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Η λανθασμένη διάγνωση και μυωπική αντιμετώπιση του προβλήματος της οικονομίας εγκυμονεί νέους κίνδυνους
Η τιτλοποίηση και η πώληση δανείων έχει ως σκοπό να παρουσιάσει εικόνα μιας σχετικά ασφαλούς επένδυσης (risk free) με όμως ψηλή απόδοση (high return). Για να μπορέσει όμως η τράπεζα να τα πωλήσει θα πρέπει να τα προσφέρει με μια σημαντική έκπτωση. Δηλαδή, τα ταμεία, και άλλοι επενδυτές που θα τα αγοράσουν θα πρέπει να θεωρούν ότι μπορούν να τα πωλήσουν με κάποιο σημαντικό κέρδος, αλλιώς δεν θα πάρουν το ρίσκο. Εκεί όμως έγκειται και η ουσία του προβλήματος. Όποια περιθώρια μπορεί να έχει μια τράπεζα για να μειώσει το ύψος των δανείων για να υποβοηθηθεί η αποπληρωμή τους, στο πλαίσιο των προβλέψεων που κάνει, δεν πρέπει να καρπωθούν τρίτοι και μεσάζοντες αλλά να χρησιμοποιηθούν με φειδώ εκεί και οπού πρέπει για διακανονισμό των χρεών και επανατοποθέτηση των δανείων σε μια υγιή βάση.
Αυτοί που θα αποκτήσουν τα δάνεια δεν θα υπολογίζουν σε καμιά περίπτωση σε εκπτώσεις προς τους δανειζόμενους. Αντιθέτως θα είναι ελεύθεροι να κάνουν τα πάντα για να εισπράξουν το μέγιστο δυνατόν. Ενώ η οικονομία είναι καταχρεωμένη και εταιρείες και νοικοκυριά είναι βυθισμένα στο χρέος και ενώ κύπριοι δανειολήπτες χρειάζονται κάθε βοήθεια να μπορέσουν να αντεπεξέλθουν, εμείς προωθούμε νομοθεσίες και τακτικές που θα βοηθούν τους λίγους που κατάφεραν να βρεθούν στο πηδάλιο των τραπεζών μας να πωλήσουν, και μάλιστα με αδιαφανείς διαδικασίες και χωρίς ικανοποιητικό έλεγχο, το ενεργητικό της τράπεζας για να μεγιστοποιήσουν το δικό τους όφελος και άλλων μεσαζόντων.
Το άλλο αδιαφανές σημείο το οποίο όμως δεν μας λέγουν είναι ότι με αυτό τον τρόπο ελπίζουν να μπορέσουν να παραμείνουν οι ίδιοι μέτοχοι και άρχοντες των συμβουλίων των τραπεζών χωρίς να χρειαστεί να καταβάλουν νέο κεφάλαιο, κάτι που είναι πασιφανές ότι θα χρειάζονται σύντομα οι τράπεζες (λόγω IFRS9 και την επιτακτική ανάγκη να κάνουν σημαντικές επιπρόσθετες προβλέψεις).
Το κεφαλαιουχικό ύψος που είναι ανάγκη να έχει μια τράπεζα είναι αποτέλεσμα του κλάσματος:
(Κεφάλαιο / Δάνεια)=12.5%[1]
Πωλώντας, ας πούμε, €1δισ. σε δάνεια, μια τράπεζα που είχε €10 δισ. σε σύνολον δάνεια, θα χρειάζεται €125 εκ. λιγότερα σε κεφάλαιο (διότι έχει μειωθεί κατά €1 δισ. ο παρονομαστής του κλάσματος για υπολογισμό της κεφαλαιουχικής επάρκειας).
Επιπλέον, αυτά τα δάνεια που είναι κυρίως μη εξυπηρετούμενα και επομένως έχουν ήδη υποστεί σημαντικές προβλέψεις (π.χ. 35%), εάν πωληθούν δάνεια ύψους €1 δισ. (ακολουθώντας το παράδειγμα πιο πάνω), έστω και με μια μεγάλη έκπτωση για αυτούς που θα τα αγοράσουν, ας πούμε της τάξης του 20%, η τράπεζα θα μπορέσει να γράψει (write back) πίσω στα λογιστικά της βιβλία ένα επιπλέον κέρδος της τάξης των €150 εκ. (€1δισ. x (35%-20%) το οποίο και αυτό θα ενισχύει περαιτέρω την κεφαλαιουχική επάρκεια της τράπεζας.
Θα μου πείτε ίσως ωραία, που είναι το λάθος; Οι τράπεζες μας και μαζί και οι σημερινοί διοικούντες, επιβιώνουν χωρίς να είναι ανάγκη να βρούμε λεφτά για περαιτέρω ανακεφαλαιοποίηση.
Το λάθος έγκειται στο ότι το πρόβλημα της κυπριακής οικονομίας είναι το υπερβολικό ιδιωτικό χρέος. Σχεδόν 4.5 χρόνια μετά το κούρεμα καταθέσεων το ιδιωτικό χρέος εξακολουθεί να είναι πέραν του 350% του ΑΕΠ και επιβαρύνει κυπριακές επιχειρήσεις και νοικοκυριά που αδυνατούν να αποπληρώσουν αυτά τα δάνεια. Και αυτό, σε μια οικονομία με σοβαρά και σχεδόν μόνιμα μειωμένη αγοραστική ζήτηση. Αυτός ο τεράστιος όγκος δανείων στους ωμούς των οικονομικών παραγόντων της χώρας δεν αφήνει την οικονομία να επανεκκίνηση πάνω σε υγιείς βάσεις. Όποια περιθώρια έχουν οι τράπεζες για να προωθήσουν κάτι τέτοιο εξαρτάται από το επίπεδο των προβλέψεων που γίνονται και υπάρχουν στα βιβλία τους. Τα δάνεια πρέπει να μειωθούν για να μπορέσει να γίνει εφικτή η αποπληρωμή τους και να δημιουργηθούν υγιείς συνθήκες επιστρέφοντας σε επίπεδα χρέους που είναι διαχειρίσημα, ούτως ώστε να είναι εις θέση οι παράγοντες της οικονομίας να πάρουν καινούργια δάνεια (see Balance Sheet Recession by Richard Koo). Εάν με την πώληση δανείων αυτές, οι έστω χαμηλές προβλέψεις που έχουν γίνει, χρησιμοποιηθούν για να παρουσιαστεί ένα εικονικό λογιστικό κέρδος και για να μπορούν έτσι οι μεγαλομέτοχοι των τραπεζών να μην υποχρεωθούν να καταβάλουν περαιτέρω κεφάλαια, τότε για αυτά τα δάνεια που έχουν πωληθεί, κάθε ελπίδα για μείωση τους προς τους κατόχους αυτών των δανείων εξανεμίζεται. Και αυτό, προς εξυπηρέτηση στην ουσία των συμφερόντων των νυν διοικούντων και άλλων ενδιάμεσων.
Η μυωπική αντιμετώπιση του πραγματικού προβλήματος της οικονομίας γίνεται πιο αντιληπτή εάν αναλογιστεί κάποιος τις επιπτώσεις στην οικονομία ακόμα και εάν υποθέσουμε ότι καταφέρνουν με αυτόν τον τρόπο οι τράπεζες να πωλήσουν ένα μεγάλο μέρος του δανειακού τους χαρτοφυλακίου και ότι διορθώνουν έτσι, έστω προσωρινά, την κεφαλαιουχική τους επάρκεια. Τι θα κάνουν τα βουνά της επιπλέον ρευστότητας που θα δημιουργήσουν με αυτόν τον τρόπο; Σίγουρα θα πρέπει να τα διαθέσουν για να μπορούν να έχουν έσοδα και κάποιο κέρδος για την τράπεζα (μετά το κόστος του χρήματος και τα λειτουργικά τους έξοδα). Σε ποιους θα δώσουν δάνεια; Ποιοι (εταιρείες και νοικοκυριά στην Κύπρο) καν θα θέλουν δάνεια όταν θα είναι καταχρεωμένοι με πολύ περιορισμένες ικανότητες να μπορούν να εξυπηρετήσουν τα δάνεια που ήδη έχουν;
Και πως θα διορθωθεί η οικονομία ακόμη και στην περίπτωση που πείθονται μερικοί να πάρουν νέα δάνεια που δεν θα μπορούν να εξυπηρετούν. Να θυμίσω ότι η οικονομική ανάπτυξη πηγάζει μόνο από οικονομικά βιώσιμα έργα. Να θυμίσω επίσης ότι είναι η μεγάλη ρευστότητα που προέκυψε από τις σπασμωδικές κινήσεις κάποιων που μας έχει φέρει σε αυτήν την τραγική κατάσταση και είχε ως αποτέλεσμα το κούρεμα καταθέσεων. Και μάλιστα πριν το 2013 ήταν πιο εύκολο να βρεθούν βιώσιμα έργα γιατί οι οικονομικοί παράγοντες της χώρας ήταν σχετικά χωρίς χρέη και υπήρχαν καλές προοπτικές ανάπτυξης. Όμως η πρώτη αιτία της καταστροφής ήταν η τεράστια και απότομη ρευστότητα που αφέθηκε να δημιουργηθεί στις τράπεζες μας και η αγωνία τους να τοποθετήσουν αυτήν όσο το δυνατόν πιο γρήγορα και με συνοπτικές διαδικασίες σε δάνεια που φέρνουν εισόδημα.
Δεν μαθαίνουμε από τα λάθη μας δυστυχώς. Κάνουμε λανθασμένες διαγνώσεις του προβλήματος (εν μέρη λόγω άγνοιας αλλά ίσως και εσκεμμένα) και αναγάγουμε το σύμπτωμα του προβλήματος, που είναι τα προβληματικά δάνεια, ως σαν να είναι η αρρώστια της οικονομίας. Η αρρώστια είναι το τεράστιο ιδιωτικό χρέος και είναι αυτό και τους λόγους που το δημιουργούν και που δεν το αφήνουν να μειωθεί που πρέπει να λύσουμε. Αντί αυτού, παμε προς ολοταχώς να δημιουργήσουμε παρόμοιες συνθήκες καταστροφής με το να κλωτσούμε το τενεκεδάκι πιο κάτω.
Τελευταίο, αλλά εξ ίσου σημαντικό, είναι ότι με την πακετοποίηση και πώληση των δανείων το μόνο που μπορεί να επιτευχθεί είναι μια προσωρινή ανάπαυλα από την ανάγκη για περαιτέρω ανακεφαλαιοποίηση των τραπεζών. Την επόμενη φορά που θα καταστεί αναγκαίο, και αυτό δεν θα αργήσει, θα έχουν ήδη περιοριστεί τα περιθώρια να το επαναλάβουν, ενώ οι επιχειρήσεις και τα νοικοκυριά θα εξακολουθούν να πνίγονται στο χρέος. Όμως, αυτή την φορά, με σημαντικά μειωμένη την ελπίδα σωτηρίας που παρέχουν σωστές προβλέψεις και μια επιτηρημένη διαχείριση από ένα ελεγχόμενο τραπεζικό ίδρυμα. Δυστυχώς οι κυβερνώντες εξακολουθούν να ασχολούνται με την θεραπεία των συμπτωμάτων παρά της αρρώστιας.
[1] It should be clarified that the example I am giving in the article where I use the total loans in the denominator is a simplification of how total loan exposure is calculated, as each type of loan is weighted (multiplied by a risk factor from 0 to 1) depending on the classification of risks by the Basel Accords. Hence, the complete formula is:
Common Equity Tier 1 (CET1) / Risk Weighted Assets (RWAs) > a minimum capital requirement (%)
Hence, for example, loans to Governments and public sector bodies with a triple AAA rating are zero risk weighted and therefore do not add anything to the total loan exposure of a bank (in Risk Weighted Assets) for purposes of calculating its regulatory capital requirements.Having clarified that, the risk weighting of loans in Cyprus is only reducing the total value of loans marginally (5%-15%, but it varies from bank to bank) and therefore the total loans value, generally speaking, is a close proxy of RWAs of Cyprus banks.
Ο Σαββάκης Κ. Σαββίδης είναι οικονομολόγος, που ειδικεύεται στην οικονομική ανάπτυξη και τη χρηματοδότηση έργων. Ήταν πρώην ανώτερος διευθυντής στην Κυπριακή Τράπεζα Αναπτύξεως και έχει διατελέσει τακτικός Επισκεπτόμενος Λέκτορας στο Πανεπιστήμιο του Χάρβαρντ και στο Πανεπιστήμιο Queen's του Καναδά. Author page: http://ssrn.com/author=262460
Φεραίος on August 23, 2017 - (permalink)
Δηλαδή, αν καλά κατάλαβα, θέλεις τους ιδιοκτήτες των τραπεζών μα γίνουν φιλανθρωπικό ίδρυμα, να συνεχίζουν να βάλουν κεφάλαια (δηλαδή λεφτά απο την τζέπη τους) για να εποφαιλούνται εκείνοι που δεν μπορούν να αποπληρώσουν τις υποχρεώσεις τους. Κανένας δέν πρέπει να αναμένεται να το κάμει. Όσο έχουν περιουσιακά στοιχία στην διάθεση τους που μπορούν να ρευστοποιήσουν δέν θα βάλουν "σιέρι πούγκα τους". Και ούτε και είναι θεμιτό/ορθό να αναμαίνεται να το κάμουν
Savvakis C Savvides on August 24, 2017 - (permalink)
Δηλαδή εσύ θέλεις να ξεπουλήσουμε τα περιουσιακά στοιχεία των τραπεζών (που είναι κυρίως τα δάνεια) και να χρησιμοποιηθούν οι προβλέψεις για να δημιουργηθεί έτσι ένα εικονικό/λογιστικό κέρδος που θα δώσει παράταση χρόνου στους σημερινούς διοικούντες χωρίς να χρειάζεται να βάλουν καινούργιο κεφάλαιο. Και πως αυτό βοηθά το πρόβλημα της οικονομίας που είναι το υπερβολικό ιδιωτικό χρέος; Και αν δεν υπάρχει προοπτική, η παράταση χρόνου σε τι και ποιους θα βοηθήσει να πετύχουν τι; Και είναι θεμιτό κατά την γνώμη σου να παραδώσουμε τους Κύπριους δανειολήπτες σε αυτούς που θα αγοράσουν τα δάνεια με μεγάλη έκπτωση και θα τα χειρίζονται (χωρίς προβλέψεις) εκτός της εποπτείας του τραπεζικού συστήματος;
Φεραίος on August 24, 2017 - (permalink)
Με εκπλήτεις. Μιλάς ωσαν οι Τράπεζες (εκτός ΣΥΝ) είναι κρατική περιουσία. Δέν ειχαμαι τον νού μας όταν χρειάζετουν.
¨Οταν χρειαζόμουν κεφάλαια για την επιχείρηση μου, η πρώτη μου σκέψη ήταν στο παλαιόν στόκ,
αδρανή μηχανήματα ακόμα και μη αναγκαία ακίνητα. Ένας επιχειρηματίας ποτέ δεν έχει ως
πρώτη επιλογή να επενδύσει επιπρόσθετο ρευστό απο την τσέπη του. Αυτό θα το κάμει μόνο εάν
όλα τα άλλα μέτρα δέν καλύψουν τις απαραίτητες ανάγκες.
