusion that we need both a Development Bank and an Asset Management Company. They serve different and complementary needs.

      Then there is the question of ownership. To have these instruments in the private sector is fraught with dangers and risks. To have the non-performing loans bought and managed by private investors is likely to be far from the optimum possible outcome for the economy. This has to be undertaken by a national agency. As I commented in my previous blog, the idea that this can be undertaken by the Private sector signifies a lack of understanding of what is involved. But the contributing banks can and should have a share a minority share in these institutions or a method by which they can share in the possible upside. Finally, I think it is far more productive and useful to have all these handled and managed in one institution rather than in separate ones for each bank. The reason is that there is a need to disentangle the web of collaterals and charges held by many banks on the same customers which impede their swift resolution.

  7. avatar

    Στο κείμενο χρησιμοποιούνται διάφοροι όροι και υπονοούνται κάποιες ιδιότητες της Οικονομίας ωσάν να είναι “αιώνιες και διαχρονικές αλήθειες” της επιστήμης.

    Στην πραγματικότητα όμως ούτε αιώνιες αλήθειες είναι, και ούτε καν επιστημονική είναι η θεώρηση των προβλημάτων μας εδώ. Ας μην συγχύζουμε τους τεχνικούς όρους με τους επιστημονικούς. Η ανάμειξη κάποιων στοιχείων της αλήθειας με στοιχεία άγνοιας που είναι ντυμένα με εύηχους τεχνικούς όρους δεν εξυπηρετούν τις ανάγκες του τόπου.

    Δύο παραδείγματα αρκούν.

    1. Στο κείμενο αναφέρεται η άγνοια των κυβερνώντων για την προέλευση της “αξίας”. Ναι πράγματι, είναι τυφλοί και δεν γνωρίζουν, και άρα οδηγούν αυτό το πλοίο Οικονομία στα τυφλά. Αλλά ούτε και ο συγγραφέας φαίνεται να γνωρίζει: Ούτε τον καπιταλισμό καταλαβαίνουν, ούτε και άλλες σχέσεις πολιτικής οικονομίας.

    Η πηγή όλης της οικονομικής αξίας είναι η ανθρώπινη εργασία. Αν δεν το αντιληφθεί αυτό κάποιος, δεν μπορεί να δώσει ούτε ορθές αναλύσεις, ούτε ουσιαστικές λύσεις.

    2. Οι “αιώνιες αλήθειες” που υπονοούνται στο κείμενο, όπως για παράδειγμα οι παράμετροι που διέπουν τις επενδύσεις, την αξιολόγηση και διευθέτηση χρεών, την εργοδότηση και την κίνηση της αγοράς, όλα αυτά – ΟΛΑ ! – ανατρέπονται πανηγυρικά εν μία νυκτί αν φέτος νομιμοποιηθεί η Ιατρική Κάνναβις και του χρόνου νομιμοποιηθεί η Κάνναβις για πνευματική και προσωπική χρήση. Αμέσως κινητοποιείται η τοπική παραγωγή, και ο τουρισμός τετραπλασιάζεται και γίνεται ολόχρονος. Ποιός από τα 75 εκατομμύρια Ευρωπαίων Φίλων της Κάνναβης δεν θα ήθελε να έρθει για μερικές μέρες ή εβδομάδες στο Άμστερνταμ της Μεσογείου χειμώνα-καλοκαίρι;

    Η ένεση σε εισόδημα που θα έφερνε μια τέτοια κίνηση θα επέτρεπε να επενδυθούν λεφτά στην τοπική αυτάρκεια (παραγωγή τροφών, ρούχων, δομικών υλικών, φαρμάκων, απλών εργαλείων) και στην Άμυνα, καθιστώντας την Κύπρο και πάλιν ισχυρή οικονομικά.

    Όλες όμως οι μπούρδες με τις υπονοούμενες “αιώνιες αλήθειες” της Οικονομίας συνεχίζουν να δρουν ως ομίχλη μες τα μυαλά ακόμα και των πιο καλά εκπαιδευμένων οικονομολόγων. Δεν τολμούν να σκεφτούν έξω από το κουτάκι.

