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A very Cypriot Swissgate

If the professional advisors had foreseen the pitfalls of Swiss Franc mortgages and did not tell the borrowers or worse still if they planned it this way, then we would have a scam of scandalous proportions.

THE RECENT MOVE of Alpha Bank Cyprus against thousands of British buyers of properties in Cyprus who defaulted on their mortgages was anticipated.

Swiss Franc mortgages and other low interest currencies, such as the Japanese Yen, became very popular a few years ago in many countries. Cyprus was no exception.

What people did not realise at the time was that the increases in their value (the Swiss Franc rose by nearly 40% since 2008) would quickly absorb any interest rate savings and increase the original capital borrowed. So if one borrowed 100,000 in 2008 he now owes 140,000 before any interest is added.

Add to this the economic downturn, which meant that property values did not appreciate and in many areas have even fallen (up to 70% on Paphos holiday homes) and the fact that banks have since put up interest rates despite Swiss Franc deposit rates going down and one can see why these borrowers are in dire straits.

The situation is so serious in some countries that the Supreme Court in Iceland has ruled against banks hiking interest rates on these loans and the Government of Hungary is taking steps to force the banks to write-off the currency appreciation differential. So what makes Cyprus different?

First of all, most borrowers of Cypriot Mortgages are foreign nationals buying holiday or retirement homes. They had to trust local people for sound advice and promises that never materialised.

The second disadvantage they found themselves in is that they are locked into these loans. “Buyers of properties in Cyprus that do not have title deeds do not have a choice of lender and cannot re-mortgage unless the land is unencumbered,” explains George Kounis, Consultant with Maxwell Alves Solicitors in the City of London.

“The bank that has lent the money to the developer is also the only possible lender to the purchaser unless it consents to another bank lending the money.” This places purchasers who run into problems at the mercy of the lender. For example, as a condition to restructure these loans to ease the repayment burden, borrowers were asked by the bank to sign a declaration that they knew and understood the risks of taking a foreign currency loan 4 years after they took it.

But the third and perhaps the most important difference is that at the time, these borrowers could not have anticipated what could happen. If the other side to the transaction (which included what they thought were their professional advisers) had foreseen the pitfalls and did not tell or worse still if they planned it this way, then we would have a scam of scandalous proportions, a Cypriot ‘Swissgate’.

“I believe this is the criterion that differentiates a normal transaction from a sting operation,” said George Kounis.

“You expect a bank to be making a profit on the interest rate differential. That is normal. What would be unacceptable is if the bank is using a developer to sell off Swiss Franc loans in anticipation of a rise in the currency value so that it can make a killing, for the developer to be using low-cost convenient mortgages to sell-off properties that would otherwise not sell and that a lawyer purporting to be acting for you would be used to keep you in darkness.”

Maxwell Alves are asking the Central Bank of Cyprus, the Disciplinary Committee of the Cyprus Bar Association and the Attorney General of Cyprus a number of searching and they are also asking the bank, the developer and the lawyer in each case to demonstrate that they were acting in good faith.

“There are just too many coincidences and irregularities that point in the other direction,” declared George Kounis who is visiting Cyprus for meetings next week. “But we need to give them every opportunity to explain.”

Readers' comments

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  • J says:

    A very personal opinion …….The sale of these properties and the mortgage facilities were a definite mis sale and mis representation of the facts.

    People were led to believe they were buying a dream and some people using life savings to do this however lots of people were sold a nightmare which has left so many people with lots of stress and sleepless night just because they trusted people.

    The country markets itself to be the friendly caring family community which it shows to its tourists however money is the route of all evils and Cyprus will make money out of people by whatever means they see fit and in this case mis leading information and pricing provided by a close business community who never offered independent advice.

    I loved Cyprus as a country to relax and enjoy family life. I now have no faith or trust and would never invest in Cyprus again.

  • Tojo says:

    One point that should be borne in mind I think is that in some instances I am aware of (including my own property purchase), we were not given a choice of the currency of the mortgage. We were simply presented with a package deal by our “advisers” which we were told had been thoroughly researched and that it provided the best arrangements possible.

