WHILST reclining in the comfy chairs after a particularly satisfying luncheon at the club with a few long-term banker acquaintances, the conversation turned, as it does, amicably but nevertheless purposefully:
“So, (Spirit of) OJB, Old Boy, with regards to this Cyprus question,” Attention levels increased discernibly whilst the semblance of diffidence was proffered, “we hear about NPLs and all that…”
Ears, even in the dingiest, felt-lined corners of the members’ lounge, pricked up. Rumours of the fate awaiting the Eurozone Testing Ground Country (à la Scotland under the 1980s Conservative administrations in the UK) had long been bandied about, but now real information from an alleged “Insider” (the only information that one could reliably trust as “Official Communiqués” and audited accounts were only for the consumption of the general public) could herald a veritable gold rush in the futures market for ownership of the much-discussed future assets of the beleaguered Mediterranean island.
“Exactly how much is owed by whom to whom for what using which collateral and means of payment and who will eventually pick up the tab, if anyone?”
(Apologies for the convoluted nature of the question, but I did say they were bankers!)
(Spirit of) OJ cleared his throat (to match his “after dinner fine brandy-numbed, completely-empty-and-struggling-for-a-response” brain). This was going to be a tricky one…
“Well, you see…” he began, confidently but completely vacuously…
Then, the club bell tolled (phew!) and a most important announcement was made: “Flight MH370 now “missing” for 1 month!” (accompanied by loud cheers from hidden figures shrouded in the darkness of the lounge). Everyone instinctively knew: only another 5 months and the aviation air disaster statute of limitations would expire, meaning no compensation could be claimed by relatives of any of the victims! (Correction: alleged victims. Phew, close one…). None of the Lloyds Names secreted in the room could withstand another year of catastrophic losses like 2012…
(Spirit of) OJB breathed a sigh of relief (which was noted but ignored – for the moment – by the assorted after-dinner brandy sippers, to be used as ammunition against SoOJB, if and when required in the future).
In the taxi on his way home, SoOJB began to think about the narrow escape from being revealed as completely clueless – in front of his present and future enemies, currently politely masquerading as the opposite – of the full extent of the Great Cyprus Financial Swindle. In order to prepare his future defence, which he was sure would eventually be necessary (probably sooner rather than later) and before going to bed, he sat at his desk. No-one would be so impolite as to ask about the detail of the pronouncements they were sure to try to elicit from him, at the next possible opportunity, re: the Fate of Cyprus, but he’d have to make sure that he’d done his research anyway.
Using the wonderful figures from: The RICS Cyprus Property Price Index (Q4 2013); the latest Cyprus Economy and Real Estate Forecast conducted by Leaf Research (as of 31 Mar 2014) and the wonderfully informative and insightful, although playfully speculative and highly entertaining piece Property Developers: Run Forrest! Run! of 23 Feb 2014 by one Pavlos Louizou, he decided to put together some probable scenarios in answer to his banker mate’s question. The following are his findings:
Taking for granted the accuracy of the Cyprus Economy Forecast, we have:
|Total Household Loans||€ 11,800,000,000.00|
|Total Household Loans as % of Total Loans||53.00%|
|=>||Total Loans||€ 22,264,150,943.40|
|Total Non Performing Loans||€ 24,100,000,000.00|
|NPLs as % Total Loans||108.25%|
|NPLs as % GDP||147.00%|
|Construction Non Performing Loans||€ 4,620,000,000.00|
|=>||“Other” Non Performing Loans||€ 19,480,000,000.00|
SoOJB attempted some fairly simple calculations on: Cash Ratios (does Cyprus PLC earn enough money to pay interest on what it owes?), Free Asset Ratios (the money CPLC says it has, can it actually USE any of it to pay off what it owes?) and Debt Asset Ratios (how much CPLC owes compared to how much it’s worth and has it got any chance of ever paying any of it off?) but his head began to overheat.
Due to: lack of information; seemingly bizarre figures (i.e. from the above, total Household Loans at 53% of Total Loans means that Total Loans are €22.2bn, Total NPLs are €24.1bn, thus 108.25% Of all loans given are NPLs (thus bad), surely some mistake? (hic. After dinner brandy again, apologies)) and general tiredness, the calculations just didn’t seem to add up.
Factor into any attempt at calculation the new, empathetic and exciting governmental proposals of : you can give your property to the government and rent it back from them until you die, leaving, well, nothing really, except probably a debt, for your nearest and dearest; the recoverable collateral of primary residences, if the bill goes through, will be converted into irrecoverable collateral; as well as the teeny-weeny virtually irrelevant smidgen of a point that probably almost all Cash in banks is not there on goodwill or confidence due to currency controls and is likely to break for the border at first opportunity, then no official figures seem to bear any relation to anything even remotely akin to all SoOJBs years of “normal” banking models. The Erik the Viking song “Tee tum, tee tum” flashed into SoOJB’s mind, but was quickly dismissed as he had to focus. He scratched his now very-warm head. He had to look at this another way.
“Oh-kaaaayyyy,” he said to himself. “Let’s get back to basics. All people want to really know is this:
“How much is my property worth and how much debt is there against it?” (thus is it worth keeping hold of, selling or maybe even buying more?)
