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Policy should focus on the need to overcome private indebtedness

Posted by (Author) on November 3rd, 2017 - 25 Comments

I am often asked to give my opinion on what I consider to be the right policy for solving the problem of non-performing loans (NPLs). My response is that NPLs are the symptom not the cause of the predicament the Cyprus economy finds itself in. The real problem is private sector indebtedness.

The focus should not be on how to compensate depositors or bond holders or even shareholders of the affected banks. It should be on how the over-indebted businesses and households can lighten their debt burden and be in a position to engage in normal economic activity in a stable and sustainable manner. Cyprus is prone to suffer, like several other countries have (Ireland, Iceland, but most notably Japan), from what Richard Koo has coined a ‘balance sheet recession’. This happens when a country’s economic agents (businesses and households) have taken up so much debt that they are not able or even willing to undertake new debt. In such cases, of which Japan is the most stark example in terms of magnitude and length, austerity measures usually prescribed by the IMF and traditional economic thinking, not only do not help but they have the opposite effect of further depressing the economy and causing a downward spiral where savings do not go back into the economy as new loans thereby aggravating and elongating the recession. Koo’s general advice is that a more expansionary fiscal policy is required to offset the fall in domestic demand arising from efforts of private sector entities to reduce their indebtedness via increased savings in order to prevent the economy from shrinking.

I believe correct strategies do exist for reducing the high level of indebtedness in Cyprus. One is to find ways for the borrowers to benefit from the substantial provisions made by the banks (which will continue in 2018). The only reason banks prefer to sell their loans (even at huge discounts) is because they consider it to be the only way for them to write back accounting profits and thus help them with their re-capitalisation needs.

Following five years of inaction during which NPLs have remained stubbornly high the Government is now considering the creation of a “bad bank”. But once again, politicians do not seem to understand the real issues and the consequences of what they propose. One perhaps should remind many of the politicians who are now pushing for this that they were the same people who killed a similar idea in 2013 when it was put forward by the then Governor of the Central Bank. Be that as it may the proposal raises more questions than answers. At what price would the fund/bad bank buy the loans? What would they do with them? Where would the funding come from?  What would the consequences be for the real estate market? Even more importantly, how is this going to help private debt and the real economy? These are the real questions no one is asking!

A good policy would be one that provides the benefits the banks would derive from selling the loans (even at huge discounts) but which utilises the provisions to make possible viable restructurings and, more importantly, extend new loans to new entities. For this to happen one needs to settle an existing loan and to refinance viable businesses using the assets that are thus released by creating new SPVs (special purpose vehicles – or, more simply, new companies) funded by new loans and by new equity. This is why I have been arguing since 2013 that we need a Reconstruction and Development Bank or a Development Finance Agency. Not a bad bank, whose main objective at best, is to manage break-down assets (rather than to create new competitive enterprises).

For households and small businesses there are other such policies which can be pursued. The starting point is to identify what is impeding a settlement within the margins afforded by the provisions and causing the economy to be held to ransom, with unpaid debts on the one hand and “counterpart” depleted equity on the other keeping idle potentially productive assets. For example, there should be a limit on the exposure of people to guarantees. There must be a way for borrowers (as there is in some other countries – notably the United States) to hand over the mortgaged asset and walk away debt free. The aim of policy should be to enable economic agents to start again. Unfortunately in Cyprus, bank lawyers and poorly informed borrowers have created this mess. The loan contracts asked for the kitchen sink while ignorant borrowers and even innocent bystanders (friends and relatives) were willing to sign anything that was put in front of them. There is also the moral responsibility of banks which should perhaps be made legally binding, in a similar fashion as the Law of Fraudulent Conveyance of New York. Under this law, it is considered illegal if a lender has given a loan without first assessing the ability of the borrower to repay. In such cases, the borrower can walk away debt free (even without losing the asset that was put up as collateral). This may be a rather extreme measure for Cyprus and one which in any case is unlikely to have retrospective effect, but a law or, better still, a central bank regulation in this respect, would surely apply pressure on banks to co-operate and even compromise in reaching settlements with borrowers. That should indeed be the ultimate aim. To help the economic agents of the country overcome their indebtedness and re-enable them to undertake new viable capital investments (and take up new loans) in conditions of strong domestic (and foreign) demand. Without such policies we will be trapped in a stalemate for too long and this helps no one. Not even the banks themselves.