Καί δέν πρέπει να μας διαφεύγει ότι κοινωνική πολιτική κάνει ένα κράτος, οχι ο επιχειρηματίας.
Η κοινωνική πολιτική του επιχειρηματία αρχίζει και τελειώνει σε π.χ. μία δωρεά σε Πανεπιστήμιο ή
νοσοκομεία ή σε μιά κοινότητα κτλ.
Δέν πρέπει να λέμε και τα αυτονόητα.
Thinkingaloud on August 23, 2017 - (permalink)
Πολύ αμφίβολο αν το όλο εγχειρημα μπορεί να υλοποιηθεί. Σε όλες σχεδόν τις χώρες της Ευρώπης ίδιες ιδέες για πακετοποίηση και τιτλοποίηση δανείων έχουν προταθεί και σχεδόν πουθενά δεν έχουν υλοποιηθεί. Ίσως κάποιοι καθηγητές/ερευνητές να μπορέσουν να μας διαφωτήσουν επ αυτού. Πιο σημαντικό όμως είναι να έχουμε επαφή με άτομα τα οποία διαχειρίζονται ταμεία τα οποίο πιθανό να ενδιαφέρονται να αγοράσουν τέτοια πακετα και να μάθουμε τι ακριβώς είναι αυτό που ψάχνουν σε τέτοια προιόντα. Για να γίνουν ελκυστικά αυτά τα όποια πακέτα δημιουργηθούν θα πρέπει να πληρούν κάποιες προυποθέσεις και να είναι σύμφωνα με διεθνή πρότυπα. Είναι σχεδόν απίθανο να βρεθούν επενδυτές που θα δεχθούν να αγοράσουν αυτά τα πακέτα με τιμές 20% χαμηλότερες. Να είσαστε βέβαιοι πως οι όποιες εκπτώσεις θα πρέπει να έιναι σημαντικότατες και μιλάμε πάντα για το 50-70% του book value δηλαδή του αρχικού δανείου και όχι του παραφουσκωμένου και διογκωμένου ποσού που καταγράφουν οι τράπεζες μετά τόκων και υπερχρεώσεων. Οπόταν ΑΝ κάποιος επενδυτής αγοράσει αυτά τα δάνεια, θα μπεί στη διαδικασία να κάνει νέες συμφωνίες με τους δανειολήπτες με σημαντικές μειώσεις και πολύ πιο αυστηρές ρήτρες για την εξυπηρέτηση τους. Αν για παράδειγμα έχει πάρει κάποιος 100 χιλιάδες δάνειο, ο αγοραστής του ΜΕΔ θα το αγοράσει για 30 χιλιάδες, θα κάνει μια συμφωνία με το δανειολήπτη να του πληρώσει 50-70 χιλιάδες με κάποιο λογικό επιτόκιο ή και άμεση αποπληρωμή και θα παει στο επόμενο. Αφου είναι προφανές πως ο δανειολήπτης δεν μπορεί να εξυπηρετεί το ποσό που η τράπεζα τώρα ζητά (αφού έχει παραφουσκώσει και το ποσό στις 130 χιλιάδες και η δόση είναι τεράστια) και για αυτό είναι ΜΕΔ και οι τράπεζες είναι διατεθιμένες να πωλήσουν αυτό το δάνειο για 30 χιλιάδες, γιατί δεν κάνουν απο τώρα την πρόταση στον δανειολήπτη να του κουρέψουν ένα σημαντικό ποσό να κατέβει στις 70 χιλιάδες (άρα διαγραφή 30% απο το book value) και να καταστεί το δάνειο του βιώσιμο και να μην χρειαστέι να διαγράψουν 70% για να το πουλήσουν;
Προσωπικά, γνωρίζοντας επενδυτές του εξωτερικού που δουλέυουν σε τέτοια ταμεία και μιλώντας μαζί τους αντιλαμβάνομαι πως η τιτλοποίηση και πακετοποίηση ΜΕΔ είναι μάλλον ευχολόγια παρά πιθανή πραγματικότητα.
The Invisible Hand on August 23, 2017 - (permalink)
Είναι πολύ αισιόδοξο το παράδειγμα που η τράπεζα πουλά δάνεια με ονομαστική αξία 1 δις και με προβλέψεις 35% προς 0,8 δις, που αντιστοιχεί με κέρδος-write-back.
Η πραγματικότητα είναι ότι τα ΜΕΔ βρίσκουν αγοραστές κερδοσκόπους προς μόνο 30% της ονομαστικής αξίας, που μάλλον θα επιβαρύνουν τη τράπεζα με πρόσθετες διαγραφές και μεγάλη ανάγκη νέου κεφαλαίου..
Με αυτά τα δεδομένα είναι ακόμη πιο σωστό το άρθρο του ΣΣ ότι η τράπεζα θα πρέπει να προτιμήσει συμβιβαστική λύση με τους πελάτες της αντί να ξεπουλά με μεγαλύτερη ζημιά σε ξένα vulture funds. Μήπως υπάρχουν άλλα κίνητρα των ξένων συμβούλων που τώρα κρύβονται πίσω από τη δικαιολογία του moral hazard;
Savvakis C Savvides on August 24, 2017 - (permalink)
Συμφωνώ με ThinkingAloud και Invisible Hand ότι δηλαδή ίσως χρειαστεί ακόμη μεγαλύτερη έκπτωση από αυτή που αναφέρομαι στο παράδειγμα μου. Και δεν αποκλείω να υπάρχουν και αλλά «alterior motives» όπως αναφέρεται και ο Invisible. Οι αριθμοί που αναφέρω στο παράδειγμα στο άρθρο είναι για να γίνει αντιληπτό πως οι προβλέψεις μπορεί να χρησιμοποιηθούν για δημιουργία λογιστικού κέρδους. Όμως η επιλογή των συγκεκριμένων δανείων που θα μπουν σε ένα πακέτο εναπόκειται στην τράπεζα και πολύ πιθανόν να είναι τέτοια που να συγκεντρώνει προβλέψεις πολύ ψηλότερες του μέσου όρου των προβλέψεων της Τράπεζας και να επιτρέπει έτσι και μεγαλύτερες εκπτώσεις στην πώληση.
Erol Riza on August 24, 2017 - (permalink)
Dear Savvas,
All the comments and your arguments may be deemed to be right in the eyes of some readers but I would like to take a different approach about the selling of loans, packaged or not.
1. From the point of view of the banks they have the loans principally for residential, SME and large corporate. I hope we agree on this at least. In my view there is little interest in banks selling their residential loans since these have a decent risk weighting and hence a good return on equity once they are performing. Banks would rather restructure these loans and hold. As for SMEs, if these are secured on residential property (as they tend to be in Cyprus) it is unlikely to be of interest again for a bank to sell as it knows the borrower will want to keep his property and the law protects him if it is his primary residence. If it is a loan to a SME unsecured no one would want to buy as the recovery rate is very low. If we look at the large corporate loans with security land or businesses these are likely to be of interest to buyers so long as they can buy and enforce their security and then hope to profit. How long will this take and please note that there is hardly any interest in creditor unfriendly countries such as Cyprus. Even if the banks chose to sell the loans/security acquired I see nothing wrong since these would be already well provided and I would wish the buyer a lot of good luck;
2. Now let us look at the regulatory environment in Cyprus. In accordance with the Central Bank regulations on Sale of Loans a firm wishing to buy such loans has to set up a Credit Acquiring Company and be approved by the Central bank or be present in the EU. Thereafter the sale of loans caries with it the right and obligations which the selling bank had and thus there is protection of the borrowers. I also feel that the foreclosure law in Cyprus, as watered down by Parliament, has made the process inefficient to put it mildly. I would like someone to tell me how many private equity funds/hedge funds have a desire to set up shop in Cyprus and hire people for the sake of buying some of the large corporate loans. These funds have a better route; they can work with the borrower and the bank to improve the cash flow and bring much needed equity to Cyprus which is BADLY needed. What is wrong with this?
3. How about the buyers of NPLs? Cyprus is not a core market for any of the funds that buy NPLs and there is no fear, as some economists and politicians forecast two years ago, that vulture funds would descend on Cyprus to buy the residential loans.
The facts belie any strong buying interest on NPLs other than the large corporate loans of banks and there is nothing wrong in this. The ECB has clearly made it known to banks with high NPLs that they have to accelerate the reduction and I see nothing wrong with efforts to selectively make write offs on loans which have little recovery scope of the original loan. This has to be on a case by case basis and it must not be the case that borrowers who can afford to pay expect a write off as they will jump on the opportunity. The Governor of the Central Bank has understood that property related NPLs will take time since the last property bubble was unprecedented and will need time. In the meantime the banks will have to do what is necessary to reduce their NPLs and continue restructuring and selective sales.
In closing we must not look at sales of NPLs by banks in isolation but in the context of the regulatory environment and the buyers. The buyers, if any, are few and they could bring equity and better asset management and I see no harm at whatever price a bank choses to sell. The regulatory requirements are such that prevent the unscrupulous to take advantage of the borrowers as these funds are not welcome in the EU and are typically Anglo Saxon and operate in countries where the foreclosure on NPLs is easier.
As for the economy and its growth trajectory this requires a lot more space since the re modelling of the economy will need more than a 5 year term and the reforms sadly are unfinished. The small number roof projects undertaken in the last 4 years speaks for itself. The economy still relies on tourism, real estate and services. The real estate may come to an abrupt end if the Chinese restrictions on property and gambling are strictly enforced and we will be left with some other buyers of passports who are non EU and subject to potential capital restrictions. So far so good what next. QUO VADIS?
Savvakis C Savvides on August 25, 2017 - (permalink)
Dear Erol,
The main reason I wrote this article was to make people understand how a "fictitious" accounting profit comes about by "using/abusing" the provisions. Moreover, as you know, when a bank fully settles a loan (i.e. by selling it to a third party whoever that may be) the provisions which is only an accounting estimate can give rise to losses or profits (write-offs or write backs) depending on whether the proceeds from the sale are higher or lower than the net book value of the loan. Unfortunately, in the case of Cyprus, this is likely to come about at the cost of slamming the door shut on the face of struggling borrowers.
Because the level of provisions for these loans serves as an informal yardstick of how much a bank can afford to write off a loan (without incurring losses) in its attempts to settle with the borrower himself a problematic loan. But what many people do not fully appreciate is that for the provisions to be dismissed and therefore give rise to a write back (assuming the sale price is higher than the net book value of the loan) the loan will have to be fully repaid (settled). It does not happen when you restructure a loan. The provisions stay in place or even may have to increase if at some stage the likelihood of recovery worsens.
Relating this logic to my diagnosis of what is the real problem in Cyprus which I have said time and again, the enormous private debt weighing on the shoulders of economic agents in Cyprus, such sales and the elimination of provisions to create an accounting profit may serve the immediate needs of the current major shareholders of the banks (as it may postpone for a while the need to come up with additional capital) but it makes conditions for overcoming debt for underwater borrowers a lot worse and it is contrary to the direction what should be the economic policy of the country in order to mitigate the effects and duration of balance sheet recession.
There is also the risk and valid concerns that some of the people who have commented on my article have made (but I have not), that there is through this means of selling the loans the possibility to use provisions for more sinister objectives. I am sure you can appreciate these risks as well anyone.
The rest of the stuff you mention I read and we can discuss over coffee the next time you are in Cyprus!
Erol Riza on August 25, 2017 - (permalink)
Two things only
1. In Cyprus more likely to have write offs as per ECB guidelines for non recoverable NPLS and
2. Please define who you regard "struggling borrowers" as doubt if these are small borrowers for residential and SMEs
The rest we can discuss over coffee as economic growth depends on government policy and not bank policy
Savvakis C Savvides on August 28, 2017 - (permalink)
Whether it is write-offs or write-backs we can't say. However, if by selling the loans the bank will register a net write-off, I can't see why they would be interested in doing it in the first place. But we are both speculating, so I prefer to leave it at that.
On your other question, "struggling borrowers" come into all categories. Households, SMEs and Large corporates. You are surely not suggesting that this is exclusive to large corporates!
Thinkingaloud on August 29, 2017 - (permalink)
The "struggling borrowers" cannot be referring to the large corporates. They have the means and the ways and probably the assets to resolve some of their issues. The "struggling borrowers" are the SMEs which are heavily indebted, and the private individuals. Unfortunately it is known by everyone who ever tried to do business in Cyprus that all banks (in a collusive manner and the CB should have looked into that) had exactly the same rules of engagement demanding personal guarantees far and beyond what would be fair demands. Personal guarantees are also used in other countries but not to the extent that Cyprus banks abused them. Personal guarantees abroad are only activated if the business owner ran the business aground due to fraud or mismanagement (i.e. treating revenues as net income and not properly managing the inflows and outflows of the business). In Cyprus, the personal guarantees are now being used by the banks in order to force borrowers into surrendering all they own. This is why restructurings do not work and borrowers and banks are in a stand off. The banks are not really incentivized to make the restructuring work as they are only eyeballing again what the business man owns (be that house, apt, properties, etc). So what is the purpose of having a Limited company if the liability extends to the shareholders? This HAS to be resolved with a decree from the CBC cancelling all personal guarantees or defining the personal guarantees as valid to the extent that the business has committed fraud. Most SMEs were hit very hard in 2011 and in 2013 and are still struggling. Many people had borrowed money on a private basis always with substantial collaterals (the banks always, at least for us "commons", demanded that the loan never exceeded the 70% of the forced sale value of the property – the forced sale value was often the 70% of the value so that meant that max loan one "commoner" (this is very important as there were others with friends and backings that got much better terms) would be about 50% of the value). According to RICS, the property values have dropped by 30-40% since the peak in 2008. That means if the bank gave out a loan at the peak of the valuations, the book value of the loan is actually, even today, lower than the valuation of the property! Lets not discuss the malpractice of capitalizing interest on NPLs!! SO, the banks should just take the property wherever possible (even if that is the first residence) as long as they stop chasing that borrower for the rest of the amount that they say they are owed!
Erol and Savvas, I am no banker but I believe I understand what is happening in the markets (here and abroad) in simple and realistic format. If I am wrong in my thought process please do correct me.
So what is the stumbling point? It is the stubborness of the banks to accept their own fault in this whole debacle we all live through! Wealth has been slashed, property prices dropped, deposits disappeared, banks vanished, CSE tanked! Yes people might have been able/willing to personally guarantee their loans in the past due to their comfort with the size of their wealth, the prospects of their business, the mandatory acceptance of the bad terms of the banks (again I must stress that banks had ALL the same terms and thus people had no choice) but today this is NOT possible. Banks must realize that they have the majority of the blame! They are the ones with the army of analysts, the highly paid bankers who peered into the borrowers business and wealth and approved the loans! Now they just have to shut up, do the necessary write offs and move on! The state should force them to do just that as they forced shareholders of BOCY to accept the loans of CPB and now have no more wealth! Problems are deeper than just skin deep and thus the actions must be much more drastic in resolving the issue. NO sane fund manager will ever buy a portfolio of NPLs for more than 10% of the value. The Cyprus banking system needs a massive overhaul! Throw out the old rulebooks and bring in new ones. Align practices with what is happening in the other developed markets and lets make this a European country.
PS:whereever I say Banks I also include the COOPs, although they were actually probably worse as they pretended that they knew about loans and all they did was approving loans for friends and family based on the guarantors (10 guarantors for an auto loan???)
Savvakis C Savvides on August 29, 2017 - (permalink)
There is not much of what you wrote ThinkingAloud that I disagree with.