    Πέτρος Ευδόκας, petros@cyprus-org.net

  8. avatar
    Thinkingaloud on October 26, 2015 - (permalink)

    Dear Mr. Savvides,
    your analysis of the situation (past and current) in Cyprus is the best I have seen this far! It explains the role the Banks, the CBC, the introducers, etc played in creating this “false” economy we all lived in and sadly enough continue living in. The so called “introducers” still push on to get their way with the introduction of the visas and passports rules, to get nonsensical investments “in” Cyprus! Most of the money that comes “in” Cyprus for visas and passports are channeled through various schemes in overseas investments and that is something that the government is ignoring for its own purposes. The banks are still not in grasp with reality and the CBC is still snoring!
    Furthermore I would state that there are good projects in Cyprus seeking financing or refinancing (to unlock capital) but the banks are unable to properly evaluate them as they are still stuck in their previous habits of looking at collaterals instead of the ability of the project/business to repay its debts.
    Private debt in Cyprus is a huge problem that the banks have to face. They ignored it for too long and they have also contributed in further exaggerating it via higher interest rates, penalties etc. The asset management companies and the bad banks could be potential solutions but they need to be well thought out and they don’t have to be mutually exclusive. Right now we need all the ammunition we can get our hands on to properly fight against the NPL monster.
    On a positive note, from personal experience, I know that are serious investors looking at Cyprus for investments that contribute in growth and knowledge. These investors have capital to deploy and the only thing they need is a stable environment without ever shifting rules and regulations to match our short sided plans for the economy. The government needs to supply that and stop focusing solely on nat gas as the panacea of all problems and nonsensical billion euro golf resorts!!

    • avatar
      Savvakis C Savvides on October 26, 2015 - (permalink)

      Dear Thinkingaloud,

      Thanks for your kind words. You have in fact summed up very well the gist of what I wanted to say. The trouble is that many of our fellow “economists” still do not seem to be able to see or go beyond aggregates and numbers. They still profess that NPLs is the problem rather than just one symptom of what is the real problem. Moreover, they think that somehow, as if by magic, things will sort out themselves. In fact, this is one of the reasons that prompted me to try to write this article in a simple and yet analytical way. I wanted to try to knock down some myths and try to refocus on the real issues. I am not naïve to think that things will change all of a sudden (especially given the conflicting special interests still at play). But as long as we all do our bit, we can only hope that some time, finally, substance will prevail over personal and political gain.

  9. avatar
    ac on October 28, 2015 - (permalink)

    excellent post
    please don’t stop making your views known to the public.

  10. avatar
    Savvakis C Savvides on October 28, 2015 - (permalink)

    The day our Government has borrowed €1b at 4.25% (and further burdened the tax payers of current and future generations with a very expensive indirect tax) and while we are not actually using the same amount we have left from the MoU for an interest rate of 1% or less, the President came out with the ridiculous claim:

    “Η κυπριακή οικονομία ανακάμπτει και επιστρέφει στην ανάπτυξη μετά από σκληρή δουλειά και σύνεση τόνισε χθες βράδυ ο πρόεδρος της Δημοκρατίας Νίκος Αναστασιάδης”

    Deja vu! Hooray!

    • avatar
      Thinkingaloud on October 29, 2015 - (permalink)

