Some people turn recluse and inert, refusing to try out anything new or to make a new start – particularly when their businesses are in financial hot water. Others are ‘cautiously optimistic’, believing that the crisis is temporary and that it shall pass, continuing to behave as they did before and thinking that, at some point, the ‘economy has to get better’, an attitude which prevents rethinking past habits. To us, both these outlooks are ineffectual. We must not allow ourselves to turn inert amid the current fluid situation in Cyprus; on the other hand, we must also not become too optimistic, thinking that all the problems will vanish as if by magic.
The portfolios of Cypriot banks comprise more loans than deposits (and capital). Even after the banks have been ‘recapitalised’, their balance sheets are deep in the red. Whereas a healthy banking system seeks to lend out depositors’ ‘stagnant’ savings (in order to collect a loan interest greater than the savings interest), the banking system in Cyprus is running a deficit which is currently being covered through liquidity guarantees from the European Central Bank and the ELA (Emergency Liquidity Assistance) mechanism, seeking to deleverage from the real economy.
The banks are desperately trying to collect on as many delinquent (or problematic) loans as possible, thus draining liquidity from the economy and from businesses, which have seen their profits evaporate (and turn into losses), thereby exacerbating those very conditions that make a business non-viable.
Take a business that continues to function at a basic level, mainly thanks to ‘good’ partners. Its revenues go toward paying salaries, the electricity bill, VAT, rent, servicing its loans (as well as paying legal fees for any bank lawsuits – which ultimately backfires on the banks themselves) and, of course, paying its suppliers. But as the business finds it increasingly hard to collect – unless if it’s in retail – it lags behind on its payments, and as a result resorts to settlements to repay what it owes at a later date; meanwhile any new obligations are not serviced. As businesses can no longer borrow from the banks – not because the banks are ‘evil’ but rather because the loans they have given out exceed their deposits and equity- they seek to borrow from everyone else, that is, the suppliers, their staff etc. This is the vicious cycle that we are in today!
Our businesses today have morphed into ‘machines’ that churn out unpaid and artificial debt. Not because they are poorly run, but because of the simultaneous contraction of the private sector, the sharp decline in their turnover, the banks tightening the screws on debt collection, and last but not least the loss of income of the businesses’ clients.
We must therefore adapt, trusting in ourselves and being open to the view that, whereas the crisis has created problems that need addressing, at the same it presents opportunities. This is an opportunity to change mentality, both with regard to the banking system and to the country as a whole. Let’s engage in some self-criticism, recognize our mistakes, and try to overcome the impasses, shedding old habits; and this goes for businesses and banks alike. It’s time for us to change.
Endnote: Through JEREMIE (Joint European Resources for Micro to Medium Enterprises), a co-financed instrument – supposedly aimed at ‘propping up’ micro and small enterprises – the Bank of Cyprus is even now asking businessmen (and even their relatives) to put up collateral in the form of homes (and other real estate) for loans, as if no other means exist to collateralise a loan. In short, we are pursuing the same model which led our banking system to the state that it is in today!