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 currently at Queen’s University, Canada. Author page:

Categories → Οικονομία

  1. avatar
    E. Z. on November 3, 2017 - (permalink)

    “…to hand over the mortgaged asset and walk away debt free”. The reality is in the US the borrower declares bankruptcy and therefore he/she does not have any assets left not just the mortgaged item. The role of a proper functioning bank is to safeguard the money of the depositors. Once you open the Pandora’s box and remove the risks that a borrower undertakes the stability of banks would come into question and also the willingness of banks to lend money would also be significantly curtailed

    “The loan contracts asked for the kitchen sink while ignorant borrowers and even innocent bystanders (friends and relatives) were willing to sign anything that was put in front of them”Are you serious? By claiming ignorance a person avoids his/her responsibilities?

    “Under this law, it is considered illegal if a lender has given a loan without first assessing the ability of the borrower to repay”. This law was in response to the NINJA loans for real estate purchases. The assumption at the time was that real estate do not decline in price and therefore the collateral was secure. Most of the problems with respect to defaults arise after the loan has been made, due to changes in the economic environment, as was the case in Cyprus, but also due to the borrower’s inability or unwillingness to properly assess the risks involved in borrowing money.

    Overall though, making it easier for people to get into debt, and somehow being able to avoid one’s responsibilities brings into question the stability of the banking system and the willingness of the public to deposit money in a bank. And without deposits and trust in the banking system the entire economic system is in jeopardy.

    • avatar
      Savvakis C Savvides on November 4, 2017 - (permalink)

      The duty of a bank to assess repayment capability is of paramount importance and it is the pinnacle of what banking should be about. The security position is secondary and only comes into play if due to unforeseen circumstances there is a need for the bank to recover from a loan that can’t be repaid. It was never meant to be the other way round, as unfortunately has become the norm in Cyprus for many years prior to the crisis. And it became the norm because simply if you allow deposits that are 4-5 times more than the country’s GDP to flow in, even if you are a proper bank (doing proper credit risk assessment) there is no chance an economy can generate enough viable projects to finance, so that the banks can earn an income on such an enormous flood of available funding.

    • avatar
      Thinkingaloud on November 6, 2017 - (permalink)

      In the US, the banks would accept the collateral as a final solution to the NPL well before they inflated the NPL to a size that the mortgaged asset no longer covers the loan! FACT! So yes, if the borrower was overindebted, then the borrower would have to declare bankruptcy but usually the asset was surrendered well before that happened.

      The loan contracts asked for the kitchen sink! YES, ignorance is not an excuse. BUT a realistic endoscopy of the loan market in Cyprus must be made before we claim that the borrower were at fault! ALL (yes all 3-4-5 of them) had the exact same rules and same contracts. So borrowers (even knowledgeable borrowers) had no real choice if they wanted to transact in Cyprus. Given that the loans were 99% Cyprus based and the deposits were primarily from abroad you can get the big picture. People who live in Cyprus and need a house in Cyprus can only get a loan from a Cyprus bank. A foreigner can deposit (+5%) money in cyprus and get a loan from abroad (-2%) for his housing needs. Ignorance is not an excuse. Collusion though is an offense, Same is misselling to retail clients and the banks have a duty to protect these clients!

      The NY law which as you say was a response to NINJA loans is actually a law that preexisted the crisis but that also shows that the lawmaker is trying to protect borrowers from the practices of the banks because the banks are in a position of power. Such a law protects both borrowers from their own greed and the banks from theirs! In Cyprus such a law would do wonders in resolving many issues with the NPLs.

      No one argues that one’s responsibilities should be disregarded. On the contrary what Mr. Savvides is saying is that both sides should take responsibility of their actions. If as a depositor, I entrusted my money to an institution which handed loans to people they shouldn’t have then why are they not responsible and point their finger at the borrowers. The borrowers asked for loans and the bankers had the duty to protect my money and make sure that they would return the full amount plus interest to me when I demanded it. THEY FAILED! I really don’t see the side of your argument in protecting the banking system’s trust! It is not the duty of the borrowers. On the contrary the state/Central Bank, should put in place such laws that prohibit/restrict/deter the bankers from misappropriating deposits and that would be beneficial to the trust system you mention.

