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.”