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Cut interest rates, write off debt …

The Cyprus government must take a close look at the excessive household and business debt, and urgently raise the issue of possible debt write-offs, obviously under certain conditions and restrictions.

household debtVARIOUS bankers have come out against cutting lending interest rates and in favour of extending the loan repayment period.

The reason is simple: an interest rate reduction of around 3 percent on the overall loan portfolio of Cypriot banks would entail an annual drop in interest payments by borrowers of some €1.74bn (or 3 percent of €58bn).

Falling revenues from interest (including interest on late payments) would seriously deplete banks’ profits as well as their capital base. These losses may therefore necessitate a new haircut, the bankers argue. Fair enough. But could it be that all these ‘massive’ revenues from the interest (which incidentally happens to be the highest in Europe) are in fact illusory, given that most borrowers today cannot (nor will they ever be able to) service their interest payments? Incidentally, no mention is made here of paying down the principal. One can conclude therefore that we are living in a sort of banking dreamland, and important decisions need to be made to correct the problem.

The current ‘recession’ in Cyprus is the outcome of the havoc wreaked upon society and the economy following the recapitalisation of domestic banks via the ‘bail-in’, or haircut on deposits. Other reasons are the reckless over-lending to households and businesses, excessive public debt and deficits and so forth.

Thus the government as well as the ‘recapitalised’ domestic banks must realise that, in order for the economy to grow on a solid foundation, household and business debt should be immediately – and significantly- reduced. Interest on late payments and charges on delinquent loans should be written off immediately, including capital interest which borrowers will never be able to pay off mainly because of prior exorbitant extortionate charges levied by domestic banks.

Just days ago, and six years after its banks went bankrupt, Iceland went ahead with a debt write-off for households, targeting mortgage debt in particular. The write-off of €25,000 per mortgage will directly benefit around 85 per cent of households.

Moreover, whereas in Cyprus deposit rates have been seriously scaled back – though they began rising a little this month – current as well as new lending rates remain sky-high instead of being slashed by a corresponding amount (or even perhaps more than that). The slight reductions in lending rates recently announced – a public relations stunt more than anything else – are not sufficient.

In order for the economy to reboot, businesses need access to cheap credit. The Cyprus government must take a close look at the excessive household and business debt, and urgently raise the issue of possible debt write-offs, obviously under certain conditions and restrictions.

Dr. George Mountis
Regional Managing Partner
Banking | Wealth & Trust | Asset Management advisory
P.P. (The Parthenon Partners) & Co
Tel: + 357 – 99 49 41 42
Email: [email protected]
Web: www.theparthenonpartners.com

Readers' comments

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  • Jim says:

    Cyprus cannot afford to give a haircut to debts owed to banks by anyone. By suggesting there may be a debt haircut, has already encouraged some to stop paying their electricity bills, as the electric company has said they won’t cut people off. A person I know has done just that & is also not paying his mortgage. He can afford to pay both, but says why should he. They won’t throw everyone out on the street is his theory. It gives him more money to spend.

    I have no doubt there will be many more with the same idea.

    It is all going to end up a bigger mess than it is now.

  • Pippa says:

    We seems to be going round in circles and I for one am getting very dizzy. All that seems to be achieved is more discussions and no outcomes. Is anyone actually making any positive progress in sorting out this fiasco?

    Please could there be some action, let those who have paid for their properties in full have their Title Deeds, those who have mortgages need to have a sensible and affordable repayment plan. Is this beyond the capability of these useless financial sector managers?

    How about some sensible decisions and let the Cyprus property market start to recover?

  • Andrew says:

    Write of developers debts by all means, but for Gods sake give home buyers their title deeds first. These greedy lacklustre developers would never freely issue title deeds, of their own accord. They would simply withhold them as a means to inflict ransom charges.

  • andyp says:

    All well and good Dr George but what about the elephant in the room?

  • Janner says:

    Cyprus is sat on borrowed time regarding its loans. The world’s banks are also in the same boat, kept afloat by low interest rates. The problem for Cyprus is the amount of corruption involved. There is no chance of ever recovering the debt. The Cyprus banks are just hoping they can extend loans until this mess is resolved. The problem is, it never will be until the debts are called in, businesses, individuals and banks must go bust for a normal market to emerge.

    Messing with the true value of capital and debt is like tinkering with DNA….something will happen but it won’t be pretty!

  • Deanna says:

    Sorry, but conniving, deceitful developers and their banker-friends must not be let off the hook to start all over again.

  • Ivan says:

    Dr George as usual makes a lot of sense.

    Perhaps the banks would like to remove the extra 2% p.a they stuck on mortgages and also reduce the debt by the amount they have overcharged the past few years.

    This allowed them to encourage deposits by offering high deposit interest rates so they could then lend that deposited money to developers and directors with little or no security!

    Now they are not lending the money or paying depositors interest can have a refund, or will the theft continue unchecked?

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

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