  2. avatar
    Thinkingaloud on November 3, 2017 - (permalink)

    Dear Savvakis, what you describe as “remedies” to the problem (and the symptoms) make perfect sense in a world that governments, central banks and authorities actually cared about its people and the prospects of these people to restart!
    Unfortunately we are daily witnessing no such will from the part of the state to help and no real monitoring or regulation coming in from the Central Bank either. So borrowers have to fend for themselves, against the all powerful, well-oiled, too-big-to-fail machines called Banks! Banks, rightly so, have well thought out, binding contracts that worked in a pre-crisis environment and they are reluctant of changing or giving back any of their advantages. So it is policy or law that needs to come to effect and make them accept changes in order to unlock the potential that lies out there. Sadly enough borrowers have no other support as even the legal system has all but few been hired by the big banks and thus are unable to defend the borrowers.
    Still NO ONE recognizes this as a systemic problem that needs to be dealt with bald moves and yes maybe controversial and unprecedented moves that would protect the borrowers today and in the future. It is clear that New York has thought of such issues and it only takes some brains to see that this was happening across the board in Cyprus repeatedly. Perhaps the law in Cyprus should not make such loan agreements void but at least give the borrowers a new start with a loan that reflects their current ability to repay without losing their asset or any of the payments they have already made. Mr. Harris Georgiades and the Central Bank (whenever the governor wakes up) should look into this and push for some radical changes. I am sure that such changes that would improve the financial system of Cyprus in the future will be very welcome from all stakeholders.
    In the meantime thousands of borrowers continue to suffer while the bankers believe that they just don’t want to pay up!! Brilliant!

  3. avatar
    Savvakis C Savvides on November 4, 2017 - (permalink)

    Dear ThinkingAloud,

    Very well put. You describe the problem we face well and I, as you, believe it is unlikely to have a solution that hurts special interests. But all we can do is write and talk about it and hope (sometimes against all hope). And that is what we are doing.

  4. avatar
    Savvakis C Savvides on November 4, 2017 - (permalink)

    No one made the argument that the loan contracts are not legally binding. But rather that over-securing them, especially when not due care was taken that they finance productive investments makes it that hsrder for an economy falling into a balance sheet recession to recover from it.

    • avatar
      Thinkingaloud on November 6, 2017 - (permalink)

      Mr. Savvides is right about the loans being over secured, and I explain:

      The NPL situation in Cyprus only reflects the inability and unwillingness of the banks to address the issue at hand. When the banks lent money to people, they would do so for an amount of 70% of the force sale value of the asset that the borrower mortgaged. The force sale value was normally the 70% of the value of the asset. That means that any loan given out (according to their own rules) was merely 50% of the asset value. Please note here that all these were done through bank-appointed real estate evaluators. So yes, they were oversecure as a collapse would entail a 50% drop in RE values. The overall drop in RE values experienced due to the economic crisis and the unprecedented events that occurred in Cyprus was around 35-40% (according to the RICS index). So even with this catastrophic scenario that we all lived through, the amounts that any borrower should have received lies just about the current (prices even started rising since 2015) value of the mortgaged property. HOWEVER, the banks, even after a loan was clearly not being repaid due to the inability of the lender to meet payments (decrease or complete loss of income, bad lending practices by the banks when the borrower was never able to repay the loan) the banks continued accruing interest (penalty fees and increased interest). That resulted in even higher debts for the borrowers and thus much larger reported NPL figures. Had the banks taken the right measures when they should have (i.e. stop accruing interests, debt to asset swaps, restructuring, etc) we would not be talking about such large figures of NPLs today! Unfortunately the Central Bank and bankers completely ignore the calls for help from the borrowers but instead focus on the large percentage of NPLs. Even if not a single loan is turned into an NPL today and onwards, the NPL percentage will continue to rise as the NPL figure unfortunately reflects all the interest that is accrued at rates of 8-10% p.a. In that sense no NPL will ever be repaid unless the borrower has been hiding money abroad or somewhere. While bankers may think that this is the case, an assessment of the reality will not confirm this.
      SADLY our bankers continue to live their own lavish lives and believe that they share no responsibility in this whole debacle while they should be the first to be blamed. The cheap excuse that the repossession laws were not in place or have not been activated is nonsense and if that had been a problem the banks should have pushed for correction well before that became a problem. Had the banks accepted assets in exchange for the debt when things started going rough people would have proceeded in doing so instead of holding on. The banks however had no incentive (nor the mechanisms in place) to accept that mortgaged asset because they have the borrower locked in with personal guarantees for anything he owes. So instead of actively seeking a resolution of the said NPL they were just sitting on the sidelines waiting for the solutions to come from the borrower side, having the luxury to reject each and every proposal they did not like the smell of it! Now good luck resolving that!!