      Dear Mr. Savvides,

      Though I understand your criticism of the President’s statement and the fact that the gov’t rushed to borrow 1b at 4.25% instead of using/demanding the rest of the money from MoU, I also believe that the government has been pushed into that corner by (a) linking markets access with success and (b) pressures by the opposition parties for exit from the MoU.
      I think the idea that exiting the MoU will be better for us is plain ridiculous. We are now controlled by some foreign forces with better knowledge and understanding of the markets, and no populist rhetoric to ensure more time at the helm. My worry is that we will soon be left alone to steer this vessel and once again our inability to properly govern will have us crushing on the rocks that surround us.
      Is the 4.25% rate though disastrous as some parties claim? Why are they comparing Cyprus to Germany and claiming that the spread is 4% which is huge? Is that really a justifiable comparison? Aren’t we a lot more like Greece than any others, with huge amounts of private debt, strong unions, protected fiefdoms and market operations (pharmacists, taxis, port workers, bakeries, kiosks, supermarkets, gigantic public sector, still no open electricity market, etc)? After all, the market is the one defining the interest rates and not us. I also read somewhere the claim that the government realizes that has no money to repay its creditors and that is why they are borrowing again!!! That is complete nonsense and satisfies only the ignorants of macroeconomics. Have you seen any country in the world repaying its debts? Ever? They always roll their debt forward. Countries issue new bonds with which they repay the older maturing bonds and keep rolling forward! This is what all the countries in the world do, all the time. If they ever have to pay back the principal with no access to markets, they go bankrupt, they call in the Troika and get a loan! This is what happened to Cyprus during the AKEL administration and yet they insist on claiming that it was the haircut of 2013 that brought Cyprus to its knees. Basically blaming the medicine instead of the illness! Was there a better medicine? Perhaps there was, but our elected “leaders” could only see that far. Could we negotiate something better? Perhaps if we had some time and we were not so desperate for an immediate solution with our banks already shut!
      So are we really returning back to growth? Well the official numbers indicate that we are back to growth. The access to the markets is not an indication of growth. And I don’t think anyone has claimed that the efforts are over. We still have ways to go but things are a bit better than before.
      So lets roll up our sleeves and get the NPLs sorted out! Lets force the banks to accept their share of the blame with regulations that clearly indicate that lending to people beyond their means (not the value of their collateral) was utterly wrong and the banks will have to accept some of that burden. If the bank accepted a piece of land for a loan, then they should only foreclose that property and whatever they get, that is the final settlement of the debt. If they have failed to properly budget for it then its their problem. Not our collective problem. Protect the economy from the “too big to fail banks” by bringing in more and better banks. If the regulation restricts the access of the banks to one’s assets to only the ones collateralzed then the market will work. Now it is at a standstill as the NPLs affect all assets owned and the linkage between borrowers, guarantors, properties etc blanket the island.

    • avatar
      Περαστικός on October 29, 2015 - (permalink)

      Δηλαδή. Δικαιούμαι να υποθέσω ότι κατα την γνώμη σου δεν υπάρχει τίποτε θετικό με τον δανεισμό του 1 δις?
      .

    • avatar
      Επιλήσμων on October 29, 2015 - (permalink)

      Με τέτοιο επιτόκιο και εγώ θα δάνειζα την Κυβέρνηση εάν είχα διαθέσιμα.
      Θα τους αποκόπτει το 30% γιά την Άμυνα?

  11. avatar
    Savvakis C Savvides on October 29, 2015 - (permalink)

    Thinkingaloud (Epilismon and Paratiritis),
    What you describe regarding the state of the world we live in is very accurate and you are absolutely right. That doesn’t make it right though. Government borrowing is nothing more than an indirect tax on its people that is passed on to future generations and future governments to manage. I know Cyprus is no exception to the rest of the world but this is a much bigger issue which we can perhaps discuss on its own some other day. My paper on “Financial Markets, Bloated Governments and the Misallocation of Capital” addressed some of these issues back in 2012.
    My comment regarding the current issue was to highlight what I mention in my article, that the Government sets its own targets (such as to access the Financial Markets) as if this is our salvation and an indicator of their own success. As my friend Epilismon points out, however, the cost of this issue is so high and for so long that it is not really such a great feat as they make it out to be. Moreover, I have three questions to put forward about this and then leave it at that as I don’t want to give the impression that I am negative or that in the grand scheme of guffs that the Govt. has done this one is particularly notable or exceptional.
    1. What is the effective rate when taking into account the total cost of the issue? I have heard that the total amount of money to be paid out (principal plus interest and costs) is over Euro 1.5b. I couldn’t confirm this number whether it is right or not. However, if it is correct, this means that the effective interest we pay is higher than 5%.
    2. The difference between 4.25% and 5% means there are huge costs involved (charges, fees, underwriting commissions and so on). Where did this money go to in Cyprus and abroad? And are these charges competitive given what is usually charged by intermediaries? If they are indeed so high, the charges alone for this issue are higher than the total cost (including charges for intermediaries) paid by most European countries.
    3. Last but not least, and this is my biggest concern, if indeed the outlook for Cyprus is positive, why did we get locked in to such very high yields AND for such a long period of time (ten years)?