Yes, personal guarantees were asked to just supplement the security cover of a loan but they were not even valued as solid security for accounting purposes or for the purpose of estimating the amount of provisions necessary for a specific loan (in other words the bank did not count on recovering anything from personal guarantees).
I also agree that this is what happens when you have huge liquidity (through uncontrolled inflow of foreign deposits mostly) and a system that lends on the basis of collateral and without doing and relying first and foremost on a proper assessment of credit risk.
As far back as 2011 while still working for the Cyprus Development Bank I was alarmed and warning against what was established as common practice by the banks for approving loans solely on the basis of collateral and without a proper assessment of repayment capability. This is why I wrote and published the paper below. Which not surprisingly, was read a lot more outside rather than in Cyprus!
Erol Riza on August 30, 2017 - (permalink)
Thinking aloud,
Some very valid points but some not so valid!
Agreed on who are distressed borrowers as struggling is not the right word used in the jargon of the European Central bank or European Banking Authority. Large corporates require a different approach. A simple definition of distressed borrowers could be as follows:
A "distressed borrower" is a borrower who is unable to fully repay his or her debt due to financial difficulties. The difficulties may be either created by personal circumstance or the terms of the loan which s/he did not fully understand or was not able to meet when originally agreeing to the loan. The term "distressed borrower" is most commonly used to refer to homeowners at risk of foreclosure.
The above captures a fair amount of what you suggest about bank behaviour in Cyprus. However, we need to look at the pre crisis banking practice in Cyprus where the credit expansion went completely out of control between 2006-2010; in fact mostly after 2008 when Cyprus joined the euro. Simply prior to 2008 the euro was a foreign currency and if my memory serves me right banks were required to hold 70% of theses liabilities in short (6 months) and the remaining 30% could be lent long term. Once the euro became a local currency this restriction was lifted and banks, via their IBUs, attracted a lot of deposits paying high interest rates and had to lend. The biggest credit expansion occurred at this period and it reached nearly 30% per annum. This is way out of line with what is considered prudent which is the growth of nominal GDP. In addition the Co OP banks were not supervised by the Central Bank but the Commissioner of Co Operatives which was accountable to the Ministry of Commerce- they should have introduced better oversight and failed. Banks, pre crisis, as we know lent on a collateral basis using real estate and personal guarantees and hardly any attention to ability to repay. The credit expansion led to a property bubble and then, as it always happens in most liquidity driven property bubbles, it burst and now we have the NPLs aplenty and the distressed borrowers.
I part ways with you when you expect the present owners of the banks, which are better regulated and have better risk management systems in place, to suffer the losses of borrowers who are in distress. It cannot be right that the investors who took the risk and helped the banking system in the midst of a financial crisis to also have to carry the losses of the previous bad management. While I agree there is a need to consider various support schemes for distressed borrowers these should be in line with market practise and with government support. The latter is something that the ECB also favours where NPLs need to be reduced swiftly, hence its support for private sector initiatives that require cheap funding.
Notwithstanding my above view I do see how banks can offer assistance to distressed borrowers and this again must be done without putting the financial system at risk. The best way would be for banks, on a case by case basis, to look at the various options of forbearance that can be applied which would allow the borrowers to benefit from some relief, including write offs. Again the write offs cannot be a general policy for all since there are clear guidelines by the Central Bank of what Arrears management should be. Those borrowers who are so called strategic defaulters cannot be allowed to sustain a living standard without making repayments to their debts. The banks are now better placed to arrange forebearance as this impacts capital adequacy and as such is linked to the level of provisions. It is no surprise that the banks in Cyprus have been asked to increase provisions. Thus we should seek solutions that will be consistent with regulators requirements and not to seek to please populists' demands. We need to sober up when it comes to the financial system as Cyprus is not immune to international economic developments and a sound financial system must be in place to weather any new storm. There is too much leverage globally; it has moved from the private to the public balance sheets!
The calls of central bankers at their recent meeting in Jackson Hole has been to be mindful of de regulation as they know soon they will have to stop QE and cut their balance sheets. This may be a very challenging period and best to err on the side of prudence.
As I point out to Φύλαρχος below, I also mean that write offs, where justified, should be done on a case-by-case basis. However, eliminating the provisions through the sale of loans is not helping this cause and makes such an eventuality very unlikely.
Erol Riza on August 29, 2017 - (permalink)
Struggling borrowers for me are those families or SMEs which have had a loss of revenue sources and were lent money on unrealistic assumptions or values of collateral. Also those divorcees whose husbands have left home and left their former wives with debt (either as co borrower or guarantor). Surely not those who have moveable or immovable wealth, at home or abroad!
Savvakis C Savvides on August 30, 2017 - (permalink)
Surely, those you describe are in this category. But why do you dismiss the possibility that even among large corporates there are some who cannot make ends meet? And yes, even some, in fact many, who have been extended loans beyond their capability to repay, simply on the basis of over-valued collaterals and even in some cases without them!
There are a number of such examples that come to mind from my experience, which of course I can't refer to by name. I would be very surprised if you can't come up with such large corporates from your own experience to tell you truth. The inability to repay is not confined to any special category of client Erol. It is everywhere and it came about from a flood of irresponsible lending from the banks.
Erol Riza on August 31, 2017 - (permalink)
Large corporates, some which are run as family firms, knew exactly what they were doing when they were borrowing. As you know some of them are zombie firms and rely on deferred tax obligations and assumed business plans. I do not see why a bank should think of write off before the owners consider bringing in equity if their business is sustainable. Writing off is only to be done in exceptional circumstances and the minute this becomes public policy then why should anyone pay his debts in Cyprus? I think we need to get real about having a Chapter 11 Law and if companies cannot secure equity, some forbearance and severe cost reductions then they should be put into administration.
The individual tax payer cannot be asked to pay his taxes and companies get away with deferrals to survive. Do you feel this is to be a sustainable basis of running a business where the shareholders take the profits and the losses are taken by the lenders? In the EU this will not gain much support and we need to think that we are part of the Cub which has its rules. We can of course chose to leave the Club and do whatever we like.
Maybe Parliament should fast track a Chapter 11; they have fast tracked other laws in the past!
Erol Riza on August 31, 2017 - (permalink)
Large corporates, some which are run as family firms, knew exactly what they were doing when they were borrowing. As you know some of them are zombie firms and rely on deferred tax obligations and assumed business plans. I do not see why a bank should think of write off before the owners consider bringing in equity if their business is sustainable. Writing off is only to be done in exceptional circumstances and the minute this becomes public policy then why should anyone pay his debts in Cyprus? I think we need to get real about having a Chapter 11 Law and if companies cannot secure equity, some forbearance and severe cost reductions then they should be put into administration.
The individual tax payer cannot be asked to pay his taxes and companies get away with deferrals to survive. Do you feel this is to be a sustainable basis of running a business where the shareholders take the profits and the losses are taken by the lenders? In the EU this will not gain much support and we need to think that we are part of the Cub which has its rules. We can of course chose to leave the Club and do whatever we like.
Maybe Parliament should fast track a Chapter 11; they have fast tracked other laws in the past!
Thank you Erol for the long comment!
I have never argued that the write offs should be general! I fully agree that they should be done on case by case basis, penalizing strategic defaulters (they know who they are) and helping those who are really trying to make things work. So we are in agreement on that front.
Sadly I know from personal experience that this is not the case.
The "crimes" of the past are still haunting the industry! Banks raised deposit interest rates in an effort to attract deposits and thus totally destroyed or wiped out industries that operated in Cyprus for many years as lending rates also skyrocketed. Businesses in Cyprus had to borrow at 6-8% above Euribor while Europe operated at less than a third of that number. Same held for housing loans etc. Again, I stress that Cypriots had NO alternative options as banks colluded and tuned their offerings.
I cannot stress enough that the non existent CBC should wake up and correct a great number of discrepancies across the board. I remember some years ago, I wanted to cash a cheque from the state and the bank wanted to charge me a fee for cashing the cheque instead of depositing it. Depositing it required 3 days to clear!!! In the meantime, the bank was definitely using my money in overnight lending and making some money off of me. I made a complaint to the CBC as I thought that this was totally wrong that a cheque issued by the government needed 3 days to clear and that I was charged for cashing it! Their reply is that the CBC does not interfere with the terms of the relationship between a bank and its clients!!! So WHAT the hell did they actually do?? If CBC is the regulator, then they should act as regulators!!
Coming back to my point with the personal guarantees, I believe personal guarantees should be activated only in the case of fraud and for the rest of the cases the collateral (as the banks happily accepted collaterals and disregarded the ability to pay as a criterion) should suffice. In all cases where the banks clearly did not take into account ability to repay, the banks should be held liable and even be fined by CBC or CySEC. In most cases the banks in their willingness to lend, they happily accepted whatever inflated valuations they received from property valuers that they had assigned to do the valuations!! There are cases where the borrowers actually borrowed 100% of the amount they paid to the developer for their apartment or house, because the bank, which had given the loan to the developer to build, happily accepted the valuations that were inflated by 30-40% by the valuers as that showed that they had done a good job with the loan to the developer!! So the borrower would get 100% of the value in a loan and thus had some money to spend on buying a new car (again banks were happy as the loan that they had given to Pilakoutas, Tseriotis, Michaels Automotive etc were being repaid!)
In my humble opinion and my simple mind, the banks, the bankers, the CBC and the ministry of Finance are all to blame in this whole debacle! The "greediness" of the Cypriots is wrongfully referenced! Cypriots have been hard working and always trying to do their best! Of course there are always exceptions and those are primarily the ones helped by the meritocracy of the Cyprus politics.
Erol Riza on September 1, 2017 - (permalink)
Thinking aloud
You are right that the oligopoly in the Cyprus banking system (two banks dominated 70% in deposits and loans) had led to bad practices and wrongful lending, to put it mildly. However, two wrongs may not be the way forward. Yes forbearance must be used to alleviate the distressed borrowers and this is even accepted by the ECB where recovery is not to be expected, even of the original amount of the loan. Herein lis the problem as th banks may feel that it is fair where there is some collateral of value. I do not feel that this should be the case but where does one draw the line. The current owners cannot be penalised for all the ills of the previous management.
However, burden sharing does mean that the borrower, the bank and the government should seek a solution which addresses the socio-economic problems of distressed borrowers who fell for the slogans of banks which promoted lending with "think about it and it will happen". In fact if it can be proved that this was mis selling the onus of the burden will fall on the banks.
Once ore any solution should not jeopardise the financial soundness of the banking system as this would be self defeating. The government has a role to play and must work with all stakeholders to address the problem of the distressed borrowers which include the issue of guarantees which unwisely were accepted as security/ The Ministry of Commerce has a very decent service to provide advice but this is not enough.
Renos Ioannides on August 29, 2017 - (permalink)
I think we all have our economy's (and all stakeholders') best interests at heart. I believe we all agree that our country and our society at large cannot move ahead with this immense private debt (individual and corporate) burden and the unmanageable stock of problem loans.
What we ought to be looking at is setting up some sort of forum or platform to incubate realistic ideas and ways of making these ideas heard and actionable. If state and stakeholders keep beating about the bush, not doing anything tangible, then our future is doomed.
Any ideas to make this happen?
I believe Erol is right in not including large corporates! Large corporates in Cyprus are very few and one should expect that they have the corporate structures in place to avoid pitfalls. A large corporate probably has enough assets to cover some of the loans, restructure, shrink and continue operating. Companies in Cyprus are mostly in the SME category with the majority being in the small or tiny business by international standards. They cannot shrink any further.
Dear Renos, I fully agree with you that we all have our economy's and stakeholders best interests at heart!
I believe most of us here would like to see our recommendations/suggestions/discussions heard but do wish to keep our selves distant from Cyprus politics. At least that is my philosophy. I would have liked the opportunity to discuss such issues in a round table format with the gentlemen and ladies on this forum.
I am not politically aligned and therefore I find it frustrating that only people sitting close to political party leaders find themselves on various boards across the economy.
Please let me know if some sort of an independent lobby/forum could be created. I would be keen to contribute to the extent possible.
PS: Apologies for replying to Savvakis under your message! I think Stockwatch should do a better job with this forum format!! The Reply button is misplaced in my opinion.
Dear Renos,
I agree that we should all be concerned about the enormous private debt hanging over us and as you know I have been doing my utmost since 2013 to elevate this so that the Government, Academia and other concerned professionals in Cyprus (like yourself whom I totally respect as I know you well from working together in past) focus on it and try to find effective solutions and policies. I can't say I have succeeded as there were not many ears eager to listen.
I am in favour to whatever promotes this cause and I am willing to participate in such forums if they are organised by concerned institutions, Associations and Societies. For your information, I have also suggested that the Cyprus Economic Society of which I am a member should organise such a panel discussion. But unfortunately, although they accepted the idea and asked me to be on the panel, it was not a priority and we are now almost a year later with a date still not set for it.
Savvakis C Savvides on August 30, 2017 - (permalink)
I should clarify that the example I am giving in the article where I use the total loans in the denominator is a simplification of how total loan exposure is calculated, as each type of loan is weighted (multiplied by a risk factor from 0 to 1) depending on the classification of risks by the Basel Accords (II & III). Hence, the complete formula is:
Common Equity Tier 1 (CET1) / Risk Weighted Assets (RWAs) > or = a minimum capital requirement (%)
Hence, for example, loans to Governments and public sector bodies with a triple AAA rating are zero risk weighted and therefore do not add anything to the total loan exposure of a bank (in Risk Weighted Assets) for purposes of calculating its regulatory capital requirements.
Having clarified that, the risk weighting of loans in Cyprus is only reducing the total value of loans marginally (5%-15% but it varies from bank to bank) and therefore the total loans value, generally speaking, is not a bad proxy of RWAs of Cyprus banks.
Ex Banker on August 30, 2017 - (permalink)
If the Banks decide or forced to write off a percentage of all NPLs there will be no incentive for any other borrower to continue repaying their loans. They will simply stop paying and wait until the Bank reduces the amount of the loan. A Bank can agree a reduction in exceptional circumstances when the borrower is in a position to repay the remaining debt in full immediately. Selling packaged loans at a discount to investors makes more sense as the buyers will pursue the borrowers with repossessions if necessary to recover the debt. That will also deter all other borrowers from even thinking about stopping their loan repayments. There is no other option, borrowers have to repay their debts otherwise there will be no Banks left.
Φεραίος on August 31, 2017 - (permalink)
Exactly my points as stated above. I agree with you. This is the only way
Spoken like a true ex banker! No further comment.