  5. avatar
    Φεραίος on November 6, 2017 - (permalink)

    Ένας βασικός συντελεστής που συχνά αγνοείται στην Κύπρο, είναι το μέγεθος του νησιού, ο πληθυσμός του
    και η κατ`επέκταση η δυνατότητα του στον αριθμό επιχειρήσεων που μπορεί να συντηρήσει σε
    ικανοποιητικό βαθμό κερδοφορίας.
    Έτσι όταν μιλούμε για νέες, καινοτόμες η επεκτάσεις σε υφιστάμενες επιχειρήσεις θα πρέπει εκτός απόν την
    τοπική αγορά στους προγραμματισμούς μας να προσμετρούμε και την δυνατότητα εξαγωγών.
    Αυτή, πιστεύω, είναι η καλύτερη και ίσως η μόνη επιλογή μας για οικονομική ανάπτυξη, σταθεροποίηση των τραπεζών και φυσικά μείωση των ΜΕΔ και ανεργίας. Θα χρειαστεί περισσότερος χρόνος αλλά είναι ο πιο σταθερός δρόμος.
    Όλοι οι άλλοι τρόποι μείωσης των ΜΕΔ θα είναι τραυματικοί για όλους και κυρίως θα καθηλώσουν την
    αγορά σε ανεπιθύμητα χαμηλά επίπεδα.

    • avatar
      Savvakis C Savvides on November 6, 2017 - (permalink)

      Tourism and our ability to gradually rebuild the economy on such projects is a big plus working in our favour. We should make more of it, although even there, the necessary capital investment cannot flow in as it should if the economic agents in this sector are heavily indebted and even worse have become minority stakeholders in their businesses in an effort by the banks to use their collaterals to mitigate their losses. But we also need a boost in domestic demand. It is not enough to rely only on tourism to get us out of this mess. We also, need fiscal policy and new investment in viable public sector projects which will stimulate the local economy. Boasting that we have managed a surplus in such times is like scoring an own goal and celebrating for it!

      • avatar
        Φεραίος on November 7, 2017 - (permalink)

        Καμιά διαφωνία. Αλλά δεν πρέπει να παράγουμαι μόνο για μάς. Φαρμακοβιομηχανία καλο παράδειγμα. Χρειάζεται φαντασία αν πρόκειται να δημιουργήσουμαι σταθερή ανάπτυξη, θέσεις εργασίας και μείωση ΜΕΔ. Τράπεζες μπορούν να δανειοδωτήσουν έξυπνες ιδέες. Τουρισμός πολύ καλός αλλά όχι αρκετός και όχι σίγουρα σταθερός. Ο Κύπριος θα πρέπει να φύγει απο παραδοσιακή σκέψη λειτουργείας απιχειρήσεων. Διαφορετικά, ότι και να γίνει με τα ΜΕΔ θα είναι κάπως όπως ασπιρίνη για καρκίνο.

  6. avatar
    It'sAllAboutRisk on November 6, 2017 - (permalink)

    I have been reading your blogs for quite some time and i couldn’t disagree more since you only suggest that the defaulters should be let off the hook and continue their lives, by also enjoying the fruits of the purchase from their bad loans. In this one you suggest that the system should find a way to set free the bad borrowers so that they can borrow again so that they can restart the economy. You also bring forward cases from the financial system of the US as an example.

    I have a few questions on these comments and i would like to know your thoughts on the matter.

