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The ballooning Cyprus fiasco

Troika inspectors are swarming over Cyprus to find out how much money the banks would need to deal with their putrefying balance sheets, and how much the government would need to stay afloat.

THE government of Cyprus is desperate. It is deliberately slowing down paying its contractors.

“We are talking about final payments and settling of bills for work that was carried out and passed through the inspections, and for which an order was issued for payment,” said Nicos Kelepeshis, head of the Federation of Associations of Building Contractors. 120 days, and more. The government also told inspectors to delay inspections in order to slow down payments.

In June, Cyprus had held its nose and requested aid from the Troika, those despised austerity thugs made up of the European Union, the European Central Bank, and International Monetary Fund that have, in Cypriot eyes, wreaked havoc in neighbouring Greece. And this week, once again, these despised Troika inspectors are swarming over Cyprus to find out how much money the banks would need to deal with their putrefying balance sheets, and how much the government would need to stay afloat.

If a deal is reached – sticking point are the conditions, namely structural reforms, budget cuts, privatizations, and tax increases – the first bailout money might arrive in October. But Cyprus is bankrupt now! So, the government is raiding the “semi-state” sector. Last week, it pilfered €101 million from the Cyprus Telecommunications Agency, €50 million from the Ports Authority, and €24 million from the Human Resource Development Authority. Now it’s going after the pension fund of the Electricity Authority to get a couple hundred million. This place is seriously out of money.

At first, it was just a funding crisis. After markets closed the door, Cyprus went begging to Russia and got €2.5 billion late last year. That money has now evaporated.

Then it was the banks. In June, the Bank of Cyprus needed €500 million and Popular Bank €1.8 billion – in total €2.3 billion. A black hole in their regulatory capital had developed when they were forced to write down the defaulted Greek government bonds on their balance sheets [“We owed it to our children and grandchildren to rid them of the burden of this debt,” sneered Greek Finance Minister Evangelos Venizelos at the time as private sector investors got whacked with a 74% loss. Read…. “A harder Default to Come“].

But the banks were joking about the €2.3 billion. They’ve also been eviscerated by Greek corporate debt – 40% of the loans on their balance sheets. They’re turning to trash as Greece slithers deeper into its fifth year of recession. Then there are the loans left over from the real estate bubble and title-deed scandal that the banks themselves colluded in. An estimated 130,000 properties are without title deeds – in a country with only 838,000 souls. Those who think they own these properties don’t legally own them. A nightmare gumming up the future of the country [I warned about it in October…. Another Eurozone Country Bites the Dust].

And so in June, as bailout talks with the Troika took off, the €2.3 billion were declared a joke. “Eurozone sources” mumbled something about €10 billion, including a government bailout, which hadn’t needed one before.

Cyprus has been trying to triangulate its bailout negotiations by adding China and Russia. They’re ogling the vast natural gas reserves found off the coast. Awash in natural gas, Russia is the major supplier to the EU through a system of pipelines, and it wants to keep control over its export market. China wants to grab resources around the world. And on July 6, Russian Finance Minister Anton Siluanov confirmed, “Yes, we have a request from Cyprus. They’re looking for €5 billion.”

So since Monday, the despised Troika inspectors have been plying their trade. And it didn’t take long for it to seep out that the banks alone would now need a bailout of €9 billion – a stunning amount for the banks in such a tiny country. Plus, the government would need €4 billion. For total package of €13 billion.

But the €9 billion for the banks is likely to grow even further – because bad debt isn’t bad debt in Cyprus. Under Cypriot rules, loans on the banks’ books that are over 90 days past due aren’t considered bad debt, and no losses have to be recognized, if the loans are secured. Hence, a mortgage that is in default doesn’t have to be written down because the bank might eventually obtain the property, which takes many years, and then sell it to recuperate its money. But property values have collapsed. And worse: the title-deed fiasco resulted in banks securing two or more mortgages with the same property – and only one of them has any value at all. But they’re all “secured”; hence, none have been written down.

The Troika inspectors are circling. They want those loans written down. Government and banks resist. The outcome of this clash will be a big factor in determining the bailout amount for the banks. And the government bailout of €4 billion will certainly rise. The first time is only the beginning – Greece, if it were to stay in the Eurozone, would require a third bailout. Standard and Poor’s tacked on some extra billions and came up with €15 billion. 83% of GDP. €18,000 ($22,000) per resident. Another bottomless pit. Is that why Russia and China haven’t jumped into the fray?

In the run-up to this crisis, people have gotten rich and taken their money to Switzerland. What’s left is debt. But instead of letting it blow up and disappear, wiping out creditors and equity holders in the process, it’s being replaced with new money, but from taxpayers elsewhere: 29% from Germany, 22% from France, even from teetering Italy and Spain….