Φύλαρχος on August 30, 2017 - (permalink)
Αυτή η ιστορία με τα μη εξυπηρετούμενα δάνεια νομίζω ότι έχει καταντήσει το σχοινί του πελλού που μονό δεν έφτανε και διπλό περισσεύει. Η ουσία είναι να αναλυθεί το καθένα από τα δάνεια αυτά και στη βάση αδιάσειστων στοιχείων να βρεθεί ποια είναι πραγματικά αδύνατο να αποπληρωθούν και σε ποια ο δανειολήπτης απλά δεν πληρώνει διότι δεν βλέπει τον λόγο να το κάνει αφού είναι φανερό ότι όσο περνά ο χρόνος οι υποχρεώσεις του μειώνονται και οι πιθανότητες κατάσχεσης του ακινήτου είναι ανύπαρκτες. Π. χ. ποια περιουσιακά στοιχεία όπως άλλα ακίνητα, μετρητά, εμπορεύμστα, απολαβές έναντι υποχρεώσεων κλπ έχει ο δανειστής; Για τον σκοπό αυτό θα πρέπει ο μη εξυπηρετών το δάνειο του να εξαναγκάζεται να επιτρέψει την πλήρη αποκάλυψη (π.χ. από τίς φορολογικές αρχές, το κτηματολόγιο κλπ) όλων των περιουσιακών του στοιχείων. Με αυτό τον τρόπο θα ξεχωρίσουν όσοι σκόπιμα δεν πληρώνουν ενώ μπορούν, από τους πραγματικά άπορους που θα τύχουν χαριστικής μεταχείρισης. Χωρίς τέτοια μέτρα, με τη νοοτροπία που μας διακατέχει δεν βλέπω πρόοδο και με το να απαιτείται από τους με χίλια βάσανα προσελκυόμενους ξένους και ντόπιους, κουρεμένους και μη, μετόχους να πληρώσουν τα σπασμένα, ματαιοπονούμε.
What a loan is worth to a bank depends on its repayment capability and in the event of default, on the recourse open to the bank. A client may choose not to pay his loan, even if he can but not because of any moral hazard arising from a restructuring of other loans, but merely from calculating that he will gain from not doing so, as the collaterals and security position of the bank are inadequate.
Many loans in Cyprus have been granted during the "happy years" without either a proper credit risk assessment but also without adequate recourse conditions (collaterals, guarantees, etc.). After all this in essence is the only justification for the bank for opting to sell its loans to third parties at significant discounts. Hence it is the security position of the bank (and its likely value within an ailing economy) that determines if a client opts not to pay and lead the bank to pursue a recovery through the Courts or otherwise.
This story about moral hazard preventing banks to proceed with restructurings at some discounts is a myth or/and a smoke screen that disguises the fact that banks probably prefer to sell loans as packaged products in a huge Ponzi-like scheme through the financial markets. And as I point out in my article, through this process obliterating the provisions and making that much harder to apply a much needed debt reduction to distressed borrowers. For your information, banks have always been involved in debt reductions and write offs on a case by case basis. And they do not do this out of their goodness nor because they want to help the economy. They do it, because it is the best possible option for the bank. And never, has a moral hazard arisen from it.
Apologies for replying to your Greek comment in English.
Leslie G Manison on August 30, 2017 - (permalink)
Essentially agree with comments of " Thinking Aloud" that banks must mainly incur the losses associated with their past wasteful lending practices. And agree with Savvakis that struggling borrowers, especially SMEs, should be provided with debt relief in a way that allows the continuation of productive activities and even support for viable new investments.Reducing NPLs per se to meet ECB targets may help the banks in the short run, but will inflict much damage on the private sector economy.
Indeed, there has to be a massive overhaul of the banking system including its rulebook and its management and professional staff, greatly facilitated by non-interference from the political leaders, but overseen by competent supervisors ( not just box-tickers ). However, presently the Cyprus banks are very fragile and unprofitable given the chronically poor quality of their loan portfolio, facing the overwhelming need to inject substantial amounts of capital from outside sources.There is the IFRS 9 regulation on boosting provisions to be implemented from Jan.2018 onward and EU( essentially German) proposal that the creation of full Banking Union and a unified deposit protection scheme needs to be accompanied by individual banks across the euro area substantially raising their Pillar II capital so as to be much less vulnerable for bail-outs by EU bodies.Unofficial estimates from Government sources suggest that Cyprus banks might need to raise over 5 billion euro to satisfy these new capital requirements.
With banks' low profitability, their unattractiveness for raising large sums from abroad, and their discontinued access to state aid, this need for very large capital injection looms as an impossible task.
Faced with this dire situation what can the Cyprus authorities do? How long can they delay addressing the problem? Can they sweep the problem under the carpet until after the Presidential election?
My view is that the Cyprus authorities including the inactive Central Bank "top brass" must deal with the capital-raising problem as soon as possible and enter into a program with the EU institutions in exchange for official financial and technical assistance, that is, another MOU.Failure to act risks fuelling the increasing perception that Cyprus banks are in trouble and could ultimately precipitate bail-in action.
Leslie G Manison on August 30, 2017 - (permalink)
Addition: I would add to my third last paragraph above after "Jan" the following " 2018 and that a EU initiative ( essentially a German proposal) requires that if a fully-fledged banking union and a unified deposit protection scheme are to be established individual banks across the euro area will need to raise substantially their pillar II capital to reduce markedly their possible requirement for bail-outs from EU bodies.According to some Government sources the capital of Cyprus banks would need to be raised by a huge sum to comply with the IFRS 9 regulation and the " making banks safer" EU initiative".
Ex Banker on August 31, 2017 - (permalink)
As long as there are no mass repossessions and a prospect of a possible haircut of NPLs, there is no incentive to start repaying these loans. Especially when there are a lot of people who are not willing to change their lifestyles.
Once repossessions of homes begin and people are left with a choice of continuing with the same lifestyle and become homeless or reduce their excess expenditure to keep a roof over their heads we will quickly see a massive reduction of NPLs.
Dear Les,
Thank you for your very sobering contribution to the discussion. As always it is very insightful. You and I have of course been very concerned for some time now about the perils of private debt and even wrote some papers on the subject which were published in reputable Journals, such as our latest in the World Economics Journal with the title "Neglect Private Debt at the Economy's Peril". Unfortunately, once again, people outside Cyprus are listening and even seem more concerned than the relevant authorities and our peers in Cyprus.
Non-indebted on September 1, 2017 - (permalink)
On a different point – the author emphasises that "economic growth stems only from financially sustainable projects". This statement reminds me of our parliamentarians. Anyone with basic economics knowledge knows the factors for long term economic development : human resources (skills, training) technology & innovation, natural resources and investment (could be machinery or the author's favourite: infrastructure projects). If this article makes such a simplification of this basic point in order to convince us, am i wrong to doubt its whole credibility?
Savvakis C Savvides on September 3, 2017 - (permalink)
You are confusing the potential for growth with economic development and welfare. North Korea has a tremendous potential but I don't think building rockets and nuclear weapons realises that potential. Neither does a project for which there is no demand for its products and services contribute towards economic development. On the contrary, what happens is a misallocation of scarce economic resources (some of which you correctly describe in your comment) which could have been employed in more productive uses. Last but not least, the economic viability yardstick is not a simplification but the golden rule for measuring the economic value of a projected investment project.
Savvakis C Savvides on September 4, 2017 - (permalink)
Correction: The last sentence should read:
"Last but not least, the economic viability yardstick is not a simplification but the golden rule for measuring the economic value of a capital investment project."
Savvakis C Savvides on September 1, 2017 - (permalink)
ThinkingAloud (and Erol),
It cannot be assumed that "probably" large corporates have enough assets and "probably" they can cope. I know quite a few that I am pretty sure they can't. And the simple reason is that all these large corporates were overloaded by debt as they were the prime targeted borrower from all the banks during the "happy years". Whether the people at the helm of these large corporates have amassed private fortunes here or abroad is a different matter (and it does not apply only to large corporates, if it happens).
There is also an unnecessary confusion created from the use of the word "struggling". I agree with Erol that perhaps distressed is a more appropriate word to use. The point is, large corporates are not immune from going under water. Many of them are like other companies in negative net worth territory. And moreover because they are indebted to so many banks with cross securities and collaterals resolving these issues and finding viable solutions becomes very difficult.
Ex Banker on September 4, 2017 - (permalink)
Large corporates can be sorted out more easily than the rest. The companies should go into administration and sold either as a whole or in part to investors at current prices. The shortfall will be covered by the Banks provisions for bad debts and the new investors should be able to manage them better, rather than continue as zombie businesses.
Savvakis C Savvides on September 4, 2017 - (permalink)
Easier said than done unfortunately. Large corporates have complex collaterals and securities to almost all the banks (and with cross guarantees more often than not). It is not easy to sort this mess out and to get the banks to agree to a reduction of debt and a relaxation of securities held, because without this, there would not be many who would be interested to undertake their existing huge debts to the banks. Also, what do you sell when large corporates are so much underwater that they are in negative net worth territory?
This is why I and a few others have been calling for a Reconstruction and Development Bank to sort this messy situation out and also to identify investors for new SPVs (special purpose companies) with manageable debts but more importantly, with viable projects which promise a good return. There is also the backdrop of a very weak domestic demand which makes any non-export oriented project that much more difficult to be appraised as viable and with an acceptable risk profile. And as a result not of interest to potential investors. The worst situation is to have the banks take over this businesses without having a clue how to manage them and/or without before knowing what to do with them so that they are quickly span back as viable and competitive projects.
Renos Ioannides on September 5, 2017 - (permalink)
Dear Savvaki and all contributors,
I fully agree on the establishment of a Reconstruction and Development Bank; it would indeed address quite a few of our economy's infrastructural and systemic issues. It would appear that, despite her deeply ingrained problems, Greece is ahead of us in forward thinking.
Given that a number of like-minded professionals care so much about trying to discuss ways of 'jolting' this economy (back?) to a healthy footing, how about trying to set up a coffee-cum-ideas exchange meeting event (assuming sufficient interest is expressed) to see how this can evolve; if it can (but where there is a will there is always a way). All suggestions welcome!
Regarding the Reconstruction and Development Bank idea we have been discussing this with the MoF since 2013. I have even written a paper which the Minister forwarded to the European Commission for comments. An extended version of that paper got published in the Journal of Private Equity by the title "Overcoming Private Debt". The stumbling was that the Government did not want to put up any Equity in order to make it happen. EIB and possibly other mutli-lateral international financing institutions (such as KfW) may also have contributed and provide lines of credit.
Anyway Renos, as I said before, if you guys organise something let me know. I am game!
Κώστας on September 4, 2017 - (permalink)
On the question of whether banks should sell loans at a discount just to get rid of NPLs, thus leaving the thick profits to the funds; or whether they should apply the haircut themselves and keep loans on their books, thus creating a moral hazard for the borrowers to not keep up with repayments:
There is a middle way.
Assuming the banks want to keep the loans on the book by offering a discount to the client, one way to remove the moral hazard is by applying the discount at the end of the loan.
For example, say client borrowed €100k, which now has NPL status and due to penalties and charges now stands at (say) €120k. Say the bank is prepared to take a hit of €50k (i.e. recover €70k). The bank can then agree to restructure the €120k loan for X years, and provided the client has repaid what would correspond to €70k + interest over a pre-agreed period of time without significant delays, then the bank will write off the rest.
That would be the most tidy and appropriate treatment, which would give real incentives to the economic agents to perform. This would put the economy as a whole on the right path.
The issue is that such treatment is not appealing to the banks. It would not give an immediate solution to the NPL situation: banks would have to wait for each restructured loan to run a continuous 6-month period of strict conformity with the restructured repayment programme, in order for those loans to come out of their NPL status and for provisions to be released back to profits. And throughout the remaining life of the loan banks will be living with the risk that the loan may fail again, thus fresh provisions will be needed.
Erol Riza on September 5, 2017 - (permalink)
A good idea if the size of NPLs was small and did not expose the banks to further risks of holding such assets on their balance sheets. The empirical evidence is that it can take many years to get these assets to be valuable for banks, unless there is a debt for asset swap at FSV. The bank then controls the asset and can do what it likes. Unfinished buildings and empty plots in obscure areas offer little scope for development.
Savvas proposal would have been fine if there was an AMC 3 years ago not a bank since another bank would have the same issues of capital and would only buy at very discounted prices. The only ones who seem to be doing a good job in other countries are the private sector which bring in equity and knowledge of the real estate development sector. Banks are not fit for purpose especially if they are owned by the public sector.
There is a lot of wishful thinking and I think the banks will get on with their strategy of reducing NPLs as they have been guided by the ECB and where there is a compelling reason to write off they will do so. It cannot be the general rule and this has to be understood. If we want to be part of the Eurosystem and comply with ECB guidelines we need to do what they ask system banks to do. If we want to think of not complying that is a different matter. I doubt any government in Cyprus has the luxury of thinking non compliance. The banks are private enterprises and there is little that can be done other than have the correct legislation in place and a framework for them to operate. Development finance for viable projects is available from the likes of the EIB and EBRD unless we want to introduce an Infrastructure Fund for new projects in which case some assets may seed this Fund; this happens in advanced economies as the UK. Question is how many NPLs linked assets can be part of such a Fund?
Ex Banker on September 5, 2017 - (permalink)
You are right that some corporate borrowers have collaterals and securities spread over several Banks, but the two biggest Banks, BOC and Laiki, have now merged into one. There are now a lot of corporate borrowers that owe money to BOC only who are over borrowed, but also own substantial assets such as hotels and large development sites that would attract interest from overseas buyers. Some of these assets have been taken over by BOC in exchange of debt but more needs to be done. These assets need to be marketed for sale asap, instead of being held by the Bank. Selling these assets to overseas investors will bring in funds to the Bank that can lend to other businesses creating employment. The problem though is the elite in Cyprus want to remain the elite with the help of the politicians and to the detriment of ordinary people looking for a decent job.
There is a huge difference between selling off assets (and properties taken over by the banks) and creating competitively sustainable and viable businesses. Even if the banks sell off the acquired collaterals they will not automatically create conditions for economic recovery. The problem is not about having the financing and funds to stimulate the Economy. The real problem we need to find a solution to is that we need at the same time to fix the economic conditions in order for new capital investment projects to be economically and financially viable. It takes two to tango. And unfortunately, the Government is not dancing.
Erol Riza on September 5, 2017 - (permalink)
Nearly hot off the press from FT
Number of European weak banks rises sharply……
In its report, Bain wrote that "any bank at any point along the spectrum can return to good health . . . if the regulators, board and senior executive team have the commitment to carry out the hard decisions required over three to five years".
It cited case studies of two banks that had moved from the weakest category in 2010 to the strongest now, by reducing their loans, cutting problem loans, increasing deposits, reducing wholesale funding and aggressively tackling costs.
For the distressed borrowers the government may lend a hand as per ECB otherwise the course is the same for all. The banks in Cyprus will have to take the hard decisions and the large corporate borrowers who are zombies may need to think again about inviting equity investment and losing control, with bank support in the form of partial write offs. The time horizon cited by Bain is very sensible and could mean NPLs are down to 20%, or better still lower!
We do not need Bain & Co to tell the obvious in Cyprus but sometimes if foreign experts repeat what some say in Cyprus it carries more weight.
Ex Banker on September 6, 2017 - (permalink)
I agree with you, but it can only be done with the correct legal systems in place and the support of the government. Unfortunately there are too many vested interests with the government, political parties and the owners of corporate entities looking after their own interests rather than what's best for the country. It has become a national sport to blame the Banks for everything in order to divert attention from the real problem which are the corporate entities, whose owners keep their businesses over borrowed while at the same time their money are abroad.
They are not all like that Ex banker. There may be some, I am not questioning that, but it is wrong to stereo-type them and generalise that the borrowers are at solely at fault, that they can pay and they choose not to, and all that jazz. The majority simply can't cope because they have been over-loaded with wasteful debt during the "happy years".