    How would you suggest that a bad creditor would be allowed to get a new loan any time soon? Why and how should any bank assess the risk of loaning again to this person or business since they are defaulters? Based only on their new business plan and future income projections? How about the fact of the bad credit history? Should that be ignored as well?

    Secondly you never mention that in the US, based on your credit history you get a loan rate that reflects your credit rating! You have never suggested that the regulator should enforce something similar in Cyprus, under a state credit rating agency, so that the prudent and logical risk takers would be rewarded for their right management of their finances, and the defaulters (especially the strategic ones) would be penalized for some years to come. Don’t you agree that this would put the right bases for a healthier economy in the future?

    Yes bankers are also to blame but our culture in Cyprus for easy and quick profits, and our willingness to always cheat the system as individuals should be addressed as well at one point.

    • avatar
      Savvakis C Savvides on November 6, 2017 - (permalink)

      I have nowhere suggested that defaulters should be let off the hook. I don’t know where you got that from. Suggesting that the debt should be eased where justified to enable the economy to kick start again does not mean that. Do you think it will be better to offer the amount of provisions that are made to vulture funds in terms of discounts in order to entice them to buy the bad loans off them, a better solution?

      On your other questions, bad creditors are more the rule rather than the exception in the state Cyprus is currently in. Do you suggest we should never consider giving finance to new current or new SPVs simply because they now have a “bad credit history”? I surely disagree if that is what you mean because it will condemn the Economy to a long and deep depression.

      I do buy the credit history argument and I am not against it but up to point and only to supplement a proper assessment of the proposed project. Not as a substitute to it. And as you can read from the comment by Les Manison and I quote “…[borrowers] have mainly been offered credit without proper risk assessment and often with insufficient security and at terms that were allowing the banks to be exposed”. I do not, as apparently Les also thinks so, believe that the banks have learned from their mistakes and that they now know how to undertake a proper credit risk assessment or even that they have this as a priority concern.

  7. avatar
    Savvakis C Savvides on November 6, 2017 - (permalink)

    ThinkingAloud, You have more than covered me with your thoughtful and sober comments. I totally agree with all that you say but most importantly for the need to put the Cyprus economic predicament into the correct context and in a framework where it is possible to come out of it for the sake of all concerned. Not even the banks will be better off if they pursue a relentless but myopic push for maximising their return through their legal position or worse, by selling the loans at huge discounts to vulture funds.

  8. avatar
    Leslie G Manison on November 6, 2017 - (permalink)

    The private debt problem of Cyprus,which arises from the excessive advancing of private credit, the wasteful use and abuse of considerable amounts of this credit, and the inability and deliberate failure to repay much of this debt, should be seen in the context of the type of crony capitalism that has pervaded Cyprus for many years.The close connections between the wealthy business and banking entities and the political class has largely resulted in an allocation of real and financial resources not in accord with competitive market forces.Genuine competition is diminished substantially by the special favours granted both explicitly and implicitly to the rich and powerful capitalists in the handing out of permits, licenses, tax concessions (including turning a blind eye to tax evasion),property rights and in the award of public works projects.What is particularly prominent in Cyprus is the very preferential treatment afforded to the rich and powerful in gaining access to bank loans and in repaying the resultant debt.
    As has been emphasised by Savvakis in previous blogs bank loans to the rich and powerful ( particularly very large corporate groups), in contrast to what was the norm for other loans, have mainly been offered credit without proper risk assessment and often with insufficient security and at terms that were allowing the banks to be exposed to fraud and strategic default. Among the ruling oligarchs strategic defaulting has been prolific, while the restructuring of their loans has often featured generous write-offs and debt reduction for property swaps with banks.
    To better deal with the private debt problem, decisions on extending new loans and the restructuring existing loans need to be much more based on technical factors rather than being influenced by political considerations and special treatment from the authorities.
    But do the banks have the capability of doing proper risk assessment to determine whether new loans can be repaid? And can the banks engage in the productive restructuring of loans and help arrange supportive equity financing so that heavily indebted enterprises can reconstruct their businesses to resume normal operations? Unfortunately most financial institutions in Cyprus do not have these capabilities, at least for the apolitical and productive restructuring of loans of larger corporations and a new institution tasked with development and reconstruction in the financial sector along the lines proposed by Savvakis is required.
    Moreover, the political authorities must reverse their irresponsible crony capitalist and populist behaviour and deal objectively with the private debt problems including strategic debt defaulting, by resolutely enforcing loan contracts using existing foreclosure and insolvency frameworks and through quickly making the judicial system more efficient.

