THE RECENT Eurobarometer 2009 survey covering the member states confirms what many have always suspected, namely that corruption may be endemic in Cyprus.
Part of the EU summary states: ‘However, in eight Member States, including Greece, Bulgaria, and Cyprus, there is almost universal agreement that corruption is a national problem’.
Recent media reports suggest that Greece has been lying to the EU over its national finances for years, behaviour which now threatens the very stability of the Euro; and Bulgaria has reportedly previously lost €520m in EU funding due to corruption and fraud in that country. Now Cyprus is ranked alongside these countries by its own citizens.
Paradoxically, the EU anti-corruption organisation, Group States Against Corruption (GRECO), during its ongoing evaluation of corruption in Cyprus ‘was repeatedly told that corruption is not a big problem in Cyprus as there are very few cases’.
In the Eurobarometer survey, 94 per cent of Cypriots agreed that corruption is a major problem in their country, with 82 per cent agreeing that corruption is unavoidable in Cyprus and has always existed, and with the police, politicians, public officials and the judicial service taking a beating, amongst others.
Transparency International defines corruption as ‘the abuse of power for private gain’, and the Bribe Payers Index 2008 states that ‘construction, real estate, oil and gas sectors are most prone to corruption’. Given that oil and gas do not yet figure in Cyprus, one can see where this leaves us and may very well account for the current scam-ridden mess in the property sector which the government refuses so far to address.
The boom years for property in Cyprus occurred after its accession to the EU, driven mainly by foreign buyers expecting the perceived protection which EU membership should have provided – how wrong they were!
Even though the government has now been fully briefed, rather than attempting to properly regulate the industry for the benefit of all, it seems content to try to mislead the EU with this ill-conceived and widely condemned amnesty legislation, only needed because of the State’s failure or refusal to enforce the laws designed to protect property buyers in the first place. Whilst the main area of complaint to the EU i.e. developers’ mortgages on buyers’ properties, is being swept under the carpet, because there is no apparent solution.
Reportedly, developers’ mortgage outstandings grew 107 per cent between March 2008 and March 2009 to €5.9bn. Since then, it has been further reported that the banks have been caught by the Central Bank trying to hide developers’ failure to service these debts by dishing out even more money and extending the loan periods. However, these banks are content in the knowledge that the buyers are unwittingly the ultimate guarantors of much of this orgy of unethical lending.
In the Republic, with the highest interest rates in Europe and little or no income due to the collapsed market, developers are now starting to go bust and the banks pushing them into receivership, in order to recover their loans. The banks have also recently raised their provisions for bad debts, with for example Bank of Cyprus seeing an increase of 536 per cent over last year. Additionally, as part of the unfolding crisis in Greece, the Financial Mirror reports that Alpha Bank and Piraeus Bank have already had their credit ratings downgraded.
In Cyprus, developers have previously sold properties which now years later still have mortgages on them. In order to service these mortgages, they will have to sell even more properties, and many of these new properties will also have mortgages on them. Currently, there must be tens of thousands of unsold and unfinished buildings with mortgages on them, most built specifically for the overseas buyer market.
With the current economic slump in countries such as the UK and Russia this will be extremely difficult, especially so as more and more potential buyers are warned of the deception of Cypriot developers in this respect.
Accordingly, we are heading to a situation where this developer debt could be toxic debt very soon, debt unable to be serviced and the collateral properties unable to be sold off by the banks.
There is a solution – not a pleasant solution but a solution nevertheless – and something the Cyprus Property Action Group raised with the Minister of the Interior some months ago. Namely, that Cyprus should adopt the same approach as the Irish government, which was faced with the spectre of massive toxic debt in the banking system, due to the Irish banks’ reckless lending to their developers to the tune of around €80bn; on properties which have since seen their asset values’ plummet and remain largely unsold.
The newly established National Asset Management Agency (NAMA), an Irish Treasury agency, has started to buy developer debt at only 70 per cent of the book value – so this is not a bailout for the banks. The developers will not be forgiven any debts, as NAMA has more power than the banks to seize and sell-off properties in the event of developer default – so this is not a bailout for the developers.
And this is not a burden on the taxpayer, as NAMA plans to make a profit on its activities which are expected to take 10 years to complete. The EU has also sanctioned the programme.
Remember also that in Cyprus the state could bring in huge amounts of Title Deed transfer tax to mitigate against any potential losses. However, it also has to be said that in Cyprus the existing mortgages on previously sold properties have to be factored in. Currently, in this land of secrecy no one will declare how many of these properties are encumbered and to what value.
Clearly, funding will have to be raised on the international markets for such a venture, but the longer the government dithers the greater the amount to be raised due to developers’ ongoing failure to service debts. At the same time, the lower Cyprus’s credit rating sinks the greater the premium will be on any funding.
Lack of any tangible action in the coming months could see the Cyprus property market severely damaged for the foreseeable future, something which is not in any of our interests.
Whether the government of Cyprus could be allowed to take such decisive action by the vested interests which got us into this mess remains to be seen.