Erol, the depth and extent of private debt in Cyprus is unprecedented. It affects most of the economic agents of the country. This is why the recovery cannot be as easy as that for other countries. Moreover, we need the Government to be willing to adopt policies to stimulate demand and even a program of infrastructural public sector and PPP projects which will help get us out from the drag of balance sheet recession. And we also need to have a RDB, as I mention on my comment to Renos. I don't think that they are willing to destroy their fairy tale story in order to do that. Especially now that we are only months away from the elections. But we can only hope.
Non-indebted-too on September 7, 2017 - (permalink)
So prof. Savvides I see that you challenge all the assumptions of the current solution and describe them as not applicable and irrelevant to the special case of the Cypriot Economy debacle.
What is exactly that you are proposing to solve the challenge concerning the NPLS?
Systematic write off? Are you stating that all the people that received ridiculously large loans with ridiculous terms and unrealistic assumptions should enjoy all of them or most of them a reduction of their loan values and thus continue to enjoy within their standard of life which normally they would not be able to support?
So people like me which were responsible, and planned their budgeting within reasonable constraints should be punished we did not participate in the party?
Help me out here I am trying to understand what exactly it is you are proposing.
Savvakis C Savvides on September 9, 2017 - (permalink)
If you were prudent and wise enough not to go into debt and receive wasteful and unproductive loans it is to your credit and no one can take that away from you. Good for you. This is not a struggle about who may be better or worse off relatively speaking. It is like arguing that one should feel happy if a hurricane (like Irma) passes through the country and because he was thoughtful enough to take cover he should not worry about what happened to those outside who have not taken cover. Or even that we should not help the injured people out there and allow the vultures to eat them alive because they were not prudent as you to take precautions.
There is a huge devastation that took place which affects our whole economy, and they were many people at fault, least of all the banks. This is not about winners and losers in a relative sense. We need to begin the reconstruction as soon as possible for all our sakes. And we will not achieve this by allowing the vultures to eat our compatriots who have been hit, even if we feel they deserve it. What would be gained from allowing third parties to asset strip the country? More devastation and a far longer prospect for a recovery from an even deeper depression.
Non-indebted-too on September 10, 2017 - (permalink)
Prof. Savvides it is about winners and losers. If by "helping the hurt" people you mean that they keep their mansions, their ridiculously expensive appartments and their standard of life which they would not have if they either met their obligations or at least the banks exercised their right to take ownership of their collateral then this is a direct robbing of all the responsible citizens of this country. And of course this is the definition of moral hazard and you know it.
If such solution is implemented WILL signal to the future generations that they should/could do the same. And make no mistake, this signal will be included in the "risk free" rate of the whole economy while populists politicians will probably commit to shady practices again with their friends in ETYK and elsewhere.
As far for the huge devastations in our country, let me disagree as well. Bail-in was the perfect solution from an econometric and economical standpoint, the perfect "market" correction. One that reminds all that there is no free lunch and which resets the system to its default state, which of course without serious industrial activity is of low value.
THE ONLY way out of our economic misery (which existed also during the crazy credit expansion of 2006-2011) is reforms to make our country friendly to ACTUAL FDI which create High value added and sustainable job positions.
In this way the problem of excessive unused liquidity (as you described it in your article) would be solved through financing these FDIs. In this way the percentage of NPLs would fall , while at the same time time would be given to these obligators to resume their loans by getting a job. There is no other feasible course for our economy. Anything else will backfire.
Personally, I would like to see you turning back from these dangerous and theoretically grey solutions which give academic backup to stupid populist politicians to speculate and divide society.
With respect.
p.s the strip of assets which happens through "investors" in land (pafos is practically owned by foreigners) how is it any different to the "vulture" funds?
Ex Banker on September 11, 2017 - (permalink)
There is nothing wrong with foreign investors purchasing repossessed businesses and other assets in Cyprus from the Banks. This happens all the time in other European countries. There is nothing unique about Cyprus. When a business or individual is unable to repay their Bank loans, the Bank should repossess the collateral and selling it. That is the only way Banks can work. Otherwise what is the point for the Bank taking collateral? The money received can then be lend to other credit worthy customers generating employment. Writing off debts can only be done in very exceptional cases. Your proposal is totally flawed and can only become an incentive to borrow money with the knowledge that there is no need to pay it back, which is exactly what created the current mess. People need to understand that they can only borrow what they can pay back, otherwise it would cost them dearly.
Thinkingaloud on September 12, 2017 - (permalink)
Indeed, any loan taken under the right circumstances and in a fair and equitable way should be repaid back or the collateral ceased. in times though when the banks, dear Ex-banker, colluded between, and scammed the industry, the borrowers and the whole Cyprus economy, then they should be held liable and the responsibility to pay up should be equally shared. If a businessman requested a business loan, then that loan should be a business loan and not one backed by personal assets, guarantees etc. If a homeowner to be requested a mortgage, that loan should have reflected his/her ability to repay and not the inflated valuation (mind you that the banks were doing their own valuations) of the house s/he was about to buy. Furthermore, the borrower should be able/allowed/encouraged to seek loans from a number of financial institutions and compare and contrast terms and conditions (not merely the interest rate) and ideally these terms and conditions would be designed in a freely competitive market. Well, that was NEVER the case in Cyprus. The banks and the banking system in general (including the CBoC, the bankers, the laws regarding the banking system, etc) were all at fault. The borrowers were never educated enough to make proper financial decisions that would affect them for 30-40-50 years of their lives.
I am not arguing that all loans should be forgotten. I am not saying that writeoffs should be widespread or considered as the de facto course of action, but I believe that the banks should proceed with write offs on a case by case and this will never create a moral hazard. No write offs will actually create a moral hazard for the banks and the bankers to continue handing out loans based on asset valuations and personal guarantees.
Foreign Direct Investments (FDI) is indeed the best way to drag the Cyprus economy out of this mess. At the same time, the banks HAVE to realize that they have to start operating like EU banks do and quit demanding personal guarantees from the foreign investors. If the business loan is not enough, then just say it is not enough. Personal guarantees will never be accepted by serious foreign investors. I know for a fact that BOC botched sales of assets off its balance sheet because the demands for providing a business loan were completely out of whack. If someone proposes to buy 5 apartments off of the bank to rent them out, and requests a 60% loan for that it will of course be treated as a business loan. That means that the rate she will get will be 4.5%+ (sadly this is WAY too high, but still this is the rate she will be offered). The loan officers should take into account NOT only the current income of the person borrowing that money but the potential income from renting these apartments out, since this is a business loan. If you are not to consider the potential rental revenue, then treat it as a housing loan! PS: this is a real scenario!! and sadly not the only one I have personally witnessed.
Banks in Cyprus are nowhere near what they should be and are driving serious investors away.
Savvakis C Savvides on September 12, 2017 - (permalink)
Towards Non-Indebted:
If you have read all that I have written in my article (and possibly all my other published work on the subject) and all that I tried to explain in my comments and you have concluded that this is about winners and losers and that the salvation will come through some defunct econometric model, there is nothing further I can to say to you to persuade you otherwise. You are of course, as am I, entitled to your own opinion.
Towards Ex Banker:
As I commented to Non-Indebted above, I don't think we are on the same wavelength and it is not productive, or even worthy of the attention of the public at large who read this blog, to pursue this discussion further. At least, I did not call your analysis (or lack of it more accurately) flawed. And I sign everything I write with my real name. Always did, even when I was employed and risking making unhappy my employers.
Non-indebted-too on September 18, 2017 - (permalink)
Some defunct econometric model? assessed as defunct by whom? on what theoretical basis?
Anyway let's leave it at that. No need to discuss further when you won't accept the big injustice and turmoil in society of the "solution"you are proposing.
Econometric models do not recognize the effects of private debt. See for example Steve Keen's "Minsky Project" which was commissioned to develop software for visually modelling national economies in a way that is intended to be more accurate than mainstream macroeconomic models – which Prof. Keen contends do not properly include debt and banking.
Dear Non-Indebted, Your sense of injustice is very one-sided. The real problem is not really about doing justice to one side or the other (and who should pay – debt is just not possible to be repaid in whole and that is the sad truth of the matter). It is also about what is the huge impact of a nation which is so highly indebted on the prospects for economic development for the whole economy. But I agree, there is no point in pursuing this argument any further. Both our positions and points of view on the matter are clear.
Non-indebted-too on September 21, 2017 - (permalink)
I would stop here but I I've read carefully Minsky Project I do not see any evidence which link to your assessment of "defunct" econometric models. Weaknesses and limitations do not qualify as "defunct".
Furthermore there is no scenario NO ECONOMETRIC SCENARIO without high private debts in near future unless someone comes and takes over the npls (bad bank??). The solution you are proposing is near to "σεισαχθια" and does not include the social implications which WILL BE incorporated in the economy through higher interest rates(e.g no bank would want to give loans if there is a possibility to have in the future similar solutions.
Yes we disaggree but my sense of injustice is not one-sided.
People were lent on unrealistic assumptions BOTH SIDES OF THE AGREEMENTS knew that they could not meet.
Now you are asking for the rest of the society to pay through our taxes (new bail-out) or stakeholders which have no previous responsibility on what happened, to bail-out all these people without them suffering any consequences (related to their loans). You insistedly stating that this is a reasonable sacrifice in order to "save the economy".
Easy solutions are populist solutions.
Just for the record.
Savvakis C Savvides on September 23, 2017 - (permalink)
What gave you the impression that I am in favour for the taxpayers to pick up the bill of failed bankers? What I am saying is that the provisions should be used (on a case by case basis) to arrive at viable restructurings rather than use them to give huge discounts to third parties in order to take the loans off the balance sheet and who subsequently will demand full payment from the suffering borrowers. This helps the tax payer and the economy.
Nagual Paulsen on September 12, 2017 - (permalink)
Three steps in dealing with a problem:
-Immediate/temporary fix, so that the system stays alive.
-Investigate to determine real causes of the problem.
-Fix the problem permanently to avoid recurrence.
-The system (banking) in Cyprus is still heavily injured but yet alive. They have applied harsh measures (bail-in on deposits) to resuscitate the patient.
-No investigation has taken place to find the real causes.
-Based on above there was no permanent fix.
Some may think: hang on a sec the system is now being supervised and monitored by the ECB. Capital requirements have been established and imposed on banking institutions, liquidity requirements are safeguarded….and let's not forget AQR (asset quality reviews). True, but has the system been really fixed?
We had a bail-in on deposits, the haircut is still at the forefront of people's minds, so bank runs can and will occur at the drop of a dime, until at least older generations die off and/or become afflicted with amnesia……provided of course that in the meantime there is no other occurrence.
Trying to fix the NPL problem is of course a must, a symptom and a cause at the same time. The implications are dire for everybody, whatever the fix may be. There is no easy way out. You can hide the problem, but it will keep cropping up whatever you do. Still, nobody wants to accept the reality of the situation (nurtured by populist politicians), so the problem keeps resurfacing…..over and over again.
But the real problem is the shortfall of fully liquid assets against deposits i.e. the "alchemic gap" (see Mervyn King's "End of Alchemy"). The banking system in this concern is "light years" away from being liquid. This is the main cause of bank runs and now bail-ins on deposits, i.e. The Fractional Reserve Banking. Now bring into the picture the Banking System in Cyprus with 50%+ NPLs and you can see the immensity of the hurdle. Here is where the root of the problem lies…. and this is what needs to be fixed.
Erol Riza on September 14, 2017 - (permalink)
NP, I am not sure what your suggestion is to resolve the problem of real estate linked NPLs in Cyprus really is; we know that there are flaws in Fractional Reserve Banking but this is not going to change and indeed NPLs in Cyprus make the matter worse. So what is your proposal?
It is now 4 years after the financial crisis and the bail in of BoC and resolution of MLB and from time to time the various politicians and bankers remember the problem of NPLs linked to real estate; I hasten to add the link to real estate as this is the "specificity", as one central banker mentioned made things worse. Yes the specificity is important since the empirical evidence globally has been that it will take a long time to unwind the huge bubble that leads to these crisis.
Since in their wisdom the politicians in Cyprus decided to protect the borrowers at all costs (especially the well to do borrowers) and lawyers have advised strategic defaulters that write offs are on the way, the problem will stay with Cyprus for more years unless the banks do what they need to do; the recommendations all along have been to get rid of these NPLs as the banks have no business managing these assets. They did an awful job lending in the past (present management cannot blamed) so much to the sector and now they reap what they have sowed.
In Cyprus some think that creating a bad bank (no way can one fund such a bank given the legal framework unless the private sector is supported by the government as suggested by the ECB) it will be like a magic wand to get rid of the problem. Sadly they have nothing to substantiate this case. Unless the stakeholders in Cyprus understand that protecting some borrowers and giving them all the incentives not to pay will not make the problem go away. Certainly write offs across the board will make things worse.
Yes there is a problem in the banking system but if the banks are truly interested to resolve the problem they should look at the balance sheets again of their borrowers and see what the debt is and also how much is the tax owed to the government and ask themselves can these businesses attract equity investment to reduce debt and to make the business sustainable. The business model of some borrowers not putting any equity and over leverage has led the economy to being over borrowed and hence the concerns of my esteemed former colleague who rightfully worries about the size of private debt. However, unless the system is put back on the right track and businesses that survive have the right business model it will be tough. For if any business takes the risk it must bear the consequences of risk taking while at the same enjoy the fruits of success. Borrowing on a LTV basis without equity injection cannot work indefinitely. In Cyprus some thought they found the Holy Grail.
So in short it is not fractional reserve banking at fault but the bad business models and the subsequent protection afforded to borrowers by politicians as well as banks not being able to get rid of the assets which have affected profitability, provisions and capital. If banks want to lend prudently and support investment the capital constraints in place, due to regulation, are made worse by the exposure to NPLs in the sector where new businesses may flourish without debt. Keeping some zombies alive is not going to make the problem go away.
I don't disagree with most that you say Erol. But I am afraid we have more zombies out there than humans. Somehow we need a clean slate to start again. In 1974, after all the devastation of the invasion and ousting of so many people from their homes, at least we had basically debt free economic agents and a solid ground on which to build on. I am not sure how we can to that from here to tell you the truth. What we have now is totally different. What worries me is that if the banks push on with their agenda all that will happen is a huge transfer of wealth from the people to the banks with no end in sight. You know better than I that banks cannot manage businesses and indeed they should not. So, where do we go from here? We need more than a bad bank or just an outright sale of loans to third parties. This is why we had those long discussions when we were both members of the Interim Board of the Bank of Cyprus and I kept insisting and pushing for a Reconstruction and Development Bank rather than a bad bank. I still do, but I am afraid, even four years after, nobody seems to listen.
Erol Riza on September 15, 2017 - (permalink)
A former Minister of Finance stated the obvious: Cypriot businesses have their debts in Cyprus and their personal wealth abroad. It seems to me the obvious way forward for banks as they funded some of the investments abroad and where they did not they should know where their loans ended. In the absence of repaying their debts in Cyprus the winding down of some companies, which have no real business viability, but are sustained by too much leniency by banks or political influence would seem to be one way to reduce private debt. It cannot be the case that wealth held by these borrowers abroad is untouchable while they wish to soldier on with forgiveness from banks. I disagree that there will be wealth transfer to banks. The phenomenon of banks getting their collateral monetised seems to be right since as we all know banks use deposits mostly to lend. If this means that depositors money is better served what is the moral case against this. Bank equity is a small amount of the liability side on the balance sheet, this we should not forget. I also feel that the current shareholders should be rewarded for the risk they took. is it right the borrowers who have been in default and used bank loans to continue to benefit?