But Spain is on the brink. The word is out: default. Or bailout. Read…. The Extortion Racket Shifts to Spain.

And here is a great perspective by George Dorgan, a portfolio manager in Switzerland who used to live in Italy. Read…. Italian Euro Exit: why it might come in 2-3 years and why it will help the Eurozone and Italy.

By Wolf Richter at The Testosteronepit – where the truth comes home to roost.

Readers' comments

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  • Costas Apacket says:

    Peter G Davis, – yes you’re correct, but then you’ve got to look after your friends haven’t you?

    How else would Uncle Stavros get his big final payout?

  • Peter G Davis says:

    Costas…didn’t the same happen with Eurocypria which entered a voluntary liquidation on Monday 29th November 2010, just after the money given in Government grants was first used to clear off loans to the Banks?

  • Costas Apacket says:

    I’m with Mike, since they Cypriot Government, or Catastrofias, still intend to pump millions into CY Air and still intend to proceed with political appointees into TEPAK and other organisations, even at a time when the writing is on the wall for all to see.

    Just what will it take for Catastrofias to actually get it?

    Or maybe he’s just incapable or unwilling to see reality staring him in the face?

  • Mike says:

    It may be worth considering the following. Ring any bells?

    In 1887 Alexander Tyler, a Scottish history professor at the University of Edinburgh, had this to say about the fall of the Athenian Republic some 2,000 years prior:

    “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse over loose fiscal policy, (which is) always followed by a dictatorship.”

  • Stuart says:

    @Mike. Rather than ‘cynical’ I would call you ‘prophetic’. Any bail-out will very quickly evaporate in the warm Cyprus sunshine, so the ‘Oliver-Twisted’ “powers that be” will be back asking: “Please may we have some more?”

  • Steve says:

    This is a good summary of where things are going in Cyprus, but everyone will read “tax increases” and move on to the next bit of woe, so it’s not sinking in. The current Cyprus state business model is not working, not now and not in the future, so it has to change the model and get enough money from somewhere until the gas flows begin and only then by selling it to other countries – what a fire sale that will be! Is it now time to settle with the Turks, stop financing an army and start taxing expats? If not, where is the money going to come from? Writing down debt and collecting as much as possible from the Troika and then defaulting, which is what the Greeks are going to do, will product a nightmare for the whole population in Cyprus, far worse than things look now. Show us the money!

  • Jim says:

    When the actual true scale of the economies plight is revealed, it may well be in such bad shape, that makes a recovery within the Euro framework, impossible. All the more so given the intense opposition to any meaningful cuts in government expenditure, from both the government & their social partners (unions).

    This opposition to solutions & the delegations to Russia in attempts to borrow more money, has led to the Troika leaving Cyprus to stew for a few months.

    It may become tempting for Cyprus to stay in the EU, but abandon the Euro & return to the Cyprus pound. This would then allow the government to devalue their way out of trouble. This change would happen over a weekend, when the banks were shut. On the following Monday, all Euros would become devalued Cyprus pounds. As more money was required, the government could just print more.

    Whatever happens, life in Cyprus is going to be harder & full of confrontation & civil disorder.

  • Mike says:

    I fear that no matter what is suggested by way of fiscal prudence we will just agree to do what is necessary to secure the loan (with no intention or means of paying it back) and then just go on as we always have done and ignore all calls to abide by the terms agreed. If we ignore it long enough it will go away as has been proven in the past.

    For all those who would consider me cynical – let’s just wait and see shall we. ‘This is Cyprus’.

  • Robert Briggs says:

    The Cyprus Authorities / “Powers That be” would be ill advised to try and fool or bulldust the Troika.
    These guys have seen it all before & will not tolerate any nonsense.

  • Gavin Jones says:

    Wolf Richter obviously knows his onions and especially the ‘artful ways’ that are de rigueur in Cypriot society. Take the treatment of non-performing loans. Naturally, Cyprus has its own unique way of describing them which cuts right across internationally accepted norms. Mr. Richter also touches on the loan exposure of Cypriot banks to Greek companies and Cypriot developers: a veritable cocktail of financial Armageddon.

    He also has a handle on the title deed scandal and has all the figures at his fingertips. In addition, he illustrates that for whatever reason, well over half the population on the island are living in houses that they don’t actually own: not exactly reassuring and belies the maxim that one’s home is one’s castle.

    Sorry, Cyprus. Your ‘artfulness’ has been well and truly rumbled and those awfully nice people with all the money, the troika, aren’t having any of it. Come in number three, your time is up.

    To quote the celebrated French writer Francois Rabelais, “Debts and lies are generally mixed together.” They certainly are.

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

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