    • avatar
      Savvakis C Savvides on October 29, 2015 - (permalink)

      Correction: Sorry, I meant to say “Perastikos”

  12. avatar
    Kax on October 29, 2015 - (permalink)

    The sale of loans is just one of the tools made available by the Government in order to help the banks.Therefore while I agree with the article, the aim is not to mass sell loans but to sell some loans,perhaps a few .Consequently it is totally irrelevant whether banks have provided enough for the total value of non performing loans.Each bank will select a few loans it is in its interest and sell them.This follows legislation to allow sale of assets to banks without paying capital gains.Obviously this is a targeted tool aimed mostly at commercial or manufacturing companies with assets held for many years and subject to capital gains tax.Developpers do not pay capital gains and anyway most likely their assets would be sold at a price that would not generate a capital gains liability.

    A local Cypriot bank made an unsuccessful attempt to take the operations of a Greek subsidiary with a relatively large published net worth.The offer we understand was negative.It is fairly safe to assume that the quality of loans and provisions against them are more or less the same across the banking system.So the answer what will happen if all loans of a bank are sold has already been answered.No capital will be left.

    In any case many loans are disputed,collateral is worth less and banks make no attempt to find out its actual value so they don’t have to take additional provisions.Behind the rhetoric the people behind all these decisions know very well what they are doing.Banks employ top bankers(in the case of Bank of Cyprus),have the best expensive advisors and on the other side are well meaning politicians who do not know even the basics.Trying to help the people they unknowingly help the banks.For instance the House excluded real estate sold at auction from the relief from capital gains when resold until 2020 .This will just drive auction prices lower.

  13. avatar
    Erol Riza on October 31, 2015 - (permalink)

    Savva

    I feel you are somewhat unfair on the government for several reasons, albeit on the cost of financing you could be right. My reasons are as follows:
    1. For a sub investment country to borrow 10 years is a positive development since it does matter that the sovereign have access to the financial markets and not depend on the conditionality of the Troika. It also enhances Cyprus’ image in the world when we need FDI;
    2. The 10 year term is necessary for a country’s funding, official and corporate, since there is a need to have a yield curve off which corporate debt may in the next year or two price their debt;
    3. As these bonds would be eligible for QE, and there is little debt available, it would help the economy if such liquidity (assuming Cypriots investors bought the bond in size) would be made available when the ECB buys these bonds;
    4. While debt may be tax of future generations I find it severe to say that Cyprus should not be borrowing since governments have funded infrastructure with debt; I think more critical is what they will use the debt for and here it is Parliament’s job to ensure good house keeping.

    Hope the above reasons are reasonable.

    • avatar
      Savvakis C Savvides on October 31, 2015 - (permalink)

      Dear Erol,

      If the bond is eligible to be used for QE through ECB or not, does nothing to make it any cheaper than it is. As far as how good a price this is, I quote you below from George Telaveris article in the Cyprus Mail as regards the spread (which is a true measure of the risk premium we are paying for it):

      “When Cyprus issued its previous 10-year bond in 2010, it was at a yield of 4.62%. Germany’s 10-year bond yield at the same time was 3.10%, resulting in a credit spread of 1.52%.

      Germany’s bond yield is now 0.44%, meaning that the new bond with a yield of 4.25% had a credit spread of 3.81%.

      The spread has therefore almost doubled since 2010″.

      Let me also point out that when you pay a very high interest on a bond and the outlook is positive, the shorter the period, the better. This interest is to be paid for ten years no matter what. Even if in the future we are able to borrow at 1% we would not be able to get away from paying this extremely high cost of funding.

      Last but not least. Where in the world did you gather that this financing is raised to pay for infrastructure by the Government?!!!

      • avatar
        Savvakis C Savvides on October 31, 2015 - (permalink)

        Correction: The article by George Telaveris was in the Cyprus Weekly not in the Cyprus Mail as I stated by mistake.

        • avatar
          Exposure on November 2, 2015 - (permalink)

          In order to understand the logic of borrowing with such a high interest rate one needs to check who actually bought these bonds.

          My bet is that BOCY bought a big chunk of the debt issuance and used these bonds as collateral to reduce the ELA from the central bank. So by buying these bonds BOCY gets a 4.25% yield on its money that was sitting in the CBC and at the same time gets a reduced interest rate from using the bonds as collateral instead of other assets for ELA which bears an increased Interest rate compared to EU central bank financing.

