OVER the past months Cyprus’ society has learned various things about the scale of its economic and financial problems and the next steps forward.
Based on the Central Banks’ new definition of non-performing loans (NPLs), the Bank of Cyprus had 36% of NPLs up to Q2 2013, whilst Hellenic Bank and the COOPs had 44% and 45% respectively in the first nine months.
The review of the Troika at the start of November “went well” – whatever that means – with the Troika reminding the government that it is to provide it with a privatization schedule before Christmas. The ‘carrot’ to the government was the ‘you are on track’ and the ‘stick’ that ‘no privatization schedule, means no next tranche of money’.
Various business associations, industrial organizations and vociferous politicians have been calling for interest on existing loans to be significantly reduced. The logic is, that if businesses have lower financing costs on existing loans, then they may be able to pay them back more easily, which would improve the overall picture of NPLs and release working capital.
A similar approach was taken in the UK, where the Bank of England slashed interest rates to 0.5%, thus reducing the effective rate on mortgage loans to under 2.0% and safeguarding banks from an increase in NPLs. Whilst the ECB has taken similar steps, this month reducing interest rates to 0.5%, this does not translate to lower interest payments for borrowers in Cyprus as most loans are linked to each bank’s own base rate, which is set separately by the bank and does not necessarily relate to that of the ECB. Local banks ‘need’ to charge higher rates because they get their financing from depositors, rather than capital markets and in order to mitigate part of the losses from their NPLs.
Politicians have called for a ‘haircut’ on loans (barbers must feel so cool right now); a blanket ‘haircut’ on debt is ill-advised as it will entice even those (few) who are paying them back to stop paying altogether. This in turn will lead to less money recoverable from banks and COOPs, which will worsen their capital adequacy ratios and make depositors even more worried about another ‘haircut’ on their savings.
Furthermore, it creates a moral hazard; a moral hazard is a situation where a party will have a tendency to take risks because the costs that could result will not be felt by the party taking the risk. A ‘haircut’ on loans would benefit those who borrowed money during the boom and who can’t pay it back, rather than those who (1) didn’t borrow money, (2) are paying it back.
Banks continue to deleverage slower than they are shedding deposits. Following the overall increase in credits outstanding, together with continuing deposit loss is translating to increased loans-to-deposits ratios. The illiquidity of the banks raises lots of questions, not only on how interest rates could possibly decline, but also on how the credit crunch can possibly be reversed at all. This is why banks have been progressively inviting people and companies to restructure their NPLs.
Loan restructuring means, in its majority, a longer repayment period typically at the same or a higher interest rate. Whilst the borrower pays less on a monthly basis, over the lifetime of the loan they end up paying considerably more. Thus, a restructured loan immediately reduces a bank’s NPLs and increases its profitability in the medium to longer term.
So, what’s next? There is considerable mistrust in the marketplace, with companies and people struggling due to the lack of turnover and liquidity constraints. This will slowly subside, but in the near term it will continue to cause problems.
Of more concern is that Cyprus has no more Cyprus-owned banks. Cyprus Popular Bank has gone to bank-heaven (or…?), Bank of Cyprus is 60% owned by non-Cypriots and Hellenic Bank is 30% respectively owned by US hedge fund Third Point and Belarus-owned Wargaming.
What’s the problem with that you might ask? Well, combine high NPLs with the Troika’s requirements to make foreclosures easier and what you get is an easier mechanism to ‘crack down’ on those who fall behind on their loan repayments. Throw in the mix non-local owners who either want to hit a specific threshold on their investment return or simply want their money back, and you have a pretty robust motive to undertake this ‘crack down’.
A damning report by a UK government adviser caused RBS to defend itself against the claim that it took advantage of ailing companies, seizing assets at a knockdown price. In Cyprus things will be much more interesting; if one controls the supply of stock by owning so many NPLs and also has the source for financing to acquire it, then it is difficult to imagine that a similar situation will not arise.
It is unlikely that this brainstorming has not taken place somewhere in government or in the boardrooms of banks. However, there isn’t that much that the government and banks can do given that they have no choice but to adhere to the commands of our creditors. As the saying goes, “beggars can’t be choosers”.
This leads me to a puzzle which I am yet to solve: “If I hit myself and it hurts, am I weak or strong?”
Pavlos Loizou MRICS VRS | Managing Partner
Leaf Research
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I don’t know about anyone else but I honestly get fed up reading these articles where the major issues with Cyprus are constantly ignored and they drone on about the bleeding obvious as if we need to be enlightened. Rubbish. We all know what it is yet these so called professionals never mention it. Jaw jaw, yet again.
The banks were negligent.
Their definition of NPL was based on property or collateral owned by the debtor, not on the loan being correctly serviced within the terms of the agreement.
This definition was only used in Cyprus. As a result developers were encouraged to increase the value of their empty houses on paper, whilst in truth their value was actually falling.
There is a saying that. “An old debt is a bad debt” And even Blue Chip companies default on old debts.
The negligent banks are not only unwilling to take a ‘hit’ they want to earn capital out of their negligence…really?
If you hit yourself you could be stupid or masochistic. If someone else hits you, ask did I deserve that. If the answer is no, then hit them back even harder. The Banks on the other hand are cunning devious and despotic, but certainly have no leaning toward self flagellation.
In the event that NPLs do get extended , how will that sit alongside issuing title deeds by 2014. Will the Banks say here are the title deeds my developer friend (cousin), now be a good fellow and give them to the honest folk who have paid for them.
The Banks are happily waiting to cause misery to thousands of innocent buyers. No doubt when the damage is done they will award themselves a big fat bonus too.
Here we are again, missing the point. The NPLs are being caused by the banks insistence that the homeowner repay the developer loans which the bank issued in the first place.
If we take my circumstances as an example. After my initial deposit I took out a £100K mortgage sold to me in Swiss Francs with a repayment of £750 per month. It was a short term repayment loan. When the crash happened the repayment went up to £1100 per month which started to become unmanageable.
I then paid an amount that I could manage which of course started the initial borrowing to rise. It took the bank nearly 3 years to restructure the loan by extending the loan period which then took the loan to £155K.
The nail in the coffin was when I was told that before the title deeds could be issued I would have to pay a proportion of the developer loan. The reason given was that the developer was in trouble and could not repay his loan. The additional figure was around £30K which has now taken the initial loan of 100K up to £185K.
As a token of goodwill the bank has offered to reduce this figure by 20% if I can find another company to finance the loan. Needless to say nobody will touch it.
My loan is now Non Performing and will remain so.
I understand author’s line of thought; however, we should keep in mind that it is the local management/ownership which crashed the banks in the first place. So perhaps it is not so bad if banks are for a while run by people disconnected from the local “you scratch my back, I scratch yours” mentality, e.g. purely concentrated on the bank viability and not various interests unrelated to bank direct operation.