IN JULY 2009, I approached a leading accounting firm with the following concept: I suggested to the accountants that in my view, Cypriot banks have the following dilemma when faced with large corporate clients:
- When a client starts having problems servicing their loans, the bank has two choices; either to continue giving them money/ extending credit, or to push them towards administration/ recoveries.
- In the first case, the bank is simply taking a “one way bet” with the particular client, as they are increasing their exposure to what is now a more “risky” client.In the second case, the bank is choosing to enter into a long-winded and costly legal process, whereby it hopes to recover its money.
- There is a third way, I felt; banks could send a team of experts to audit the client and suggest ways to improve the way their business is run so as to improve their ability of servicing their loans. In this way the bank would take a calculated risk/ choice and the client stood a better chance of “surviving”.
- The accountants agreed. We duly organised a team and went out to approach various banks and large corporations with our “new service”. We failed miserably. We didn’t get even one client.
Three years later we all find ourselves in the middle of the crisis, with banks having (even larger) exposures to corporates and yet stubbornly refusing to take advice. The way I rationalised it in 2009 was that the economy was (at the time) still doing “OK” hence the potential clients couldn’t see the benefit of what we were offering. Now however this is not applicable as the economy is not doing well but they are still refusing to take advice, which means that clearly my deduction was wrong.
I think I finally cracked it. Let’s say you are a 25 year old Cypriot who has finished university and who has worked overseas (probably in London) for a couple of years. You decide to come back to Cyprus and enter the private sector.
The year is 1976 and Cyprus is still in a state of shock from the 1974 invasion; 200,000 people are living in makeshift refugee camps (tents), the main commercial port is gone and there is no international airport. You decide to start your own business with help from your family and friends.
Over the next 34 years, until 2008, Cyprus’ economy (GDP) grew from $490m to $25.3bn; a staggering 5,000%. Over the same period, the UK’s grew from $236bn to $2.6tln; an increase of 1,000%.
Your choices as a young man were all profitable; land and property values kept rising throughout that period, share prices rose and banks gave handsome dividends annually, tourism had consecutive record years, and “anything you touched turned to gold.”
The year is 2009 and you are 58. You are now running a major corporation or are in senior management of an organisation. A “kid” walks into your office and suggests that you should be more prudent with how you manage your clients and that you need to consider issues like procedures, productivity levels, liquidity of collateral, downside risk, etc.
Obviously, you laugh at them because nothing like that ever happens (or, to be exact, has never happened during your working life). Of course, even if the “kid” happened to be right, you would know what to do as you have successfully steered the company for more than three decades.
Think about the above. Pause. Think of the people you deal with on a day to day basis. Pause. Smile.
The attitude outlined above stems from a great economic environment and from a general lack of risk taking by Cypriots. The latter is mainly due to societal reasons (think of how many people who know who they and their kids are in government or work for a bank) and the general ‘fear of failure’ (or rather, of what people will say if you fail). Low risk taking means a low chance of failure, which also means low chance of knowing what to do if you do fail. Americans have a saying that a business person who hasn’t gone bankrupt at least three times hasn’t taken on enough risk.
So, what actions and mistakes have I done and what business lessons have I learned?
- In 2007 I quit my fund analyst job in the City (London) to start a niche real estate consulting (brokerage) firm in Bucharest. My partner and I knew nothing about Romania, but we worked like crazy and within a year we made the company a success. When the downturn came, we switched our focus to rentals and then closed down the office. This experience taught me to have low fixed overheads and to be able to enter and exit a particular market/ business quickly and easily.
- In 2009, I moved to Nicosia and used my savings to buy a small plot in Ayios Dometios. The idea was to build a small three storey building and rent out the units. Being naïve, I did a thorough due diligence only after I bought the plot. I then found out that architecturally the building could accommodate no more than two large units (the plot had a narrow “face” abutting the road which made parking for more units a mess). This affected significantly the value of the land.
When the bank decided to raise the interest rate on the development loan by increasing its spread, I decided to sell at a loss as they had shifted the playing field midway through the same. No level playing field meant that I would end up being a bigger looser (and soon). This experience taught me to take the time and to pay to do thorough due diligence. Also, to be willing to “take my losses” rather than stubbornly wish that things were different than they actually are.
[NB: Interest is typically calculated as the sum of a base rate plus a spread you agree with the bank. In 2009, the base (euribor) was decreasing which meant that my interest rate was also increasing down. The bank decided to increase my spread (even though this was not in the contract) in order to ensure that it received the same income from me.]
- In 2010, I made two choices.
- The first was that I bought a small number of bank shares, even though I had repeatedly said to myself never to deal with anything I do not understand. It’s needless to say where share prices are now and what I learned.
- As the economic, banking and later sovereign crisis started unravelling the property market in Cyprus started feeling the brunt of its implications. Many people started to pay more attention to the market but few had the tools and expertise to examine and analyse it.
When I noted this gap in the market, I was duly told that “we have been fine all this time. No one wants to examine the property market or pay someone to undertake cash flow modelling for their investments”. Taking heart from my experience with the accountants, I teamed up with an economist who has banking experience and set up a niche real estate and financial modelling consulting firm – Leaf Research. Best thing I ever did. I learned that sometimes, you have to listen to your gut feeling despite of what people say.
I hope to be able to make more mistakes in the future and to keep learning from them. If I ever stop making them, it means that I am not trying hard enough.
In the mean time, I have at least found a way to rationalise how and why some of the people around me think the way they do. Time will tell if they see the error of their ways, or if they go down with their sinking ships.
