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The Greek haircut and the Cyprus real estate market

BANKS lend approximately €0.90 of every €1.00 they take in deposits. The remaining €0.10 they hold as ‘liquidity’. Liquidity is a financial term that means the amount of capital that is available as cash at the request of the financial institution. Today, most of this capital is tied up in investments such as equities and bonds, which (theoretically) can be sold and converted into cash at the discretion of the bank.

For Cypriot banks, a part of this €0.10 is held in Greek government bonds which are effectively bank loans to Greece. How much of this €0.10 is in Greek government bonds varies from bank to bank, but the significance of the recently agreed 50% ‘haircut’ in Greek bonds is virtually identical for them all.

The ‘haircut’ reduces the amount that banks will receive from Greece when they redeem these bonds and the interest they receive from them in the meantime. If Greece has borrowed €0.04, the 50% haircut means that it will only have to pay the banks €0.02 – and the banks will lose the other €0.02.

Banks have a number of options open to them to increase/restore their liquidity from €0.08 to €0.10.

Their first is to issue their own bonds, i.e. borrow money from someone else. But this option is inappropriate because, as a result of the market’s low assessment of the Island’s economy and rising bad debts on existing loans, the banks will have to offer bonds at high interest rates.

Their second option is to attract new deposits through higher interest rates; this is already happening. However the increase in deposit rates will also increase the cost of borrowing and will lead to further damage.

The third option available to the banks is to increase their share capital by issuing more shares. For existing shareholders, in order for their investment not to be ‘diluted’, it means that they will have to give more money to a bank to receive the same level of dividend they are receiving on their current shares. But what shareholder, be they new or existing, would want to invest in a bank in Cyprus in the current environment? Cypriot banks are not profitable and are unable to pay dividends – so what is the point of investing in them?

As a consequence of the Greek bond ‘haircut’:

  • Firstly, the cost of borrowing on new and existing loans will increase as the banks try to recover losses from their investment in Greek bonds.
  • Secondly, there will be a further reduction in lending by banks and stricter criteria for those wishing to borrow money.
  • Thirdly, the reduction in loans is likely to reduce growth in the economy and lead to a significant increase in financial pressure on households.
  • Finally, the knock-on effect will be an increase in non-performing loans which will increase further the pressure on financial institutions and the Island’s economy.

And what about real estate?

In this article we have not discussed the real estate market, even though the sector has caused a significant part of the problem in which we find ourselves and holds part of the solution. However, as a society, we have yet to recognise that ‘the problem’ will not go away any-time soon. Slowly slowly – and when it’s probably too late – we will then move on and try to solve it.

About the author

Pavlos Loizou MRICS is the lead consultant at Leaf Research

Leaf Research carries out real estate market research and financial modelling for development projects and for properties that are used as part of a business. The company specialises in development, tourism & leisure, health & wellness, the education industry, and ‘green energy’.

(Originally published in Greek, this article first appeared in the Simerini Business Weekly supplement published on 28th October, 2011)


  1. Bang!
    Georgie Papi is dead. Long live the EU.

    He tried to play political hardball with Merkozy and, due to sufficient numbers of people IN HIS OWN PARTY, plus various self-serving politicians back home who showed the French and the Germans that THEY could be relied on to keep Greece in the Euro (so no need for a 100% bail-out or any uncomfortable referendum which may deliver the “wrong” result), a democratically elected government is being removed in favour of an unelected coalition that will keep Greece in the Euro, irrespective.

    According to many sources, democracy in Italy is next to fall (even though it’s impossible to have any sympathy for Berlusconi).

    Did anyone see Sarkozy on telly the other day? According to him, the EU is the only thing keeping France and Germany from trying to tear each others’ throats out on the battlefield. Again. For him, the Euro and EU WILL continue, irrespective of what they have to do to keep it together.