    • avatar
      Savvakis C Savvides on November 6, 2017 - (permalink)

      Totally agree and very well put Les.

    • avatar
      Thinkingaloud on November 8, 2017 - (permalink)

      Very well put Les.
      Unfortunately those of us who have tried venturing in this rotten economy without the “right” backing got our hands (or more body parts) burned. The interest rates were nowhere near what the “big” players got (despite their bad credit), the service the “big” guys got was far superior while the access to information (confidential often) was unrestricted for them.

      The access to information is a big issue and especially now. Information that should have been kept private to protect parties. Traditional “big” players in the market have always had better access to information than anyone else did. Even today, they have the right “channels” in place to know whether someone is indebted, distressed or not (thank you banks for the Artemis system of knowledge sharing) in order to take advantage of the system accordingly. This illegal (but secretive) access to info results in snatching up of “deals” from big players.
      For example, the bank agrees to accept someone’s property for a value well below the market price. This has been assisted by the regulation that was designed to help borrowers by which if a bank repossesses an asset that transaction has no capital gains. While this was meant to help the borrowers, the market is actually working in favor of the banks. To understand this consider the case where one tries to sell his property for lets say 500k. He can then deliver to bank the net of that which is 400k (-20%) especially in the cases where the asset is the product of inheritance (hence nearly zero cost). The market and especially “big” players know this and they collude with their friends,the bankers, to buy the plot off of the bank at a later stage at probably 300k (which is a price at which the bank has repossessed the asset) instead of buying it from the seller/borrower. That leaves a huge gap for the borrower while the difference has already been transferred to the shareholders of the bank via provisions. So instead of helping the borrowers, or the shareholders, the bankers are actually helping their “big” friends who have all the right political and other links as Les mentions. Need I say more? A quick look around in Nicosia especially where sales to foreigners are much less than in Limassol will reveal who the main buyers are and it is easy to see that these same buyers where the defaulters just a couple of years ago! It is a miracle how they managed to survive and thrive while everyone else is struggling.
      The Central Bank has to step up to the plate and start controlling these things and make sure that the system is not fraud! Perhaps Odysseas Michaelides and his team should take a really good look at all these transactions and the practices of the past. Lets investigate all the ex-bankers who have been hired by all the big boys right after their banks had collapsed. Could that have been a payback for favors during their tenure at the banks? That is a very easy and clean way to pay them back by adding them to the payroll.

      The political and business elite of Cyprus is really a joke and is littered by many who have only survived not because of their business or political savviness but because of their preferential treatment they enjoyed for generations. We have seen guarded monopolies in Cyprus up to the very recent past create families who are now considered the business elite in Cyprus. It is time to break the mold. I am not against capital but I am against unfair treatment that perpetuates mediocrity! Look at the various government and semigovernment boards! All the same people being recycled as if Cyprus has no other “brains”. If they are not recycled they are appointed because of their connections to some one or some political party and they will be called at some point to repay that favor.
      I am frustrated with Cyprus! I am fed up with how things work in Cyprus. I am disappointed by the quality of our parliament and their inability to think! Haven’t we had enough of this mediocrity and cronyism in Cyprus? Why do we continue on this path with no one interfering to stop this?

    • avatar
      Erol Riza on November 8, 2017 - (permalink)

      Dear Les,
      I would like for the sake of more clarity wish to know what you mean by a “new institution tasked with development and reconstruction in the financial sector”. Is this a bad bank like NAMA or an AMC like Sareb. These were set up under different circumstances and after the BRRD was introduced unlikely to be set as before. Or do you mean a development bank to offer development finance? If the latter do you feel that the terms would be better than the EIB or the EBRD for what are viable projects? In other words would a Cypriot development agency borrow at better terms than a AAA international development bank that can pass this benefit to the borrowers in Cyprus?

