PUBLIC finances may have been brought under control in the last year, as the government never tires of telling us, but the wealth-creating part of the economy continues to slide deeper into recession a year after the Eurogroup decision that supposedly saved the country from bankruptcy. We say ‘supposedly’, because the decision finalised in the early hours of March 25 is increasingly looking like a temporary reprieve rather than a permanent solution to problems faced by the banking sector which affect the whole economy.
One year later, banks and businesses are stuck in a deep hole from which there seems to be no obvious escape route for both at the same time. Whichever attempts to climb out is pulled back down by the other in what has turned into a cut-throat, no-win situation. What prospects of recovery could there be in one, two or three years when the cost of survival is proving so high? Would anything be left standing, when the only departments of the banks doing business would be those dealing with loan recoveries? And with the economy contracting, would the number of businesses unable to service their loans not increase?
Currently, everyone is talking about the non-performing loans (NPL), which stood at about 50 per cent and the banks are having great difficulty recovering. No law has been passed to facilitate foreclosures yet, but bankruptcy notices are appearing in the newspapers while there is information that banks have been taking over the administration of some of their bigger debtors. But the fact is that NPLs have been rising as a result of the worsening economic conditions. In June 2013 the Bank of Cyprus’ NPLs were 36 per cent but by the end of the year had reached 53 per cent; the co-ops are faced with the same problem.
The issue is further complicated by falling property prices which means that the security held by the banks as collateral for loans is inadequate. Banks have been trying to persuade customers to provide additional security, according to associations representing the latter, but with very little success. More significantly, because of the weak legal framework the banks are having great difficulty dealing with debtors that refuse to pay anything. They could take them to court and wait two to three years for a ruling, but in the meantime they will have received nothing of what they are owed.
Businesses fighting to stay afloat, meanwhile, make the calculation that by not making loan repayments they could ensure their survival until things improve or the bank secures a court ruling against them. There is no real incentive for them to opt for the restructuring of loans that the Central Bank has proposed, especially given the extortionate interest rates charged by the banks – at eight per cent, by far the highest in the Eurozone. These high interest rates, which are essential for the survival of the banks, are making repayments difficult even for businesses that have not defaulted on their loan repayments, and could lead to an increase in NPLs. As the economy continues to contract, fewer businesses would be able to pay the interest on their loans, let alone repay the capital.
The Troika’s proposed remedies for the banking sector may seem correct in theory but in practice they are a disaster for the economy. Perhaps the lenders want a complete clean-up of the economy with a big proportion of so-called struggling businesses to close down and only for the fittest to survive; ditto for the banks. This may be the way they believe the Cyprus economy would be put on a healthy footing again, ignoring the human suffering that will be caused along the way because the unemployment rate will soar well above the 19 per cent that is forecast for this year.
There is a way to avoid the total meltdown but the banking sector would need the support of the European Stability Mechanism, which exists to bailout a member-state’s financial sector if it is a stability threat in need of re-capitalisation. We know that Cyprus is, technically, ineligible for help from the ESM, but if an exception were made and assistance were provided to the banks it would not only help restore confidence in the banking sector but it would give some breathing space to businesses, which are suffocating. Every possible avenue of securing additional help for the banks from the EU must be explored by the government. This should be made its number one priority because without it, talk of recovery would be nothing more than a joke in poor taste.
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