The message from all stakeholders should be that time is up for businesses that cannot justify bank forbearance or some further restructuring. The use of hindsight has never helped in Cyprus since if you recall the NPLs were closer to 30% and it would have helped to address the problem before it became the monster problem everyone remembers from time to time. Yet ALL the political parties killed an idea in August 2013 before it was born without knowing the consequences of their decision. That option of a Real Estate Investment Bank you allude to is no longer feasible and desirable since the banks have taken the provisions necessary so that they can take more drastic action in terms of sales of loans and foreclosure; why would they want to sell at larger discounts?. This is what has to happen with protection of distressed and vulnerable borrowers. Finally the MOF is coming around to this view which is good news. I think we should not seek to reinvent the wheel and say that Cyprus is different; it is not and we should look at Ireland and Spain and how FDI has grown once the banks were out of the woods.
Savvakis C Savvides on September 16, 2017 - (permalink)
To be honest, I find your comments rather disappointing and to put it mildly, a little casual.
The biggest mistake we all do is to generalise from an arbitrary assumption which does not apply to most let alone all. You say and you take it for granted, that Cypriots have bags of wealth abroad and they are all strategic defaulters. I would have expected this type of crude logic from other people but not from you Erol. And since when do you accept as gospel what current or ex ministers of Finance say!
Moreover, winding down businesses does not reduce the private debt as you argue! The debt is still there whether the business is wound down or not. If you mean collecting on the collateral and other security positions held by the banks such as floating charges and personal guarantees it is not necessary, or a must as you imply, that they businesses are wound down in order for that to happen. I fail to follow your logic. In any case, I don't see how this will help the economy and put it on a path of development.
You also argue that the "gallant investors" and Funds that have taken equity positions and through this control the banks should be rewarded. The simplest and perhaps only way left for them to do so is through raiding the balance sheets of the banks. I can't see how this will happen through long term profitability, and I am sure, neither do they. And I very much doubt they are willing to take such ride in a any case in order to find out where it takes them.
Last, but not least, my proposal was never for a Real Estate Investment Bank! I don't know where you got that from. And it is really disappointing coming from you who really should know better. There is a huge difference between that and what I have proposed which is a Reconstruction and Development Bank, which to be honest, I don't care to explain, yet again. If you really want to find out, you can read one of my published articles; it is mentioned and described many times.
And as far as Spain and Ireland is concerned, these cases do not even come close for comparison purposes to what Cyprus is going through. None of these countries have the enormous and overwhelming private debt problem that Cyprus is up against. In Cyprus, indebtedness is the rule rather than the exception as far as the economy is concerned. This is why I was referring to having more zombies than humans in Cyprus. You can't rebuild an economy from zombie economic agents (heavily indebted – both households and companies).
Savvakis C Savvides on September 20, 2017 - (permalink)
There seems to be a need to make a distinction between loans extended to the rich and powerful (very large corporate groups) and the regular loans that were offered to others. After having a private chat with Erol I think we both agree that this elite group of bank customers more or less had it all there own way. But which however are a special case (perhaps 20-30 clients at most) that that does not apply to borrowers at large.
The relative weak position of the banks against such clients was mostly self-inflicted. The banks brought this upon themselves because the bigger the client and loan, the softer the terms and pricing! On their part, the sought after big clients took advantage of the fact that bankers were competing for their business and somehow managed to over-borrow to almost to the maximum from all the banks! Moreover, the banks granted them these huge loans often at below funding cost rates and insufficient security. In some cases, not even the personal guarantees of the major shareholders were required. The rich and powerful were indeed like the "godfathers" of some bank managers and also with some politicians/government administrators as regards soft contracts and relaxation of rules and obligations.
An old friend on September 14, 2017 - (permalink)
Any suggestions of how to fix it ?
Κώστας on September 12, 2017 - (permalink)
I do not think that his thinking is flawed, and this comes from a present banker with over 17 years of lending experience between the UK and Cyprus.
The point that the author is making is not, of course, that lending should be lax and borrowers should be able to get away with it. Nowhere in his writing is this suggested. In fact, he has criticised the bad lending that had gone on for so many years, with the blessing of bank boards and with hardly any meaningful intervention from the Central Bank.
The point, I think, the author is trying to make is one of size. When you have such a large portion of the national economy suffering from loan defaults, then carrying out an aggressive repossession strategy and selling those loans cheaply to funds that will then be harsh on borrowers, this will amount to a significant transfer of wealth from the sufferers (in this case middle class or below) to those with ample liquidity (i.e. the wealthy).
Without meaning to sound a communist (which I am not), any person with a basic grasp of economics knows that the size of the middle class in any economy is a pivotal factor of that economy's prosperity. When you have the rich becoming richer and the poor getting poorer, the long term prospects of that economy deteriorate.
All the above are in addition to the author's argument of fairness, in effect implying that the masses were conned by the commercial banks' policies and practices.
And let me be clear, these practices and policies were not merely endemic to Cyprus banking. Greed and amateurism are unfortunately common in financial institutions world wide. The difference with Cyprus is again size: all banks behaved in similar fashion; and over-borrowing was widely encouraged and carried out for such for a prolonged period of time without consequence
Ex Banker on September 14, 2017 - (permalink)
Dear all
When we are talking about the Banks writing off debts, who is supposed to lose this money? Because when someone gains, someone else loses. Who does the Bank money belongs to? The current shareholders who had nothing to do with the creation of the NPLs? The Banks retained earnings, which there aren't any since the Banks are not making any profit, but also belong to the shareholders? Or the depositors? The previous shareholders who were responsible for the appointment of the senior Bankers and the creation of Banking policies have already lost their money and gone. Why should the current shareholders lose? Banks were operating within the environment created by the governments and the regulatory authorities. Why isn't anybody calling for the gonernment and/or the Central Bank to pay? If anyone one of you bought shares or deposited money in the Banks recently be happy to lose your money for the sake of people who do not or cannot afford to repay their debts? If anybody loses their home due to inability to repay their debt, it is the governments and charities responsibility to provide housing, not a business such as a Bank.
Φεραίος on September 16, 2017 - (permalink)
Ex Banker
I agree completely with you. Most of the friends here look at the Banks as charitable organizations. This is unfair to the new investors. Nobody should expect i.e. Mr. Ross who invested at very difficult times to voluntarily loose money because of the Cypriot borrower mentality not to repay its debts.
The private Banks, and for that matter all private businesses simply do not operate like that.
I must say that I am shocked by most of the comments here . It is obvious to me that our friends here never owned, and never run a personal business
Savvakis C Savvides on September 18, 2017 - (permalink)
I don't think that anyone here, or elsewhere that I know of, argued that debts should not be repaid. However, to say that borrowers can pay but that they choose not to pay (i.e.. that they are "strategic defaulters") is to say the least naïve and possibly a convenient argument for some. With only a few exceptions, people do not pay their instalments not because they choose not too, but because the can't.
You also forget that it was the duty of the bank to assess the repayment capability of the client before granting the loan. If the bank relied only on the collateral to grant the loan, this is not only wrong but borderline immoral. In the United States under the Constitution they call that was to introduced to protect borrowers from such lending the Law of Fraudulent conveyance.
The other point that is missed in my opinion is that this is not just a legal matter to be settled in the law of contract. Of course it is such, but it is also a national financial crisis which affects the whole of the economy. Pushing to collect at all costs and without regard to how this affects the economy and prospects for development can only make things worse and elongate and deepen the effects of the recession and even turn it into a depression.
Φεραίος on September 19, 2017 - (permalink)
If you really believe that most of the borrowers don`t pay because they can not, you must be living in a different country. They simply don`t pay because people like you and the politicians encourage them not to, as if "someone" from the outer space will pay it for them.
It is, the least, strange for someone to want the bankers and the shareholders to keep throwing their money, increasing the capital of the Bank, so that these people can continue to own and live big houses, buildings and land.
The great majority of these borrowers have assets that can easily cover their debts. They don`t do it because as most of them say "we`ll wait until the property value increases" This was my position for a long time now and the BOC CEO confirmed it very recently
Φεραίος on September 19, 2017 - (permalink)
As far as the United States is concerned, yes that is the United States, not Cyprus. At the same time we must not forget that in the United States they can "kick you out" of your house or take over your business and assets in zero time if you elect not to pay or if you can not pay your debt.
We don't live in a different country. We just perceive the world differently. What you and some of the CEO of banks tend to generalise is the exception rather than the rule. The hundreds of thousands of borrowers just cannot make ends meet. Many have thousands of Euros to pay every month and they are either unemployed or receiving a salary which does not even cover the interest!
It is convenient for the banks to argue like you in order to generate a favourable sentiment for introducing legislation which will enable them to make a good return on their investment. But not through the long run profitability of the bank because without a prospering and growing economy this is an elusive dream at best, but rather through the Bank's balance sheet. If you want to read how this is done read for example "The best way to rob a bank is to own one" by William Black.
Do you also know that in the United States one can hand the collateral to the bank and walk away debt free? No fixed or floating charges, no personal guarantees, no assignments or life insurances or memos!
Thinkingaloud on September 19, 2017 - (permalink)
Dear Fereos, you sound like someone sitting on the board of a bank! I can understand your point and I don't think anyone here said or argued that borrowers should not repay their loans. You completely wrong on that front. At the same time I think it is wrong from your side to try and protect investors in the banks who knowingly invested in banks at times or turbulence in the prospect of making good money. We should not look upon them as saviors but as business savvy people. Have I had money to burn I would have probably done the same. Don't think that Mr. Ross will sweat over his investment in the BOC. He has much much bigger investments and concerns right now.
Most people in Cyprus did not get appointed on some board in a bank and do not have the fat salaries of many smart but nevertheless politically aligned people who got good positions and the crisis actually helped them. Most of the people maybe have a house or an apt they live in and they get by with the minimum salaries. The problem lies in the fact that the banks at some point got cocky and started lending money to NINJa (No income, no job people) purely on the basis of the value of the collateral. Sounds familiar? Look into what happened in 2007 in the US. Our bankers came just a bit late into the party. But OUR bankers were even smarter than the US bankers! They colluded with the property valuators, and jacked up values!! Hooray!! Everybody is happier, the bankers are drinking champagne and cheering and taking trips as the branch that handed the most loans that quarter, year etc! People, retail customers are happy that they can get a loan and they do! Bankers often offered them without even asking for one! So why not take it! YES this happened in the US and YES in the US the bank can kick you out the moment you start not paying! YES, I agree with you that this should be also happening in Cyprus! BUT first of all, control the bankers! Make sure that the bankers are not allowed to give loans without proper dued diligence and making sure that the borrower can/has the necessary income to cover that loan! Make sure that the bankers are not charging extortionate fees and interest! Make sure that personal guarantees are only effected when there is fraud involved! Don't give all the power to the 5-6 banks in Cyprus who can easily collude and offer identical products and identical terms cornering anyone in Cyprus who wanted to do business or live in Cyprus. Check why there is no more manufacturing in Cyprus. Check why there is no textile industry in cyprus. All these are the effects of the supersmart bankers we had for ever in Cyprus.
The majority of the people are not paying their debts because they can't! Not because they don't want to! Nobody wants to lose their house but at the same time, if they had the option of selling the existing one and paying off their debt and moving to a smaller one they would take it! If they had the option of surrendering their house and getting rid of their debt and rent a place they would! BUT the banks won't allow that! The banks have personal guarantees which in the minds of the sick bankers it means that that person will still be indebted for the rest of the amount that the bank thinks it is owed! Because the bank which accepted a collateral now does not recognize the collateral as enough! They want more! NO this my friend is NOT right or fair. The Central bank should wake up and take notice! People are suffering with the banks! They are unwilling to negotiate, they are unwilling to help! And why should they? They have people like you who have not had to deal with the banks and politicians who argue that we should protect them and their newly found investors! Yeap, we just forgot the previous investors whom we ran to the ground and now have debts to repay!! It is sad seeing how people who have not felt the problem are so ready to defend the banks! I know a few myself!
Φεραίος on September 20, 2017 - (permalink)
The points completely missed here:
1. We have brand new Banks that helped the country survive. The malpractices/illegalities of the past are the responsibility of the Government/Central Bank and any other local institution that did not perform as expected.
They should pay the price along with the debtors.
2. The Country can survive if a few thousand people live in smaller houses, drive smaller cars, do without a house at Protaras. But the Country CAN NOT survive without Banks. The sooner this is understood and accepted the better for all of us.
Yes, I had bad experience with the old Banks. Not any more.
Φεραίος on September 20, 2017 - (permalink)
Ignoring the obvious and the election to avoid the use of common sense destroyed the Country`s economy and resulted in the looting of the old Banks. The old Bankers paid the price by loosing their shares and some of them are facing criminal charges as we speak.
If we acted again in the very same way, as you suggest, the end result will be exactly the same i.e. leave the Country without Banks
Οι τράπεζες ισχυρίζονται ότι η πώληση δανείων σε ιδιώτες θα μείωνε την επιβάρυνση των τραπεζών και θα ελευθέρωνε τα κεφάλαια και τους πόρους για να στηρίξει νέο δανεισμό.
Συμφωνώ ότι θα βοηθούσε τις τράπεζες να ξεφορτωθούν το πρόβλημα των ΜΕΔ, χρησιμοποιώντας (αλλά και εξανεμίζοντας έτσι) τις προβλέψεις για να δείξουν πλασματικά λογιστικά κέρδη ούτως ώστε να μην χρειαστούν να βάλουν νέα κεφάλαια, αλλά όμως αφήνοντας τους πνιγμένους δανειολήπτες στο έλεος των τρίτων και εκτός επιτήρησης και χωρίς πλέον περιθώρια για έστω μερική διαγραφή χρεών. Δηλαδή βοηθούμε τους μεγαλομετόχους να παραμείνουν στο πηδάλιο των τραπεζών ανακεφαλαιώνοντας τις τράπεζες χωρίς ίδια κεφάλαια αλλά δυσχεραίνοντας όμως το πραγματικό πρόβλημα που μαστίζει την οικονομία που είναι το τεράστιο ιδιωτικό χρέος.
Συμφωνώ επίσης ότι αυτό θα αυξήσει την ρευστότητα, αλλά σε ποιους δανειολήπτες που δεν είναι καταχρεωμένοι και σε ποια έργα που θα είναι βιώσιμα θα δίνουν οι τράπεζες τα δάνεια. Ρευστότητα υπάρχει και τώρα και δεν δίνουν δάνεια. Οι προϋποθέσεις για βιώσιμες επενδύσεις είναι το ζητούμενο, όχι και άλλη ρευστότητα. Άμα λύσουμε το πρώτο, το δεύτερο λύνεται από μόνο του. Αν δεν πάρουμε μέτρα για να δημιουργηθούν υγιής συνθήκες για βιώσιμες επενδύσεις, η αυξημένη ρευστότητα μόνο χειρότερα μπορεί να κάνει τα πράγματα.
A general comment for the three thoughtful comments added by ThinkingAloud (who more or less expresses my position and sentiment), the useful contribution by Nagual Paulsen and Costas who puts matters in perspective.