      If we want to have lower NPLs we need to see what the government role could be and how this could be aligned with the private investors in any innovative tool, be that securitisation or structured finance. I think that we should heed the words of the rating agencies, the SSM director and the ECB about the need to reduce NPLs and with what measures. A new entity is no panacea to the banks which face increasing demands on the size of the provisions and capital and we should allow the current management and boards to get on with their job; in my view they know what has to be done to address the challenges they face, not least a hostile legal environment! I think we should not allow politicians/Parliament to get involved in the banking system, other than what is recognised as a role to facilitate the proper functioning of a legal framework that enables banks to reduce NPLs. The distressed households are a social issue and herein lies also the role of government.

    • avatar
      Savvakis C Savvides on November 8, 2017 - (permalink)

      Dear ThinkingAloud,

      I read what you wrote which paints a good picture of Cyprus’ crony capitalism. A good friend of mine with more wisdom than most bankers and Government officials put together, but who likes to remain anonymous, once said to me “the Cyprus Republic is characterised by a mixture of oligarchic and debt-financed capitalism fostered and facilitated by lawlessness and irresponsible Government and Bank policies. The pursuit of growth based on this type of crony capitalism [inevitably] leads to recurring financial crises.” And I would add the creation and sustaining of the ruling elite that you talk about who use this for own benefit while holding at ransom the fate of the economy for all of us. People have to scratch below the surface and finally understand what is going on behind their backs. Your narrative is probably the best I have read that takes us a step closer to that, assuming of course that some are even listening in!

  9. avatar
    Thinkingaloud on November 13, 2017 - (permalink)

    Today’s new statistic that 32% of all restructurings fail should alarm those wise enough to understand why they fail. Anyone ever involved in any bank negotiation (not only for restructuring) and not belonging in the crony elite that Les described knows the strong arm techniques the banks use to corner clients. Banks are not really restructuring! They have to provide substantial write offs to those who really cannot pay. Chase the strategic defaulters to the ground if you like and give the rest the slack needed in the economy to grow. Lower your interests to the bare minimum (yes 1% or 0% even) and allow the businesses and individuals to breathe. Salaries are still lower than 2011-2013.
    The Central Bank MUST pass a retrospective directive that voids all bank agreements in which the bank obviously provided unwarranted loans. That way, the banks will come to terms and understand that they too have to back away on some issues and start making realistic expectations about how things will be resolved. A loan, usually a multiple of ones income, lets say 5x, so someone with a 30k income gets a 150k. loan, has been growing way faster than that person’s salary. So how are we ever going to bridge the gap? More than likely, the borrower lost 20% of his salary. That’s why the loan is an NPL. The borrower’s salary is 24k a year and his loan was 150k. The bank raises interests rates and slaps a penalty making that 150k growing by 8% per annum. 12k the first year, 13k second year, 14k year 3, etc. Meanwhile the salary, if she is lucky grows by 3%, so roughly 700 euros per annum. !! So 4 years after the crisis, the loan is 205k, and the salary may be 28k. So the multiple of the loan is roughly 7.5x. Oh by the way, the collateral, had tanked by 60-70% according to the bank (probably around 20-25% according to RICS). Anyone out there to explain how this will ever be resolved? And this is probably a good case where the multiple was only 5x. What about the cases where the banks gave out loans on a 10,15,20x multiples? Did the banks not act in a criminal way, knowing that the borrower would very likely miss payments and the bank would get the property? Shouldn’t that be illegal? Isn’t this a form of loanshark behavior? Why are we letting the banks off the hook? Why is it the borrower’s fault? The borrower asked for a loan and the bank, evaluated his situation and acting in a capacity of “protecting” depositors money should have declined the application. What about the obligations of the banks under the so called mifid rules? Any serious lawyers out there not already hired by the banks?

    • avatar
      Savvakis C Savvides on November 14, 2017 - (permalink)

      Very thoughtful comment once again from ThinkingAloud with which I totally agree. There are some “economists” who are actually celebrating the fact that 68% of restructurings still hold! Not even dissecting the problem as very wisely ThinkingAloud has in his comment.

      And as if that was not enough, we had today the MoF bragging about a 3.9% increase in GDP. 350% of GDP in private debt and over 100% in public debt with a shaky banking system is not something you recover from with 3.9% growth!