    There was mention of the fact that the mortgages were arranged in swiss francs however as the mortgage was guaranteed to be at a fixed rate for its full term and therefore currency fluctuations would not be a risk.

    Of course this excellent mortgage deal proved to be fictitious. Both the advisers and the developers went along with this deception until six months after completion when the truth finally came out that it was in fact a variable rate mortgage. This is of course just one of a number of scams in the arrangement.

  • janner says:

    Odd_Job_Bob,

    I hear what you are saying but disagree with some points. Something very wrong has been allowed to happen in Cyprus. However, it has all been said before (many times). I guess only time will tell.

  • Odd_Job_Bob says:

    Janner,

    Yes, I am being harsh, but I believe totally accurate. I completely agree that much of the Cyprus property dealings over the last few years was a well-orchestrated pincer movement, from top to bottom. The Swiss Franc Mortgage bit certainly hasn’t helped but, before I get on to answer your questions, here’s two for you:

    1) If punters knew that, by speculating in a THIRD currency (probably earning in Brit Pounds to live in a Cyp Pound country but their biggest expense would be denominated in Swiss francs!) they ran the risk of exchange rates acting against them, would they have done it?

    2) If the interest rates offered for Swiss Francs were the same as for loans in Brit or Cyp Pounds, would ANYONE now have a Swiss Franc mortgage?

    I hope you agree that both the answers to these questions are probably NO.

    In conclusion, people bought a financial product THAT THEY DID NOT UNDERSTAND as IT WOULD MAKE THEM MONEY (approx 4% interest as opposed to the 8% they were offered for more sensible currencies).

    Now, with regards to the PPI comparison, the advertising blurb for the companies claiming to get your PPI refund for you starts like this: “If you’ve taken out a loan, credit card or mortgage, you’ve probably been sold PPI (http://www.youtube.com/watch?v=yPvf3g7VLr8).

    Basically, people went in for one product (a loan) and came out with two (loan + PPI. Which was cr#p). Most people didn’t even know they had it! This is very different from going in to a bank for a red loan and coming out with a green one cos it’s cheaper. Obviously, it’s cheaper for a reason, but people weren’t interested in finding out why by speaking to an INDEPENDENT financial advisor.

    Lastly, with regards to the courts. Even in countries with a (relatively) fair justice system, it’s just not possible to compensate people who speculate and lose as the amounts you’d be talking about would be humongous.

    Unless, of course, they’re banks….

  • Janner says:

    Odd_Job_Bob,

    I think you’re a little harsh. This isn’t a one off. Purchasers were sold a line from bottom (agent) to top (Government). It was planned, coordinated and executed to maximize profits. It is a scam and it was reckless.

    Do you also feel the same about those who have been sold unsuitable products in the UK? Is it their fault as no one twisted their arm? The businesses who are now lining up to claw back their money for mis-sold insurance policies are doing so for a reason. Those mis-sold PPI claimed their money back for a reason too.

    Consumers expect to be treated fairly and in the swiss-franc saga, this was not the case.

    Only time will tell if the courts share that view.

  • sam london says:

    What alpha bank are doing is to further destroy the property market and economy in Cyprus. At the end of the day this will end up in London courts where there is no sympathy to the banking industry and especially Cypriot banks. As a result they will not recover any assets in the UK and the publicity will ensure that no-one will invest in Cyprus for a very long time. The construction industry will stagnate and anyone trying to sell a property will find it nigh on impossible. The campaign against investing in property in Cyprus is proving to be very successful and from talking to investor friends from Russia they are also aware of the dangers of the Cyprus property market and banking industry.

  • Odd_Job_Bob says:

    Personally, I blame the film Trading Places.

    If anyone offers you “Fivers for a Pound” (or Swiss Francs instead of British or Cyprus Pounds) and, due to a load of reasons you don’t understand (“the Swiss Franc is traditionally a strong currency”, which is why you SHOULDN’T take out a loan in it if it appears cheaper at the moment, or “You have to take out a loan with the developer’s bank”, would anyone stand for that in England?) it works out cheaper for you, there has to be a catch.