          All in all again indirect state support to a failed bank. The complicity of the state and BOCY in these market gimmicks is preposterous. The people of this country are suffering and lost their savings in order to save a zombie bank.
          Both Laiki and BOCY were bankrupt and we chose to keep a zombie in our midst that needs endless sacrifices chunks of our flesh to survive.

          • avatar
            Savvakis C Savvides on November 2, 2015 - (permalink)

            Excellent remark and questions posed by Exposure. Concerns which I also share. It is also indicative of the fallacy we often hear from politicians regarding the need for bank liquidity, “ζεστό χρήμα”, and so on to replenish the economy. The problem is more like “the banks don’t know what to do with the excess liquidity they already have!” and that the Government as Exposure is astutely pointing out is probably bailing them out.

          • avatar
            Επιλήσμων on November 3, 2015 - (permalink)

            Dear Savvakis,

            You say “the banks don’t know what to do with the excess liquidity they already have”.
            Well, at least one Bank, BoC, seems to know very well what to do: Double the remuneration of the Members of the Board of Directors, and give pay rises to high officials of the Bank. Easy, isn’t it?

            You told us that you served as a Member of the interim Board of Directors of BoC during 2013. Could you please tell us your monthly remuneration during that period and how it compares with what the current Board will suggest for their remuneration at the next General Meeting of the BoC?

          • avatar
            Anonymous on November 4, 2015 - (permalink)

            Very good point you are raising there Exposure. Similar practices were followed by other countries at the onset of the bust – making banks the government’s lender of last resort via a “moral suasion” channel – and on the first attempts at placing government debt back in the bond markets – Portugal, for example, did this exactly in the manner that you are describing.

            Now the government has also decided to institutionalize forbearance, with repeated calls for a relaxation of provisioning standards by local and European supervisors. They should of course do whatever they can to buy time, but at some stage they should also come up with something, anything really, that has the semblance of a policy actually aimed at tackling the problem at hand.

      • avatar
        Erol Riza on November 2, 2015 - (permalink)

        Credit spreads in a market when supply is limited as Germany borrows less and the biggest buyer is the ECB one get VERY distorted markets and I would not look at the credit spread of 300 bps for a single B name as too bad.
        As for infrastructure investing I was alluding to why governments in the EU in general should now borrow more and suggested that if this is also the case in Cyprus why not. Parliament, which ratified the bond issuance, has a responsibility to ensure the use of proceeds are for the benefit of the economy. Accountability of government is the job of Parliament is it not?

        • avatar
          Savvakis C Savvides on November 3, 2015 - (permalink)

          Erol, See the comment by Exposure above and my reply. Today it has been confirmed that a large part of the bond was taken by Cypriots (probably as Exposure suspects, Cyprus banks). Just in case you had any doubts, this should tell you a lot about the state of our Economy and the dubious role/behaviour of the Government.

          • avatar
            Erol Riza on November 4, 2015 - (permalink)

            Dear Savva and Exposure,
            I see nothing wrong if Cypriot banks bought the Govt bond which they can use to improve their balance sheet and their liquidity. The US and the ECB have been doing this with all sorts of tools and easy money. Why do you think Cyprus should not support its banks? Owning government bonds improves their capital adequacy, given the risk weighting, as opposed to lending to an SME unsecured. Would you not think it is better for the bank? In the current environment where the private sector is overburdened with debt, and with few credible borrowers, why not? All the major state supported UK banks did the same and look at their balance sheets now.
            I think it is time we realise that the banking system will not fund the economic recovery as the rules have changed. In the EU long term lending is mostly from non banks. In Cyprus, since we have no institutional investors, we need FDI and they need a stable economy and certainty in the legal framework, something which Parliament has made sure it is not.
            Banks have a difficult time as it is with the regulatory environment post crisis and their job has been made more difficult with constant Parliament inference. The last thing we need is for a law forcing banks to offer the loans at huge discounts to distressed borrowers who have been unable to restructure but are able to buy the loans. The issue of housing loans is another matter and herein there is scope for government support.

            as for my dear Epilismon I would say that the opposition offers an alternative government role but it is Parliament, the representatives of the voters, who hold the government to account via Parliamentary committees. Even in our Presidential system Parliament should act as the enforcer of good governance which includes accountability. If they do not it is another matter;)

          • avatar
            Erol Riza on November 4, 2015 - (permalink)

