SPEAKING at a forum for finance managers held in Nicosia yesterday, senior managers from three of the Island’s banks outlined a gloomy future for the economy and called on government to take bolder steps to reverse the downward course.
Christos Stylianides, deputy CEO of the Marfin Laiki Bank said that “The Cyprus banking system dealt with the shocks of the global credit crisis. However, the government’s failure to take measures in time led to its consecutive downgrades by the rating firms and its inability to borrow from the foreign markets”.
“On the other hand banks are under constant pressures to increase their capital due to the haircut on Greek bonds, so we were forced to stop lending”, he added.
Mr Stylianides said that the liquidity problem in Cyprus is due to the policy pursued by the Cyprus government and especially the policy of the former Finance Minister, who tried to finance the deficits through domestic borrowing, which exacerbated the banks’ liquidity problem.
A further reason is the downgrading of the banks by the ratings agencies, which affects the inflow of deposits.
Marios Savvides, General Manager of the Piraeus Bank stressed there is cash but there is no liquidity in the market and although balance sheets show that cash is available, it is not available for lending.
He also agreed with Mr Stylianides that lending by the banks will be very restricted next year.
Mr Savvides also believes that property prices will continue to fall over the next six months.
Various reports indicate that the average Cypriot’s take home pay is around €20,000/annum, while the latest RICS Cyprus Property Price Index shows that the average price of a 3-bedroom, semi-detached house is €419,880; that is nearly 21 times the average Cypriot’s annual salary!
Compare this to the UK, where the average house price is around 6 times the average salary.
This would indicate that the property market in Cyprus has been manufactured as the average Cypriot cannot afford to buy a house without borrowing many times more than their annual salary.
In the past, banks were giving credit based on their expectations that the value of the underlying collateral (property) would continue to increase and this helped to fuel the boom in house sales.
But now that property prices have fallen, the underlying collateral is worth less – and in some cases it has fallen below the amount of money advanced under a mortgage. As the banks have been tightening their criteria for lending, this puts further downward pressure on property prices because their value depends on the willingness of the banks to lend.
How much further will property prices fall? Only time will tell.