    If an investment adviser (not legal adviser, as it’s not their field. You wouldn’t ask an electrician about plumbing, would you?) could second-guess the market, the very last thing he’d be doing would be telling YOU!

    As harsh as it may sound, people thought they were on to a good scam by borrowing in a currency that appeared to make the possibility of a house in the sun an affordable reality. Gullible, naive, trusting: all words which can be used to describe an attempt to circumvent normal processes and fit in with the “artful ways” of the new host country.

    The (now defunct) UK series Hustle has this line: “You cannot con an honest man”.

    I have enormous amounts of sympathy for people caught up in the Great Cyprus Lending Scam (as it’s all about the money and NOT property….), but I’m afraid nobody twisted anyone’s arm into signing a Swiss Franc mortgage deal.

  • Howard Skelton says:

    Whilst the banks and developers may well be guilty, as I am sure that there were some hefty commissions available to the developers, my personal experiences actually put blame upon the buyers.

    Whilst working for a well known currency exchange company I came across many buyers seeking to establish long term currency transfer arrangements to hedge against currency movements. In my case normally Sterling into Cyp Pound and then Euro. Those that approached me for Sterling/Swiss Franc or Japanese Yen, were very firmly advised of the risks involved as both I and my company were firmly against these transactions.

    However, many of the clients disregarded our advice re taking the mortgages but took our advice re hedging the payments. This hedging would be reviewed bi annually, in line with the rates at each anniversary.

    So I ask myself..Why would the clients see the sense of hedging but not that of dangerous long term movements……

    As I told clients at many seminars…If I could read the financial markets I would be conducting my business from my mansion in the Bahamas. Why did they feel they knew better?

    Thank goodness for retirement.

  • Dunn Good says:

    We borrowed in Swiss Francs but were told that we had to change our Bank to the same as the developer in order to get the loan. The developer then guaranteed our loan from the bank, a three way deal. The reason being that the Bank had received a memo from H.O. that using a sales contract for security was not safe.

    We were told that if we followed this advice the developer would not charge a surcharge for borrowing from a different bank. The Alphabank gave us a list of different currencies that we could use but suggested by e-mail that Swiss Franc would seem advantageous to us. Despite taking legal advice for nearly 1000 euros we have been told we have no defence.

  • Susan says:

    We have a Swiss mortgage and the bank which was taken out in 2005. This money then sat in the bank earning interest for the bank while we waited for our house to be completed. We made no payments over this time and no interest was charged. It would be interesting to know what the bank earned in interest in this time?

  • Adrian says:

    You would have a better chance of straightening out a corkscrew than getting a straight answer from the government, lawyers and assorted bankers (rhyming slang).

    I just wish that there was a quick way to make them conform to EU law instead of them cherry picking the ones they want and “fudging” the ones they don’t want because it would spoil all the corrupt scams.

  • Alan Waring says:

    I rest my case. Over the last couple of years, I have described in various articles this state-mediated fraud as an output example of sovereign corruption. I have also used the Cyprus Title Deeds-cum-Fraud Scandal as an extensive case study in a chapter on Immovable Property Fraud in my forthcoming book Corporate Risk & Governance ISBN 978-1-4094-4836-5.

    Don’t expect any admissions of guilt, apologies, remedial action or redress from this crew. It will be denial, blanking and obfuscation all the way. I re-iterate AndyP’s ‘good luck’ wish to Mr Kounis in getting even a reply to his request/demand. Hell will freeze over first.

  • Costas Apacket says:

    More Like Shark Gate

  • @Alexey Golovanov – when you mention benefits, which clients are you talking about?

    Those buying property or the property developers?

  • Alexey Golovanov says:

    So, in fact, the bank(s) will insist that it acted in good faith, it didn’t know the difference between loan sharking, usury and banking, and all these was for the benefit of the clients?

  • andyp says:

    The very best of luck to you George in getting a straight, if any, reply from that lot.

    I will also donate 100 euros to your chosen charity if The Stigette is not on your list of Lawyers to be questioned.

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