    What does it mean for us? Don’t expect any EU, MEP, MP, EU parliament help for any issues we have here. Brussels is prepared to do anything to keep the club together, in comparison to killing democracy (plus plunging any EU “consumer nation” into decades of austerity and poverty), WE, the property wronged here, aint nuthin’.

  2. Hi Nigel,

    I agree, he may ask that in the referendum.

    However, I don’t think he’ll ever get there, certainly not in the present political climate. I just read this article in the FT (after I wrote, honest!):

    Papandreou will fall but he is right to take this gamble

    The Greeks don’t want the Drachma back, but they want the austerity measures even less. Ideally, they want to remain within the Euro, but have all their debts paid for them and a clean slate arrived at: structural reforms without the austerity measures.

    This unexpected announcement about the referendum was designed to put pressure on the France/ Germany axis (or it could have easily been discussed with them first). If Merkozy caves in (as the cost of the Euro crashing would be much higher than the is it €300 – €400bn it would cost to prop up Greece? Nobody knows the true figure…) then the ideal situation for the Greek electorate would be arrived at and Mr P will carry the day!

    The BIG (massively historical, by all intents and purposes) question is this: has he judged France and Germany correctly?

    I do believe he may have (if there’s not been a coup by the time he gets back from, the G20!)

  3. @Odd_Job_Bob – there is another theory that says that the question Papandreou will ask is “Should we keep the Euro”.

    It seems that the majority of the population would vote yes as they do not want to return to the Drachma.

    This would enable Papandreau to implement whatever economic measures are necessary to remain in the Eurozone.

    It’s a high-risk strategy!

  4. Is it just me, or is Papandreou in the process of playing a blinder?

    I mean, this Greek haircut of 50% ain’t never gonna happen. It currently has debt of 160% of GDP and the economy is contracting at 7% p.a. The numbers just don’t add up.

    The proposed structural reforms and austerity measures, which are HUGELY unpopular, will NEVER be agreed. Papandreou knows this. Even if they were, Greece WILL fail all its targets (as it has for the last year and a half). Oh, and it’ll reduce the Greek economy to the Latin American eternal debt situations of the 70s and 80s. Really not nice.

    So, what’s he playing at, announcing the referendum WITHOUT telling Merkozy about it? Trying to get the country to back him or sack him?

    Nah. A “No” vote, which is pretty much guaranteed, will allow him to take the country out of the Euro, with no blame apportioned to him (“It is the will of the Greek people”). The deals of last week and the €8bn necessary to keep Greece afloat for the next coupla weeks were just buying time, in the hope that once promised, the money will HAVE to be paid (er, maybe not).

    “Get it over with, get it done quickly”, seems to be what this referendum is about. This haircut nonsense would be a slow economic death for the country, political suicide for anyone involved in it and solves nothing.

    Mr P is an astute politician. He has made the calculation, based on his perception of the need for the Germans and the French to keep Greece in the Euro (and thus keep a few of their banks from going bankrupt), to go for broke. His message, I think, is pretty clear: Bail us out COMPLETELY or we walk.

    The ultimate in brinkmanship, but I think it may work. But don’t quote me on that…

  5. I agree with what Pavlos has to say. Although the market does not need some one to underline the problem, it needs someone to show the path to recovery. Mr Pavlos is an estate agent, he should give us an indication on how to overcome this situation and bring back some confidence in the market to start buying again.

  6. A useful reminder of the fundamentals of banking practice and how Bonds work etc but I think many of us who scribe here have in fact ‘recognised the problem’ and that it fundamentally involves the Cyprus property markets; many of us also recognise that ‘it will not go away any-time soon’. Just that the Cyprus government and general population seem to be still to be in Denial and ‘Waiting for the Next Miracle’. But probably the recently announced Greek referendum and the Eurozone leaders’ responses suggest these matters will soon be brought into brutally sharp focus as regards Cyprus. Then it may well be tine for high-level, I.e. government, Action!

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