            Savva and Exposure,

            I see nothing wrong if Cypriot banks bought the Govt bond which they can use to improve their balance sheet and their liquidity. The US and the ECB have been doing this with all sorts of tools and easy money. Why do you think Cyprus should not support its banks? Owning government bonds improves their capital adequacy, given the risk weighting, as opposed to lending to an SME unsecured. Would you not think it is better for the bank? In the current environment where the private sector is overburdened with debt, and with few credible borrowers, why not? All the major state supported UK banks did the same and look at their balance sheets now.
            I think it is time we realise that the banking system will not fund the economic recovery as the rules have changed. In the EU long term lending is mostly from non banks. In Cyprus, since we have no institutional investors, we need FDI and they need a stable economy and certainty in the legal framework, something which Parliament has made sure it is not.
            Banks have a difficult time as it is with the regulatory environment post crisis and their job has been made more difficult with constant Parliament inference. The last thing we need is for a law forcing banks to offer the loans at huge discounts to distressed borrowers who have been unable to restructure but are able to buy the loans. The issue of housing loans is another matter and herein there is scope for government support.

            as for my dear Epilismon I would say that the opposition offers an alternative government role but it is Parliament, the representatives of the voters, who hold the government to account via Parliamentary committees. Even in our Presidential system Parliament should act as the enforcer of good governance which includes accountability. If they do not it is another matter;)

          • avatar
            Anonymous on November 5, 2015 - (permalink)

            Dear Erol,

            I would like to respectfully disagree with your assessment of the benefits of bond purchases by banks.

            Simply put, there is actually plenty wrong with what the banks are doing. If the whole point was to shift the composition of their asset portfolios towards the zero RWA end, cash/reserves works just fine. That they are able to instead hold a comparatively higher-yielding government bond that still carries a zero capital charge is problematic in at least three ways:

            (1) The bonds do carry risk and that’s one of the big known problems of the regulatory framework, ie that it affords local regulators the discretion to apply a zero risk-weight on government bonds and creates all sorts of distortions along the way.
            (2) There is empirical evidence that the accumulation of sovereign bond holdings has been displacing credit to firms, and the evidence is causal – ie, the mechanism at play extends beyond a lack of credit demand channel. And banks in the US/EU do still provide long-term credit to firms, albeit at reduced levels, with a number of surveys showing that access to credit conditions have improved dramatically since the onset of the crisis. The types of firms that find it easier to obtain bond financing in capital markets are not your typical firm operating in Cyprus.
            (3) The yield the banks are receiving from these bonds is coming from taxpayer money. And all sorts of issues arise from that, central among which is that the new revenue plus lower funding costs may not even be used for strengthening the bank’s capital position, but may end up subsidizing all sorts of inefficiencies within the bank.

            The government is buying time for the banks. It would be nice to know what it plans to do with it.

        • avatar
          Επιλήσμων on November 4, 2015 - (permalink)

          Dear Erol,
          Accountability of Government is not really the job of Parliament, how could it be! It can however be a function of the main opposition, what we call in greek “αξιωματική αντιπολίτευση” ή, κόμμα μείζονος αντιπολίτευσης. Although here in Cyprus, even a minor political party, eg The Green Party with 1.8% can attempt to perform this function if the MP is someone like Mr Perdikkis, but in the end it is the vote in Parliament that counts, and in the vast majority of cases, the Government has its way.

        • avatar
          Savvakis C Savvides on November 5, 2015 - (permalink)

          Excellent reply by Anonymous to Erol with which I totally agree with.

  14. avatar
    Savvakis C Savvides on November 4, 2015 - (permalink)

    Dear Epilismon,

    Although I suspect you already know the answer to the question you posed, I confirm the following:

    We have unanimously voted to reduce all directors’ remunerations with an across the board factor of a minimum of 20%. Typically, the remuneration of a member of the Interim Board was set at €13,000 p.a. Stockwatch reports that it is now set at a minimum of €45,000 with some members earning €70,000. Also, the remuneration as members of Board Committees was €2,100 p.a. and on the Audit Committee €4,200. The remuneration for the current BoC Board seems to have been upped in some cases by ten times! Also, it should be noted that in the Interim Board of BoC the Chairman and Vice Chairman earned no Committee fees where they were participating.

    The above are to the best of my recollection accurate and are provided so as the shareholders and other people who are interested know the truth about how much Directors’ emoluments have increased since the Interim Board.