Pavlos Loizou MRCIS
Lead Consultant, Leaf Research
@Gavin Jones. I agree. Unfortunately, the blame-game and sinning circus here will run and run. Over the coming months and into next year, we will see in Cyprus a mini action-replay of the reaction in Greece to the reality of the similar austerity measures that were imposed there.
Just as in Greece, the government, aided and abetted by union demagoguery, will duck,dive, wriggle, slither, lie, cheat and ignore the austerity conditions imposed with the EU bailout. Expect to see melodramatic displays of public protest and likely disorder. Just as in Greece, stage payments will only be forthcoming if real and verified action actually occurs.
But even now Greece is STILL failing to demonstrate its commitment to such action. They obviously believe quite naively that this is just a game of poker and somehow they can browbeat the EU into giving them more money but without Greece having to take the austerity measures demanded. Cyprus will be no different.
Pavlos Loizou.
Once again thank you for candidly sharing your thoughts and experiences.
Unfortunately, I rather feel that you’re the guy desperately trying to plug the dam with your fingers while the guys on the other side are busy filling it up with water regardless of the consequences.
With recent events concerning the bailout, Cyprus has in effect lost its hard earned independence as a result of arrogance, naivety, ineptitude and some would say bloody-mindedness.
I feel that the following quotations are apt in light of what you and Curmudgeon have written:
‘The greatest fault in man is to think he doesn’t have any.’ Carlyle.
‘As long as we maintain that all others have sinned and we are blameless, it will be difficult to stop sinning.’ Constantinos Paparigopoulos.
@Curmudgeon. Don’t worry, the Brits are always at the top of the Cypriots’ blame list for everything, no matter how absurd. It’s a clause written into the constitutions of all the political parties. Don’t be surprised if over the coming months some Cypriots vent their hostility on anyone who looks ‘northern EU’, just like they are doing now in Greece.
BTW, Pavlos Loizou’s article has been published in this week’s Financial Mirror, so at least the business community will have an opportunity to read it – but, as you say, will they actually read it and understand it let alone act on it?
Pavlos, so refreshing but I doubt very much if your fellow Cypriots will read the article let alone understand it.
I am reliably informed that the wise men in the coffee shops still talk about politics and religion but now include how foreigners are ruining their country. When the conversation gets around to discussing the recession and the reasons for it, they are in denial. This downturn has been caused by outsiders absolutely nothing to do with Cypriots.
One of my banks tellers reliably informs me the Americans have caused the downturn. They he says, want to dominate the world therefore seek to financially undermine Cyprus until it collapses. When Cyprus is on it’s knees they will rush in to take the gas. Clearly he doesn’t read newspapers or watch news bulletins.
His garden must be full of sand.
What is more worrying, the teller is well educated and well travelled.
I wonder how the (sour) cream at the top view things….
What an excellent article. Loaded with great background on country, culture, complacency, competence. And, especislly the attitudes of Banks. And Pavlos, so good that you are brave enough to talk about ‘mistakes’ – my father used to tell me as a ‘lad’, ‘a man who never made a mistake, never made anything’ (well ‘owt to use his blunt Yorkshire vernacular).
Good article. It is a pity no one is listening..or at least that is how it seems
I’m surprised that no-one has mentioned the Papal infallibility in Cypriot government.
What about the lunacy of the government that failed to assess the risk of storing 98 containers of volatile munitions next to the Island’s largest power station?
Pavlos, great article with content that is spot on.
Our bank did exactly the same Euribor margin hike to us with absolutely no notice or communication of what they were doing.
After complaining to the Central Bank of Cyprus they said they couldn’t do anything about this and pointed us back to a no-mark in the Bank who did absolutely nothing to resolve our complaint despite months of correspondence.
It’s like living on a foreign planet trying to deal with these sort of issues in Cyprus.
Let’s hope that membership of the EU eventually has a positive effect in Cyprus that provides Consumers some sort of mechanism and support network to successfully challenge issues such as these.
@Pavlos Loizou. A refreshingly candid and experienced-honed article. I share much of what you say. As a corporate risk management specialist, I have always taken the approach that organizations should:
(a) do as much due diligence as is realistic and reasonable before any major decisions or commitments, and
(b)make the best judgement they can on the due diligence and any other info available when making the decision or commitment.
It is essential to a culture of responsible risk-taking but, as you imply, it cannot warrant zero risk and only reduce the likelihood of unwise decisions etc.
Regrettably, as you say, so many large organizations here and around the world just refuse to do it that way. Now just retired, I spent my entire career trying and sometimes succeeding to persuade large corporates to embrace Enterprise Risk Management. My one regret was not being able to persuade more to see the light.
I accept that the main ‘we’ve never had it so good’ reason you give for Cypriot businesses ignoring the ‘right path’ is a factor. However, I am equally sure that there are other factors and motivations in the mix (here and elsewhere). In a chapter entitled Countering Tunnel Vision and Quack Governance in my next book Corporate Risk & Governance (Gower, early 2013), I examine the following that I have come across time and again in boards and senior management:
Bounded rationality, narrow risk-related experience, untutored view/ignorance, unchallenged dogma.
Failure to recognize risk inter-dependencies.
Arrogance among directors and senior execs and an often unwarranted belief in their own risk expertise.
Biases towards finance, insurance and risk transfer, risk quantification, single metrics and salvation models; ignoring people and HR risks.
Personal agendas and self-serving calculation: an apparatchik ‘herd’ culture; cynical, temporary presenteeism encouraging lip service; soft-peddling and indecision on risk issues.
A chancer culture of ‘what can we get away with?’ and casino-style gambles on major issues with little or no cogent risk evaluation.
There are no easy quick-fixes for all this but I propose a corrective framework in the book.