The problem with the Cyprus Economy as I mentioned a few times is one that Richard Koo coined as one of "Balance Sheet recession". It basically occurs when private debt increases rapidly and to levels that are in such magnitude where the normal adjustment of "creative destruction" and through additional lending/financing cannot happen. Even if it was possible to pursue such an adjustment it would most likely, as we know from Japan, take many decades to overcome. Austerity, which is the usual pill given by IMF and naïve economists in the EU does not even begin to solve the problem. On the contrary, it makes it even worse as it kills the prime requirement for economically viable projects which is a strong domestic demand. The reduction of private debt (on a case by case basis) is a must and a necessary measure in such circumstances. And as ThinkingAloud points out, the banks are not victims or innocent bystanders. They have in the main caused this balance sheet recession crisis through their irresponsible lending practices. In the USA, the State of NY has enacted into the constitution the law of Fraudulent Conveyance which is designed to protect borrowers from vulture bankers to give out loans that can't be repaid solely on the basis of collateral (with the ultimate purpose to acquire the asset of the collateral). The law stipulates that if the bank cannot prove that they have taken due care to assess the repayment capability of the borrower, the latter can walk away from that loan. So, moral hazard cuts both ways. It is not just a stigma on the borrower. This, to put an end to this one sided frenzy of moral hazard preachers.
Thinkingaloud on September 18, 2017 - (permalink)
Moral hazard cannot be one sided. There should be laws and bylaws to protect both sides of the equation. While debt forgiveness is considered a moral hazard, the rescue of the banks at all costs is not?
I am hugely disappointed by Erol's superficial and naive comments that Cypriot businessmen have their wealth abroad. That is pure nonsense that serves the populists and more dangerously the dumb unionists! Cypriot business people have worked their asses off their whole lives to create and grow. Yes, there are cases of strategic defaulters who managed to take their money abroad and now are in a position of power to negotiate with the banks. This is however not the norm. Most people are hard working honest people who got scammed by the banks and their fraudulent behaviors, their super high interest rates, and although working honestly for decades, they saw their wealth and efforts disappear overnight. I know for a fact that despite making several viable proposals to the bank to reduce overall debt by surrendering property, restructuring remaining amounts and allowing the business to operate in order to create the needed cashflow to escape the NPL spiral, the bankers are unwilling to budge as if they know best. Well, THEY don't and this was proven again and again in the past with their ill advice and their bad behavior. It is very easy to find out if someone has extra assets abroad or if they are hiding money and frankly the banks know exactly who these people are. They are the same ones who used to get the best interest rates, the best terms and the bankers were making some extra money under the table for themselves. Huge amounts as wedding presents, long term contracts for their sons and daughters companies to provide services to these businessmen, free travels etc. Bankers act as if they are the innocent bystanders.
I am not in favor of widespread, blanker write offs. I am in favor of proper laws that will protect the participating parties in the economy from fraudsters like the bankers. I am in favor of partial write offs in cases where people are really coming to the table with proper potential solutions for their NPLs where both sides take some hit and potentially survive.
I am not sure that a Reconstruction and Development bank would help at this stage. Proper monitoring of the banks and retrospective enforcement of proper controls would. As Mr. Savvides said, the State of NY has the law of Fraudulent Conveyance, designed to protect borrowers from vulture bankers. This is absolutely necessary in Cyprus and whoever has been involved in banking in Cyprus in the past 20 years can attest that this has probably been the biggest weakness of the Cyprus banking system.
Cypriots are not greedy bastards as conveyed by the bankers today or our politicians at some point and sadly by Erol in this post. But the system has to be designed to work and be a fair game. It is about time we stop protecting the banks, as it is about time to stop protecting the borrowers with laws that stop foreclosure. BUT first things first! Even the field, so the big guys (banks) stop having the upper hand, take the bat off their hands, take away the brass knuckles and then remove the protection from the small guy (borrowers). Let them go at it! I am obviously routing for the underdog!
Ditto! The main thing to avoid at all costs now ThinkingAloud not to legalise schemes which are designed to allow the guys currently at the helm of the banks to hijack the provisions to forestall efforts to raise capital. As you say, these provisions can be employed on a case-by-case basis to soften the debt burden and incentivise solutions which will create new viable business entities (whether through an RDB or not). Selling the loans at huge discounts outside the banking system and exterminating the provisions buffer will be the endgame. The abyss is what lies ahead.
Erol Riza on September 19, 2017 - (permalink)
Thinking aloud,
I will pick up the challenge by citing numbers to you and you can then think again and aloud:
Prior to joining the euro the government of the late President Papadopoulos offered an amnesty for all those who held wealth abroad. If my memory serves me right £2bln pounds were repatriated and the tax collected (5%) helped Cyprus join the euro as it helped Cyprus balance the budget, albeit a one off. Between May 2012 and March 2013 an amount of €12bln of funds flowed out of Cyprus; I do not think it was all Russian money. Hence it is not naive at all to express an opinion that wealth of businessmen is held abroad, unless you think that all the wealth is held in safe deposits in Cyprus. I did not suggest that all businessmen have wealth but those with NPLs of substance can repatriate funds to reduce their debt in the form of equity injection. Why not if they have it? Why should the borrower rely on the bank writing off without any burden sharing where this is feasible?
Thank you Erol for the numbers!
Late President Papadolpoulos offered the amnesty to try to bring back some of the stolen money that were the loot from the Cyprus Stock Exchange 1999 bubble/fiasco. Was anybody investigated for that crime? Nope!
Whatever money flowed out of Cyprus between May 2012 and March 2013, the banks know their owners and UBOs. By all means go after them! Hunt them down and be relentless!! Sadly enough that money is not the money of pure hard working businessmen in Cyprus. A large percentage of that is foreign money of people with multiple accounts in various banks across Europe. Do you know that the advisors at the foreign banks like Barclays, Juliu Baer, Credit Suisse etc were warning their clients of what was to happen in Cyprus a year before the haircut?
Unfortunately the vast majority of the population in Cyprus did not have that information offered to them or even if they did, they could not open an account with major EU financial institutions to operate their businesses as Cyprus was not an accepted jurisdiction! Did you know that?
Erol, I agree with you that there are people with substantial amounts abroad. Not only cash but significant assets (apartments and houses in London and Greece primarily). What I am saying is that the banks know exactly who these people are BUT they are NOT the majority!! Generalizing is SO WRONG! They are not the ones who are struggling today! The banks can look into each and every one of them and chase them for what they have! Please do!! But do not generalize and argue that the Cypriot businessmen have money abroad. The Cypriot business men and women are primarily small or tiny business owners who were working for their whole life making ends meet and offering a decent quality of life to their families. Very few had the opportunity to live the flamboyant life with the massive cars and houses and money stowed away abroad. Wealth is highly concentrated in Cyprus and it is easy to spot it as the "wealthy" typically show it off! They are usually aligned with the political "elite" and participate in the Cyprus cronyism (lets look at the previous chairman of BOD of Bank of Cyprus who "owns" half of Paphos and again was helped by the government's citizenship by investment program). Look into the big developers who had all the major government contracts, look into the major hoteliers who own half of the beachfront of Cyprus.
I do think hard Erol and I think aloud! It would be good if you did too!
Ex Banker on September 18, 2017 - (permalink)
I'm trying to understand your reasoning. In 2013 ALL Cypriot banks went bust. They were insolvent. They were saved by the injection of money of foreign investors. Are these the big shareholders who should lose their money? If that is the case, why should anybody else invest money in Cypriot banks when they will need recapitalisation very soon? Like it or not, Cyprus like any other country needs strong solvent Banks.
Thinkingaloud on September 19, 2017 - (permalink)
Did anybody protect the previous shareholders? The ones who injected money for decades? The ones who had the savings of their lifetime invested in these banks?? The ones who worked for these companies, who worked and operated their businesses through these fraud institutions?
It is brilliant to say today that you must protect the investments of the likes of professional fund managers who knowingly took the plunge and invested in these companies (unlike the thousands of retail investors who lost their investment overnight because someone decided to fold Laiki into Bank of Cyprus). You are truely an ex-banker! Your understanding of how things work is lopsided as it was when you worked at the bank! Wake up!
YES, Cyprus need strong solvent banks! It also needs strong solvent private businesses and households! Make no mistake! I am NOT saying that the regulators should force losses upon the investors like they have done in the past. We are only arguing that the playing field should be leveled. The banks can take some of the losses. The households can also take some of the losses but not absorb the whole weight of the losses. What if you save the banks and you end up with strong solvent banks but no one left to take loans and operate? That's brilliant! Bankers are notorious for their bright minds!
I am no banker, I am no financial guru nor a professor but I have common sense which apparently is not that common after all!
The banks MUST be forced to (encouraging did not work) acknowledge their own faults, work with their borrowers on viable solutions to resolve the NPLs which THEY have primarily created and stop acting like the innocent bystanders.
Ex Banker on September 19, 2017 - (permalink)
Theoretically you are right. The previous shareholders lost their money because they are the ones who created this mess. What I'm saying is that the Banks will need recapitalisation very soon. I think all agree on this. The current shareholders will have to provide these monies in order to protect their investment. If they lose their current investment, what insensitive do they have to put more money into the Banks? No insensitive at all. In your scenario who do you suggest will be willing to put the money that will soon be needed to recapitalise the Banks? If you have the answer to this question then I fully agree with your proposal.
My friend, it is very simple! Look at Argentina! It has defaulted spectacularly 8 times in the last 100 years! And yet, there is always someone waiting at the other end to lend to Argentina! Is it because they love Argentina or Maradona that much? Nope! It is pure investment appetite. If bank of cyprus' current investors loose their shirts, some new investor will identify this new low as a good entry point and their will be new money coming in! If the imbalances of the market are corrected, the protection of the borrowers decreased, the repossession law strengthened, while at the same time leveling the playing field for the banks by penalizing them for the misbehavior of the past, I assure you that investors will be lining up to invest in this newly cleaned system! There's your incentive for investment! Potential profit! BUT make no mistake! I am NOT in favor of chasing away investors or defrauding investors. If the government today says that the laws change just to hurt the investors, then we will be creating a very bad precedent. The FDIs must be welcome and supported. Just not at the expense of the locals!
The previous shareholders are not the ones who created this mess. It is the absence of proper governance and control that created this problem. If the make up of the shareholders base is 100,000 investors each owning 0.1% then, there is no real control! Why do you think Bank of Cyprus was acting the way it was? There were never any sophisticated investors in the bank. It was just pure retail investors who entered at some inflated prices back in the glory days of the Cyprus Stock exchange fiasco. So YES, we do need sophisticated foreign activist investors who will not allow the scumbags (the list of ex bankers is huge) to run the bank as if it is their own stable. I want to see in Cyprus the likes of Elliott (Paul Singer) who pushed Argentina's government into default! We want activist investors who will not take any nonsense. Have we had them, instead of some russian money laundering oligarchs or some greek fraudster lawyers as main shareholders, we would never be in the position we find ourselves today!
Renos Ioannides on September 19, 2017 - (permalink)
This post is triggered by Thinkingaloud's commentary but is addressed to everyone on this blog.
Thinkingaloud's thinking is, in my mind, quite robust, clear, to-the-point, rational and realistic.
My experience tells me that the truth is always somewhere in the middle. It is true that all should take a hit, a hit that they can actually afford. Dogmatism is not a good guide. Each case should be determined on its own merits. There are strategic defaulters, there are people who really cannot make ends meet, there are shareholders who should be kicked out of their positions (if only our legal system would accommodate this) because they are tricking the system, and there are shareholders who are lifelong fighters and should be assisted. There are borrowers who should be relieved by reducing their exorbitant debt, and there are borrowers who should be vehemently chased after.
And let us not forget that around 90.000 of our 90.200 business enterprises, or so, in Cyprus are micro, small and medium enterprises, which provide around two thirds of employment; and the vast majority of these enterprises needs pragmatic professional help.
All these arguments going back and forth are, I think, futile; what everybody wants, is for our country to start operating rationally, efficiently and equitably, both economically and socially. Can we, for once, agree on this simple statement and put our collective minds on finding constructive solutions, instead of fighting, amongst us, over futile theoretical concepts? It is, after all, an acceptable fact of life that people will have different opinions, differing views, diversified theories and ways of thinking; it has always been like this.
The real fact, however, is that this country is faced with excessive private debt and little practical hope of how to resolve it. So then, if we put our collective minds constructively to trying to find – and force – real solutions, that would be rational economic and social (not in the political sense) thinking. I think we can actually make it! But we must push aside our egos. Are we mature enough? Can we make the difference? Can we snowball our common deep wish for a sustainable and equitable economic growth into something real and tangible or are we just going to be arguing amongst ourselves endlessely and pointlessly? It's up to us. Savvakis's previous suggestion of bringing the matter up to the Cyprus Economic Society, or to some similar platform or even a new-to-be-established platform, is worth exploring.
Thank you Renos for the kind comments on my thinking!
I do hope that my thinking is really all that!
I believe we can all agree that what we all seek is the best solution out of this mess that we were all pulled into. We must make rational proposals that would be potentially accepted by all stakeholders. We in effect must act as the mediators in this stalemate and offer realistic solutions.
We all agree that borrowers must pay! No one can walk away scot free from their loans! If they made bad decisions they have to take the hit. Equally the banks must take the hit for their bad decisions and processes as well. We must all find a solution that will save the banking system (not reward it but help it survive) while allowing the real economy to function by not draining all potential economic activity! I again will focus on the biggest hurdle in my mind which is the personal guarantees which were shoved down the throat of every borrower in Cyprus. That is the "GET OUT OF JAIL" card that the banks hold and is keeping them from offering realistic solutions. As the majority of businesses in Cyprus are small to micro family owned businesses, the personal guarantees are choking the economy. The personal guarantees were a way for the bankers to hide their incompetence in understanding a business proposal and properly evaluating its prospects. They offered loans not based on the business proposal but with the comfort of the personal guarantees. Personal guarantees must only be enforced in the case where fraud was what brought down the business and thus the loan became an NPL. If the banks provided the borrowers with loans they could not afford, why is it only the borrowers problem? The banks evaluated the collateral, the banks had the mechanisms and the knowledge to properly evaluate the borrower and yet they failed to do it right! Why are the banks not liable? Why are the bankers involved with these loans not investigated and sacked? The collateral for the loan should be deemed a sufficient resolution of the NPL. If the bank inflated the loan to an unbearable loan with surcharges and increased interest rates, then it is the bank's fault and problem! It is not a liability of the borrower! It is afterall just accounting gimmicks!
I believe we can all work together to find solutions. I do hope that the discussion on this board is not wasted and some suggestions are made to the gatekeepers and stakeholders of the system.
At the same time I do hope that the presidential candidates don't just take the views expressed here and spin them in a populistic way because Fereos will be right that more people will just hope that the loans will be forgiven!
Savvakis C Savvides on September 20, 2017 - (permalink)
Some of the discussion has focused on who is more at fault and who should now be paying the price of failure. However, we need to realise that this is not about winners and losers. This is not a zero sum game. We have all messed up badly as an economy. This includes bankers, borrowers, politicians, regulators, even professionals like lawyers and accountants, to mention just a few.
If we engage in an unproductive debate of who was the biggest culprit we will expose ourselves to even bigger dangers and risk sinking the economy into deeper waters. Nevertheless, we need to identify what we did wrong in order not to repeat it and to come out of this wiser for planning and building a better future. We are all at fault and I agree with those who have contributed in this conversation (notably ThinkingAloud) but even some of you who have been a little partisan in your views but helped in bringing out the issues and the constructive discussion that ensued that we have to get our act together in order to avoid the worse and start the rebuilding process. The problem will not go away by looking the other way or by denying its existence.