      I reckon that 3.9% growth (if indeed true/accurate) that the Minister is bragging about, covers only about half the interest accrued in a year! To even begin to hope for a reduction of private debt you need growth rates in two figure numbers!

  10. avatar
    Leslie G Manison on November 15, 2017 - (permalink)

    There seems to be a view expressed by the Government that rapid REAL GDP growth will contribute importantly to alleviating the private debt problem.Of course with their bland statements based on the absence of any realistic and competent analysis in the Ministry of Finance and CBC they do not tell us how.There is no detailed information on how the benefits of Nominal GDP growth are being distributed and how they will actually help heavily debt-laden NFCs and households achieve better performance in the repayment of debt,let alone increase their investments to help sustain robust economic growth.
    It is the view here that the benefits of the relatively rapid GDP growth are flowing disproportionately to the business elite comprising the large hoteliers, developers, accounting and legal firms, and wholesalers/ retailers.Take tourism, which has been the leading growth sector, where revenue has been rising by over 15% on an annual basis.How much of this increased revenue of hotels with their all-inclusive packages goes to employees and to local businesses( restaurants, car hire companies etc.); do hoteliers continue telling their overseas agents to keep a considerable part of their due receipts abroad?
    Average money wages have only been rising at an annual rate of around 0.5% (doubt that hotel employees obtained much more!) over the first part of the year against a 5% plus rise in NOMINAL GDP; in line with the penetrating comments of THINKING ALOUD this is by no means sufficient to allow financially-stressed households to improve their debt repayment capabilities.
    And are businesses outside those of the elite being put in a position by the “impressive” GDP recovery to service their debts and contribute to investment and employment growth? For the formal economy there does not appear to much trickle-down from the leading growth sectors in the employment of skilled and educated persons.Cyprus still has the highest proportion of temporary or part-time workers albeit underemployed of its total employees in the EU.
    Indeed, the crony capitalism of Cyprus with its increasing tolerance of tax evasion and selective granting of favours to the business elite and poor and biased enforcement of laws and regulations including loan contracts has driven many businesses into the large underground economy characterised by low productivity and incomes and an inability/unwillingness to service debt.

    • avatar
      Savvakis C Savvides on November 16, 2017 - (permalink)

      Les raises an important question by pointing out that even with this nominal growth it is hard to see how, if at all, this eases the enormous private debt.

    • avatar
      Thinkingaloud on November 17, 2017 - (permalink)

      Unfortunately Les, I believe we are just 4-5 people talking with each other and none of our ideas or concerns reach the right decision makers.
      I believe there will never be a real solution to the debt problems we are facing. The banks will never back away from their ill practices of the past that the borrowers (partly due to ignorance, partly to no other choice) had to accept and sign off of. The personal guarantees on top of the collaterals, the inflated valuations by the real estate valuers appointed by the banks, paint a very grim picture for the future.
      A loan handed out in 2011 was based on a 2011 valuation that now the bank says it is not right. The bank should be forced to accept the valuation of the 2011 and not today’s valuation. That way, the borrowers will not be left with substantial loans even after debt-to-asset swaps. The loan agreement should be canceled if it is proven that the bank did not make the right/proper evaluation of the borrowers ability to repay as that would convey ill-intent as the bank was eyeing the borrower’s property to start with and was not really concerned with the serviceability of the loan. But who will be brave enough to take these decisions and drive them through the system? Such action would greatly reduce NPLs right away.

      • avatar
        Savvakis C Savvides on November 20, 2017 - (permalink)

        You hit the nail on the head once again. But as you say, who would even dare think, let alone take action in this manner. It is far easier and more in their nature for our politicians to lay out a red carpet to the banks for finishing the job on their suffering over-indebted and “over-secured” loan victims.

  11. avatar
    Savvakis C Savvides on November 27, 2017 - (permalink)

    Το ξεπούλημα των δανείων θέτει τα ΜΕΔ εκτός τραπεζών αλλά διαιωνίζει και σκληρύνει τις επιπτώσεις του ιδιωτικού χρέους! Τα ΜΕΔ είναι μόνο το σύμπτωμα του πραγματικού προβλήματος που είναι το τεράστιο ιδιωτικό χρέος το οποίο παραμένει και γίνεται χειρότερο εκτός τραπεζών.

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