Economists have welcomed the idea of creating a state-owned bad bank to help the banking system offload toxic loans to focus on supporting a battered economy post-pandemic.
Bank of Cyprus Financial Research director Ioannis Tirkides told the Financial Mirror, there is no better time to table such an idea as the Cypriot economy is going through a crisis which, inevitably, will create more unserviceable debt.
“The Cypriot economy was already going through a transitional period with banks trying to offload non-performing loans (NPLs) accumulated over the past year when it was struck by COVID.
“This combination will bring about a bigger impact than any other recession,” argued Tirkides.
He said acquiring bad debt is part of doing business, but circumstances created by the coronavirus pandemic do not allow banks to deal with it as they would in a normal transition.
He argued that getting rid of bad debt is an inevitable part of renewing the banking system in a time of crisis.
“Having a healthy banking system is the basis of having a healthy economy.”
Tirkides said the government needs to step in as bad debt is no longer manageable for banks.
“We launched into the new year with new restrictions and lockdowns, which will take their toll as businesses and households will struggle to pay off loans.
“Of course, Cyprus has a lot riding on tourism, hoping that arrivals will recover in 2021, but the truth of the matter is that it might take the industry up to eight years to fully recover,” argued Tirkides.
The economist said tourism sector businesses were the best in bringing down their NPL to debt ratio from 60% to just 10% in the past years.
“This may no longer be the case as, tourism stakeholders will find themselves in a tight spot, taking them some years to get out of”.
“So, the state is justified in stepping in and creating a bad bank with public money to save the banking system.”
He underlined that stepping in, does not mean rescuing all businesses and borrowers in trouble, it has to be a slow and organic process of restructuring the banking system, in line with EU guidelines.
What makes a good bad bank?
Tirkides said the government’s intention should be to bail out the system and the economy, not necessarily to make money.
“However, for such an endeavour to be successful, assets purchased by the bad bank have to be at a low price for it to be viable.
“It will have to introduce the right legal and governance framework, ensuring that the bank will perform, free from any interventions.”
University of Cyprus economics professor Sofronis Clerides told the Financial Mirror for a bad bank to succeed, good management and transparency are key.
“Such an institution will have to work with transparency and include the private sector to ensure that best practice is followed,” argued Clerides.
The UCY professor said economists are concerned over the framework of the bad bank.
Initial statements made by the Finance Minister hinted at the bad bank being part of the government’s social policies.
“Authorities will need to be very careful when designing the framework for the bad bank, making sure not to confuse its role with that of the state.
“Social and welfare policies are the job of the state. A bad bank should be there to manage toxic assets. The state has other tools such as the ESTIA scheme to carry out social policies.”
The economist said a good, bad bank requires a surplus of skill and infrastructure investment.
“The government’s proposed choice of KEDIPES, the Cyprus Asset Management Company, seems at the very least, to be logical in this context.
“KEDIPES has been involved in distressed asset management for some time, so some part of the requisite skill set has already been acquired.”
Clerides said the government should intervene to resolve the issue of the NPL burden on the banking system but will also need to ensure it does not transfer the risk to taxpayers.
“With transferring the toxic assets to a bad bank, the risk will be transferred to the investors, thus keeping deposits in banks safe from a future bail-in.
“However, if the investor is the state, then assets should be bought at a very low price, ensuring that the taxpayer’s money will not be wasted.”
Economist and MP for the Independent Movement, Anna Theologou told the Financial Mirror Cyprus would be better off if it nationalized the banks.
“We are trying to resolve an ageing problem since the 2013 crisis with no innovative ideas tabled.
“The idea of a bad bank was tabled back in 2013 but authorities pushed it aside. Why would you want to do it now?”
Theologou argued it would make more sense to nationalise banks with a large Non-Performing Exposure rather than bailing them out once more.
“A bad bank will be called to take on toxic assets worth billions. For a bad bank to be able to do this, the state would have to back the endeavour with guarantees worth more than the banks themselves.
“The two largest banks in Cyprus have a combined worth of €650 mln.”
She argued that nationalizing banks would be more profitable than bailing them out.
“The state has already backed KEDIPES with €8 bln while the entity has only been able to recover €650 mln through assets managed.”