  15. avatar
    Thinkingaloud on November 5, 2015 - (permalink)

    Dear Savvakis and Epilismon,

    I think that focusing too much on the remunerations of the members of the BoD of a private company (especially a Bank with about 70-80% market share) is wrong. I am of the opinion that such high remunerations come with greater responsibilities. At first, we all realize that while in the past we never knew who the members of the Board were, now we all know them and we focus on them and expect performance. Members of the BoD should be qualified, certified, approved, able, capable, knowledgeable, reliable, intelligent, most importantly accountable and ethical. How many people fitting this bill would really serve on these boards for peanuts given the new regulatory framework and the accountability of their actions? (remember the saying “You pay peanuts, you get monkeys”) How many hours do they have to commit to this position and can they realistically serve on other positions? Would you Mr. Savvides, join this board today for less than 40k a year? I believe you wouldn’t! The interim board you served was a different mindset! It had a “patriotic” (total nonsense when you consider this is a private company that deserves no better treatment than any other company) spin to it that urged you to decrease remunerations. I believe “high” or “low” remunerations must always be read in context.
    Dear Mr. Riza, I greatly agree with you on many fronts and I agree that we need a stable economic environment to attract FDI. It is also very true that most long term lenders abroad are non banks. Unfortunately in Cyprus we fail to understand this and most importantly, the banks cannot function properly in Cyprus. Ideally banks, should be able to sell their loans to other institutions but also the borrowers should have the right to buy out their loans (only to correct some ill practices of the past). If I am given the right to buy my loan at a discount lets say 50%, I will be able to go to a bank and ask them for a loan at that amount. The bank would evaluate me and probably find that I am able of repaying that amount (while the bank that owns my loan now, cannot for some reason properly restructure my loan to make it performing again as they are unwilling to offer me that discount (they want a lump sum). So effectively what happens is that the bank that is now lending me the 50% is buying my loan off of my bank. That’s one way things would work. I also think that every case is special and while I may deserve a 50% write down, somebody else might be at 20% or 80%. The banks though HAVE TO come to this point! And the question remains, “why not properly restructure with write downs, long grace periods, very low interest rates and allow the economy to grow as growth is the only option to resolve the NPL issue?”. I know for a fact (personal experience) that there are very good operating businesses, with excellent financials, looking for loans and even so, the banks are unwilling to lend because they are too focused on collaterals and asking for too high of an interest rate to make sense. So this whole BS about no demand for loans has to stop.

    • avatar
      Savvakis C Savvides on November 5, 2015 - (permalink)

      Dear Thinkingaloud,
      I was merely responding to a question regarding the remuneration of the Interim Board. I am not really worried about the declared salaries and remuneration of members of the Board of BoC. I also agree with you that the compensation should be proportional to the competence and the level of responsibility undertaken. On your personal question, I would, as I did in my tenure on the Interim Board, accept to offer my services (and I actually do right now elsewhere) for a lot less for, as you say, “patriotic” reasons. Suffice to say that what worries me about the current Board is not their salaries.

  16. avatar
    Savvakis C Savvides on November 5, 2015 - (permalink)

    Dear Erol,

    With all due respect your statement is packed with inconsistencies:
    1. You say “[it] is time we realise that the banking system will not fund the economic recovery” and yet you also say “why do you think Cyprus should not support its banks?”. If the banks will not fund the economic recovery why then should the Government (i.e. the tax payer) support/subsidise them? I thought that the whole idea of helping banks through the bad times (which personally I do not find a convincing argument) was that they will be able to fund and support the economy!

    2. You also make the bold statement that ” Owning government bonds improves their capital adequacy”. Of course it does. So is giving them free tax payers’ money! I missed your point here!

    3. Then you continue to say “rather than lending to SME” which I totally find confusing! If a bank’s job is to use it’s liquidity on Government subsidised bonds rather than fund viable SME projects, I am sorry, but we are in totally different universes!