“Seems a fair enough point”. SoOJB congratulated himself on at least finding something that appeared to make sense.
However, there was also the obvious question of what the “other” non-performing loans of €19.4bn were for.
Sensible assumptions (although not completely conclusive) could be that €11.8bn of this could be Household Loans, leaving €7.68bn for something else that has gone bad. I don’t know what that is. SoOJB frowned.
If we assume for now that this €7.68bn has nothing to do with un-title-deeded property (you know what I mean) (i.e. maybe secured personal loans on titled property), then we have the following scenario, that I like to call Scenario 1:
|No Loans Against Deedless Property Apart from “Construction” Loans|
|(Assuming “Construction” NPLs related to Deedless Property)|
|Number of Properties Without Title Deeds (approx)||120,000|
|“Construction” NPLs per Property||€ 38,500.00|
|Average Property Price||€ 225,679.50|
|Net Average Property Value||€ 187,179.50|
|Debt Asset Ratio||17.06%|
Which isn’t that bad really. However, not really likely, as we know already that loans taken out by the purchaser to buy homes (i.e. Swiss Franc Mortgages) probably form part of the Total Home Loans figure (how much of it? Anyone’s guess!)
So, we have a Scenario 2:
|ALL NPLs Are Against Deedless Property (but no other debts…)|
|(Assuming ALL NPLs related to Deedless Property)|
|Number Properties Without Title Deeds (approx)||120,000|
|If ALL NPLs relate to deedless property, then how much per Property||€ 200,833.33|
|Average Property Price||€ 225,679.50|
|Net Average Property Value||€ 24,846.17|
|Debt Asset Ratio||112.37%|
Ouch. This would mean that the average property would be actually worth about the cost of a Twix (which are really expensive in some countries!)
However, neither of the above scenarios are true, as we know that each NPL is likely to have a whole load of other debts attached to it (VAT, IPT, CGT, various Memos for work not paid for and, last but not least, normal and penal interest!) This will push up the amount of encumbrance on the property. We won’t even factor in owner occupier mortgages (as no way of knowing).
A FAR more realistic way of working out what the Net Value of the average property in Cyprus is would be from Mr Louizou’s example of a few weeks ago (I like this one!):
(Attachment of the full detail for the Good and Bad Andreas spreadsheets)
To summarise, if the developer Andreas were an extremely good boy and paid the interest due when he could, plus all of the capital he could (as soon as he could, leaving himself completely broke for the whole period he had his development), we have Scenario 3 (summary below):
|“Good” Andreas’ Example of Likely Debts Against Property|
|Debts per Property||€ 91,663.84|
|Property Price||€ 120,000.00|
|Net Average Property Value||€ 28,336.16|
|Debt Asset Ratio||76.39%|
Now, it is extremely unlikely that Andy-mou would leave himself and his family completely brassic for 10 years and still be sporting a debt of nearly €1,000,000 to the bank (€916,638 debts spread over 10 properties, from the original example), so far more likely would be Scenario 4, summary below, where he pays the first year’s interest to avoid penal interest rate charges but then, when he can’t sell his high quality wares (ahem…), he doesn’t pay a red cent more to his mates at the bank.
So, we have the following – scenario 4:
|“V. Bad” Andreas’ Example of Likely Debts Against Property|
|Debts per Property||€ 320,641.00|
|Property Price||€ 120,000.00|
|Net Average Property Value||-€ 200,641.00|
|Debt Asset Ratio||267.20%|
Maybe Scenario 4 is a bit of an exaggeration (as he may pay some capital), but judging from the abject poverty we see every day in the lifestyles of the developers (ahem again, but much bigger this time), Scenario 4 seems a lot closer to the truth than Scenario 3. And we still have to add on any purchaser mortgages, good or bad.
So, in answer to the original Banker mate’s question:
Q: “Exactly how much is owed by whom to whom for what against which collateral and with which means of payment and who will eventually pick up the tab, if anyone?”
A: “A poo of a lot by mostly developers (but some miffed mortgagors who either refuse to pay anymore or simply can’t afford it) but exact figures unclear to the banks for property the mortgagor paid for but doesn’t own against collateral they don’t own with probably not much means of payment (as they spent a lot of their money on buying the thing they don’t own in the first place!), with the tab possibly partly picked up by the EU (so the whole sorry mess can continue ad infinitum, cos if the EU don’t, their own particular gravy-train party grinds to a halt, which it probably will anyway), if anyone”.
Anticipating the final question (“Can we make any money out of it?”), SoOJB scribed, with sleep clawing at his now thoroughly weary brain, “When the eventual default happens (as the EU’s financial backers, the Germans, won’t do “ad infinitum”. Well, not forever ever), any buildings not crumbling into the hard-baked Mediterranean earth will probably be resold to the very same developers at a pittance, once the occupants have given up the ghost. So yes…”.
At which point, smiling, he added the sneaky caveat, “if you’re willing to wait a while and are a Cyprus property developer of the right sort (and not a Shepherd!)”
Final comment sufficiently cryptic to preserve membership to the club until next set of questions (hopefully not before the next few years’ fine dinners…), SoOJB willingly succumbed to the arms of Morpheus, a good day’s work well done.