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The world has turned upside down

The country makes its living from tourism and financial services but, with banking being six to eight times the country’s GDP, there are systemic risks given the size of domestically owned banks and their exposure to Greece.


THE GREEK mathematician Archimedes once said “Give me a place to stand and with a lever I will move the whole world”.

But Archimedes failed to add “…and with enough leverage I can turn the world upside down”. Thus, we find ourselves in the precarious situation where tiny Greece is causing a crisis in the Eurozone and a flight to safety by investors and depositors alike.

This is an outline of what lies ahead:

Greek economy – Things in Greece are a real mess. One side is asking voters to vote for it promising that when they come to power they will cut salaries and pensions. The other side is saying that they don’t care what the previous government agreed; they will simply not adhere to it even if that means going bankrupt. With 22% unemployment and a reduction in earnings of close to 40%, what would you choose?

Cypriot economy – The country makes its living from tourism and financial services, with banking being six to eight times the country’s GDP. Thus, there are systemic risks given the size of domestically owned banks and their exposure to Greece. The (recently nationalised) Cyprus Popular Bank is the most exposed to Greek debt, with 49% of its total loans, followed by Bank of Cyprus at 34% and Hellenic Bank at 17%.

Let’s put it in a different, crude, way:

Cyprus GDP: €15bn
Cyprus banking system: €15bn x 8 = €120bn
Exposure to Greek debt: Assume 30% x €120bn = €36bn
Greek non-recoverable debt: Assume (at best) 30% x €36bn = €10.8bn

Note: The total amount of Greek government bonds held by all Cyprus-based banks was circa €6bn, of which they lost circa €4.5bn

Cypriot real estate – Residential and commercial real estate remains overpriced, even though in the coastal districts of Paphos and Famagusta residential prices have fallen by 30-40%. Residential prices remain out of kilter with their long-term price to income multiple, whilst commercial property is suffering from higher vacancy rates resulting in lower rents, and from higher initial yields.

We expect residential and commercial prices in Nicosia and Limassol to fall by another 15-20% within the year. This will be compounded by the increase in the unemployment rate and the drop in earnings of government and banking sector workers, expected to materialise over the near-term. Land is the most overpriced property type across Cyprus and the one which we expect to suffer the most over the medium term.

From peak (2008) to trough (probably 2013/2014) we expect property prices to fall by 40% (residential Nicosia), 50% (holiday homes), and 60-80% (land on city fringe and countryside).

“Without Greece, Cyprus would have been fine” – Some have said it so often, that they have actually started believing it.

The Cyprus Central Bank defines non performing loans as those that are in arrears for over 90 days, and where the outstanding interest and loan amount is not covered by the collateral. The default rate currently ranges at around 12-15% of bank loans. Under the more widely used definition of non performing loans as those that are in arrears for over 90 days, the default rate currently ranges around 25-30%.

Let’s see what the numbers tell us:

Housing loans to local residents: €12.5bn
Housing loans to overseas residents: €2.6bn
Total housing loans: €15.1bn
Non-recoverable debt: Assume (at best) 10% = €1.5bn

Other loans to local residents: €10.9bn
Other loans to overseas residents: €0.9bn
Total other loans: €11.8bn
Non-recoverable debt: Assume (at best) 20% = €2.4bn

Total non-recoverable debt: €3.9bn

This amount excludes all loans to developers, companies, Cyprus government bonds, etc. Adding those makes things look much, much, much messier.

Cypriot banks – We envisage that banks will effectively become loan-workout companies, with considerable hands-on property management activities. The various outstanding loans will need to be regularly reviewed and restructured, and foreclosure and other proceedings will need to be initiated. At the same time the actual physical assets will have to be maintained and managed by their new owners (the banks). As a result banks will need to “invert” their front/ back office structure; they will transform themselves from companies having a large client-facing network which is geared for lending, to one with a smaller count of client-facing personnel and a large hands-on back office.

What do we do? – One of the wisest things we read said that “loans are a way of bringing the future into the present, with interest being the penalty for doing so”. Well, the penalty is high and the future isn’t as great as we thought it would be.

  • If you don’t have cash flow problems, then put a plan in place in case you have in the future; 90% of businesses fail because of cash flow, not because they are not profitable.
  • If you have cash flow problems, then get professional advice immediately. Talk to your accountant, try to extend your credit terms, and give debtors a chaser.
  • If you have taken out a loan, then now is the time to seek advice on what your rights are and how to restructure it.
  • If you are the bank that gave the loan, then you need to recognise what the future holds, make a plan and have a system in place of how to deal with your loan and property portfolios, and be flexible with your clients if there is any chance of increasing your recovery rate.

About the author

Pavlos Loizou MRICS is the lead consultant at Leaf Research

Leaf Research is a leading real estate consultancy firm, providing high quality real estate market research, valuation, feasibility studies, financial modelling and strategic consultancy.

Readers' comments

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  • Gavin Jones says:

    Pavlos Loizou.

    Glad to see that someone of your stature (I mean it) involved in the real estate business is spelling it out as to how it is as opposed to how people want it to be.

    However, I echo the comments of others that you’ve been rather conservative. In addition, some of your figures seem to be out unless I’ve misinterpreted them incorrectly viz. total loan exposure of Cypriot banking sector is in fact €152 billion (IMF figure) of which €23 billion is to Greece. Still, what’s a few billion in the context of this exercise.

    I’m glad that you’ve touched on loans to developers, something which has tended to be airbrushed out of people’s psyches and hardly ever referred to.

    In addition, there are the ramifications of the title deed scandal which you didn’t touch on but there’s more than enough with this little lot to be going on with…

  • Maxwell Hannah says:

    I agree Cyprus would have been a lot better off if it had stayed out of the EU and did not get mixed up with Greece.

  • Costas Apacket says:

    Good report if a little cautious with the outstanding toxic debt figure.

  • Mike says:

    Well done. The author, in my opinion, has at last spelt it out, albeit somewhat cautiously in my opinion.

    Adding what may turn out to be the non recoverable debt owed by developers and companies would give a truer indication of prospects and I have always believed that property prices were between 50 & 75% overpriced.

    Staggering I know but this is Cyprus not Monaco, Moscow, London or Hong Kong. It speaks volumes about those of us who have just paid what has been asked without a true evaluation of the financial, political, and environmental stability and prospects of the Island.

    Those of us who have known Cyprus since the late 40’s, like me, must be truly amazed at the point we have reached. Whatever next.

  • The views expressed in readers' comments are not necessarily shared by the Cyprus Property News.

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