    4. You then comment “All the major state supported UK banks did the same…”. Erol, it is a totally different thing for the Government to take ownership of the Bank as they did in some cases in the UK and elsewhere from subsidising with tax payers’ money the current major shareholders in control of the bank so as to enable them to do their thing…

    5. Then you say “In Cyprus, since we have no institutional investors, we need FDI [for those not accustomed with acronyms "Foreign Direct Investment"] and they need a stable economy and certainty in the legal framework…”. But you completely ignore that the first thing foreign investors would need to have is a stable and functioning banking system. N.B. When I say functioning banking system, I don’t mean one that does not finance viable SMEs by the way or one as I mention in my article where the deposits are foreign owned and the toxic loans are weighing on Cypriot businesses and households.

    6. Last but not least, you make the incredible statement “the last thing we need is for a law forcing banks to offer the loans at huge discounts to distressed borrowers who have been unable to restructure but are able to buy the loans.” I know you are not always in Cyprus, but where did you get the idea that the banks are offering viable restructuring solutions to their clients (at discounts that they seem very willing to sell the loans to foreigners) and the borrowers “were unable [to close a deal]? If they do offer similar haircuts to their loans as those they will be selling to funds I assure you many will be able to restructure their loans or even find the financing to buy them. The hard truth is the banks have not been willing to do this. And where is the problem if the borrower has first option to buy his loan intended to be offered to an intermediary at the same price? How is it going to be helpful if we pay these intermediaries huge margins and to do what?

    I could go on and on. But I think you catch my drift!

  17. avatar
    KKyriacou on December 23, 2015 - (permalink)

    Mr Savvide your interest of the well being of the Cyprus economy is admirable, but as I have pointed in the past in one of your articles a lot of your ideas are simplistic and to an extent misguided. (If I recall correctly in one of your articles a fe months back was against FDI in the banks because of potential shenanigans that could help foreign investors and their friend steal our loans at huge discounts.) I wish I had the time to go into this in more detail but I will just point out to your last comment when you ask: “And where is the problem if the borrower has first option to buy his loan intended to be offered to an intermediary at the same price? ” Like many of your suggestions, at surface is a great idea, and it’s sounds fair. But there’s an obvious moral hazard that cannot be ignored: it encourages every borrower that conducted its business prudently and has been current on its bank obligations to become non-performing in order to participate in the principal forgiveness of their debt. Something that off-course the bank cannot allow and will try to prevent with some new rule. So at the end, while the intentions are right, you end up setting a precedent where good debtors are penalised while bad ones are rewarded; to put it bluntly you will be promoting a market environment where winners lose and losers win.

  18. avatar
    Savvakis C Savvides on December 31, 2015 - (permalink)

    Dear Mr. KKyriacou,

    What a loan is worth to a bank depends on its repayment capability and in the event of default, on the recourse open to the bank. A client may choose not to pay his loan, even if he can as you say but not because of any moral hazard arising from a restructuring of other loans, but merely from calculating that he will gain from not doing so, as the collaterals and security position of the bank are inadequate. Many loans in Cyprus have been granted during the “happy years” without either a proper credit risk assessment but also without adequate recourse conditions (collaterals, guarantees, etc.). After all this in essence is the only justification for the bank for opting to sell its loans to third parties at significant discounts. Hence it is the security position of the bank (and its likely value within an ailing economy) that determines if a client opts not to pay and lead the bank to pursue a recovery through the Courts or otherwise. I am not just saying this because I am arrogant or as you say “simplistic”. I have been practicing what I preach, and may I add very successfully, for many years.

    This story about moral hazard preventing banks to proceed with restructurings at some discounts is a myth or/and a smoke screen that disguises the fact that banks probably prefer to sell loans as packaged products in a huge Ponzi-like scheme through the financial markets. Of course you are entitled to your own opinion as I am sure you will agree, so am I. But thank you for your comment and for reading my articles all the same.

  19. avatar
    KKyriacou on January 5, 2016 - (permalink)

    Agree. Everyone is entitled to their own opinion. But what you pontificate against, (and with a tone of Mid East Mid East conspiracy theory i.e. “ponzi-like” scheme) has been successfully executed in the U.S. and to a slower extent in European banking system for years.

    • avatar
      Savvakis C Savvides on January 7, 2016 - (permalink)

      Successfully for who?!!! Packaging and selling sub-prime loans in the USA almost brought down the whole economy! Yes, some linked to the banks have made fortunes at the expense of the tax payers, if that is what you mean successfully.

Leave a Reply

Note: XHTML is allowed. Your email address will never be published.

Subscribe to this comment feed via RSS