The main point I wanted to pass through my article and the discussion that followed is my grave concern that if we eradicate the bulk of the provisions through permitting the current major shareholders of the banks to sell the loans outside the banking system we will aggravate the negative impacts of the already enormous private debt and render the prospects for a quick recovery for the economy to extremely slender.
I hope, as Renos suggests, that there will be a continuation of this pertinent discussion in other forums.
Thinkingaloud on September 21, 2017 - (permalink)
Dear Fereos,
You are unfortunately totally missing the point! You are purely aligned with the banks and bankers without really looking at what is at stake here.
The banks are NOT brand new! They are the same faulty institutions they were before with new shareholders and new management! If I change the management of my company and even I am ousted as a shareholder and new shareholders come in, is the new management and shareholders not liable for the mismanagement and fraud of the past??? This is exactly why due diligence is performed before you buy a new company! This is exactly why equity ownership has pitfalls! Because you are liable for all the crap that entity carries!
Now, if we keep on protecting the banks, like we have done in the past because they are too big to fail, then we have failed!!! Lehman was too big to fail and it failed. Bear Sterns was probably too big to fail and it also did. Goldman Sachs was saved by Warren Buffet who did not buy equity but instead handed a hefty loan with unprecedented benefits for himself in a convertible bond structure.
No investor/shareholder rescued the banks in Cyprus! They invested well after the debacle and that is exactly why we have the whole mess we have today! They knew what they invested in! They invested in Cyprus's too big to fail bank knowing that the government will NOT let the bank collapse as it is necessary for the economy! They were right! They know people like you will always support the banks at any cost!
I am arguing here today to let the banks collapse! Allow Bank of Cyprus to go bankrupt! There are more banks to serve the Cyprus economy today! And probably new investors will come into the bank again or even better a wholly new bank will take its place! Why should we protect the bank of Cyprus? I seriously don't get it!
Anyway the point is that all we are saying here is to level the playing field!
Here's a thought! Do you know why people/borrowers keep on trying to hold on to their properties until the real estate market recovers?? Do you know why banks do not readily move in to seize the collateral? Because the system is all designed wrong!!
Example: I, decided to buy a house in 2008! Peak of the market! I have a decent job, my wife has a decent job bringing in an annual combined income of 60k a year. We have some money saved, our parents helped too with some savings! We found an apt, 3 bdr, 400,000. Stupid of us to even consider it but hey, Cypriot mentality! You MUST own a place and not "waste" money on rent! We apply for a loan and the bank values the property. Because the developer, is banking with the same institution and the bank prefers to hand out 10 loans to 10 people rather than one big loan to one developer we have very good chances of getting that loan! Better diversification! Less risk! According to the bank's "rules", the loan can only be for 70% of the forced sale value! Forced sale value is about 70% of the valuation! So the loan will come to be about 50% of the 400k. Well, I don't have that 200k required so we rediscuss. The developer joins in and the banker says, you know what, we will get another valuation and since this is a housing loan, we can give you some better terms. So the new "valuation" comes in the apt is now worth 500,000. Brilliant! Forced sale value is no longer 70% but 80% and the loan can be about 80% of the forced sale value. So about 65% of the 500,000. So 325,000 loan, I have the rest in the bank. Everyone is happy! Interest rate, because this is a home loan is the super low of 5%!!! Yeap ONLY 16,000 a year in interest! I should be better off just renting the place for about 1,500 a month but that never crossed my mind.
So, we buy the flat and start paying our mortgage and everyone is happy. All of a sudden the bank collapses, our parents who had always since inception bought shares of the bank and they had a couple of hundred thousand worth of shares for the rainy days lose that money, I lose my job, my wife's salary gets a 30% haircut and all of a sudden we cannot make ends meet. The bank, comes in and says, you are not paying your loan so the new interest is not 8%! Yeap, couldn't pay the 16,000 interest per year, I have to know cough up 24k a year (had already repaid about 25k and now have only 300k loan). Well, obviously I can not meet payments! My property value by the way has tanked! It is worth 250k max IF i find a buyer! So I rush to the bank and offer the bank the solution to seize the property! The banker looks at me and says "what is the bank going to do with the flat? And if we take it in we take it at the new forced sale value which is about 70% of the 250 so that's 175 max SO you still owe us another 150k! Remember those personal guarantees?? And, by the way since you have a car in your name and so does your wife, we will want those too. BUT we can't take the flat because we cannot handle it! We might have a unit to handle such things in a couple of years!".
So I walk away with no real options there. So my NPL is growing exponentially with 8% plus penalties every year and my flat's value is deteriorating. I can't really move out of it and I can't sell it either! The bank has no incentive to actually find solutions with me and I am stuck!
Had the bank had the mechanism to handle foreclosures, had I not signed off on personal guarantees, problem would have been solved before it spread! So WHY is it the borrower's fault??? If the bank had no mechanism to handle seized properties why did they demand the property as a collateral?? Why are they ballooning my loan and the(ir) problem??
Long story, short! Lets' just go back to the drawing board! The Central Bank should come in and demand all personal guarantees are void except in the cases of fraudulent behavior! All loans proven to be handed out without proper evaluation of the borrower's ability to repay are void because there was malicious intention from the bank's side. This will incentivize people to surrender their houses if the value of the flat (monetary and sentimental) is less than the loan it carries! If it is, then the fault is with the bank for not making the right evaluation and taking the right cautionary measures from the start! Prices have not dropped by 50% (70% of the forced sale value of the valuation, where forced sale value is 70% of the valuation – 49%) in most cases! So all in all everyone is hurt equally and the economy survives!
Call it oversimplification but I tend to think that way!
Thinkingaloud on September 21, 2017 - (permalink)
Just another thought!
How about we correct the discrepancies with the personal guarantees and the loans that were approved based on the collateral with no consideration of the ability of the borrower to repay first at the Coops?? The government is the main shareholder (which means all the tax payers of this country) and thus we are not penalizing foreign investors since some of you are so concerned about them. The government will in effect help the economy by improving its own financial institution and can set the precedent for the rest to follow.
Come on Harry Georgiades!! You can make it happen! It will be a great way to help the economy!
Φεραίος on September 22, 2017 - (permalink)
Nothing more to add. You and most of the friends here have all the answers. I am just a businessman.
Savvakis C Savvides on September 23, 2017 - (permalink)
You are just a businessman! From what you say, I was almost sure you were a bank employee. But I agree, we have exhausted the issue, no more to say.
Φεραίος on September 24, 2017 - (permalink)
Χα χα χα. Τραπεζικός υπάλληλος!!! Κυπριακή νοοτροπία. Όπως, αν κάποιος υποστηρίζει ΠτΔ στις διαπραγματεύσεις είναι ΔΗΣΥ, ή αν κάποιος δεν υποστηρίζει ελεύθερα ωράρια είναι ΑΚΕΛικός.
Λυπούμαι που απανήλθα αλλά ήταν μεγάλος ο πειρασμός.
Savvakis C Savvides on September 21, 2017 - (permalink)
Dear ThinkingAloud,
Thank you for describing so simply and lucidly the real problem we are up against as an economy and how it emerged to a large extent out of irresponsible banking practices. I totally feel for you and so many others who have fell into this web of traps set up to enable zombie banks to earn an income on dubious money that the Central Bank irresponsibly allowed and even encouraged to flow into our small economy.
I said many times that the practice of personal guarantees is at the root of the problem. And it is these personal guarantees (and the obsession of the "banks" with taking all sorts of security covers), as I mention in another comment, which incidentally were reserved for the many small and regular borrowers (the rich and powerful often managed to get off very lightly) that are now not allowing the economy to restart and rebuild.
As you say, no one is suggesting that debts should not be repaid. But what can't be repaid will not get paid by just demanding it and letting it accrue interest for ever!
In the United States that some of our contributors who seemed to be supporting the extreme "save the banks" view have pointed out there is a quick resolution of the problem. But they forgot to say, or perhaps are just unaware, that in the United States one can just hand over the collateral to the bank and walk away debt free. No personal guarantees, floating and fixed charges, assignments, life insurances or even memos there like the good Cypriot lawyers have advised the banks to have in their loan contracts. Mind you, these are the very same lawyers who have in their pursuit of profit and riches for themselves have brought into the Cyprus banking system the tens of billions of oligarch and other elite money in the first place that were the prime cause of the demise of the Cyprus economy. Not to mention that many of these lawyers happen to be also politicians.
Erol Riza on September 24, 2017 - (permalink)
The title of the very serious issue about the economy and the wrong diagnosis has degenerated sadly into banker bashing as if in the rest of the world the laws prevented the financial collapse, unseen in financial history. An amount of $200 billion in fines by the US Treasury on banks internationally testifies to how much was wrong in the banking industry. Where there no laws to protect the borrowers or shareholders? Indeed there were and yet when the regulators were asleep on their watch this is what happens. The problems were global and this has been the case for the last 40 years I have been in banking. Cyprus is no different for we must not forget what the political reaction was in Cyprus when the Central Bank tried to increase the deposit developers had to invest from 30% to 40%. The decision was reversed within weeks.
One might ask should the blame game and banker bashing end right now. Yes, to my mind it has to stop as we are missing the trees from the forest which is what the title is if I am not mistaken. In the cases where the law has been broken the due legal process must be allowed to take its course and we must look at what goes on in the EU where we belong.
The key to investment and growth is an increase in productivity and upgrade of the product which Cyprus offers to those who buy goods and services from overseas. By increasing productivity and hence making Cyprus more competitive the attraction of Cyprus will increase as a destination of foreign direct investment, be that in energy, shipping, healthcare/medical tourism or business services; the key was to privatize some state owned entities to attract investment and improve governance; sadly the opportunity to attract foreign investment, if it was there, has been lost thanks to union reaction.
If we want to see the banks to play a role in financing, if this is within their scope, they should be allowed to use their balance sheets to do so. The legal environment in Cyprus has become hostile to banking as if the borrowers and parliamentarians are blameless. It is now 4 years after the crisis and there is a need to leave purgatory and get back to the fact that banks have a role to play and that for those who have borrowed excessively and have wealth, be that locally or abroad, to face up to their obligations. I have not suggested households or SMEs with their homes at risk to be foreclosed. On the contrary I consider this a social issue and the rest follows. However, to read that the CEO of Bank of Cyprus appeals to borrowers to pay up and not delay any further begs a serious question. How long should a bank be patient?
I think the argument about economic growth and investment is currently blurred by good fortitude in that tourism has performed exceptionally well and passport sales have attracted foreign investment. But who has benefitted from this only time will tell. Has productivity been improved? Has it made Cyprus more attractive for the other sectors not supported by incentives been able to attract investment? Have the issues of good corporate governance been addressed? Have the foreign investors been convinced that Cyprus is friendly and stable investment destination? I think these were the issues which the article should have addressed and not banker bashing. I think we should read between the lines of what the rating agencies and the EU Commission/IMF have repeatedly told us and face up to the fact that there is need to live in the global market and the nature of capitalism' if we fail to understand how technology, innovation and productivity are the source of wealth and losses we will still be looking at who blame.
Thinkingaloud on September 26, 2017 - (permalink)
Dear Anonymous, the intention of the discussion was not to result in banker bashing but to look deeper into the problem rather than a problem of non payments. The problem as you well said did not arise due to lack of laws but due to the lack of proper monitoring and enforcement of regulation.
Now though the discussion focuses on what needs to be done to get over this stalemate. The fact that the markets collapsed in other more regulated countries does not mean that we should disregard the importance of regulation and we should continue on our previous ways. it is a great opportunity now to bring in more regulation that would make the system work better now and in the future.
We all agree that loans have to be repaid wherever there is stored or hidden wealth but at the same time show the necessary sensitivity and understanding in cases where the loan has ballooned to unserviceable sizes. At the same time all participants who acted in an unethical manner should be penalized. Be that borrowers who overborrowed with no intention to repay and banks which lent money without the proper safeguards and more importantly disregarding the ability of the borrower to repay. (hence the banker bashing )
Hopefully somebody will pay attention and do something about it because no matter how long and hard we discuss these issues, we are not the decision makers and we cannot effect any changes. But certainly, what we all aim at is a resolution to the problem that will allow the economy to function again.
Savvakis C Savvides on September 27, 2017 - (permalink)
The discussion should be, as Thinkingaloud says, about what would make the economy function again. We are all losers and we are all to blame (and surely some more than others). Leaving aside however the blame game, the truth is that there is no easy way out of this deep whole we put ourselves in.
An economy which is so highly indebted cannot just restart! Why? Because of two simple reasons: 1) there is not much chance that a loan can have a good repayment capability, even if economically viable, since when the additional loan to finance the new venture is added to the glut of debt which already exists, the chances are that total combined debt can't be repaid, and 2) even if one finds relatively debt free companies, the conditions of very much weakened and depressed domestic demand make any business venture that depends on it so much harder to be viable. That leaves tourism and some export oriented activities. These can help gradually improve the situation, but even at the best of circumstances, it would take decades to overturn the adverse economic conditions and risks burdening the economy. Debt is the rule not the exception or one that affects say 10% or 20% of the economy.
So, what can we do, one may ask. We should somehow find ways to reduce the debt and to create new business entities which are either debt free or that they carry only a manageable amount of loans. This means, disentangling the web of loans, collaterals and guarantees. There is no one currently who can do that and the banks only care of their own relative position vis-à-vis other banks. So, co-operation is not easy to come by. Moreover, the banks proved time and again that they cannot identify and assess viable business enterprises and projects. Left on their own, there is no guarantee that history will not repeat itself.
This is why I kept crying since 2013 for a Development Finance Agency and/or a Reconstruction and Development Bank to lead the way and to enable the Government to alleviate debt where it is merited and in order to enable new healthy business cells to evolve in the economy. There is also a great need to evaluate and finance economically viable projects in the public sector. The politicians cannot determine these projects and are often too influenced by other factors in supporting and spending public money often in non-viable capital investments. These major investment projects, if economically viable, can help enormously in restarting the economy. They should not be left to the whims and likes of the politicians.
Thinkingaloud on September 25, 2017 - (permalink)
Dear Savvakis, the example I gave earlier is not my situation! It is an example that describes the majority of the NPLs in Cyprus and why there is stalemate! The problem is real! Personal Guarantees (PGs) is one of the problems. It helps bankers do a less than optimal evaluation of the borrower and it also locks the borrower in for the bank. As you well said in the US, if the loan did not make any sense any more the borrower would walk away from the asset surrendering it to the banks. That way the bankers had to do a very good job when analyzing the potential loan. As we all know this was not really the case and the "free money" syndrome resulted in the 2007 collapse with housing leading the problem.
So I am not sure if anyone that should be listening is listening but the CBC should readily give orders/instructions for the PGs to be void, especially in the cases where the bank failed to do the proper evaluation of the borrower's ability to repay. In most cases, where PGs should have been effective, they are not as they were abused by people who intended to defraud the banks (among others) and transferred their assets in the names of their kids, wives, BVI companies etc. The banks (and so does the public in a large extent) know who these are and they should try to recoup as much as possible.
I think that people with access to politicians/economic advisory boards, bank boards etc should act responsibly and convey this message and pursue a resolution to the problem before it is too late. The government has designed systems to assist the collapsed world of developers (the naturalization by investment for example) but the rest of the economy is not really improving. We are only building empty houses for some russians, chinese, etc who never come to live in cyprus so the economy is not really growing.