Cyprus Banks and Cyprus Property

On 13 June the Informer published an article entitled “Cyprus Government will have to write off Cyprus Bank Debts”.

On 10 June Bank of Cyprus announced that its fund raising of up to 645.327.822 Euro Convertible Capital Securities had been oversubscribed with total subscriptions amounting to almost 659 million Euro.

The Bank said that the capital raised from the issue will be used to further strengthen the Group’s capital adequacy and in particular its Tier 1 capital. As at the end of December 2008 it reported its Tier 1 capital ratio at 7.5% and with this new fund raising it would increase to 10%. Good News.

But there must be growing concern that the Cyprus construction industry is still facing a dire market with thousands of unsold properties still on the books of estate agents and property developers.

Interest rates in Cyprus have remained high and the Cyprus banks boast that they have a low proportion of funding from the wholesale money markets.

But at the same time the interest burden on developers must be hard to meet as sales of new properties are hard to make.

Seperately new funds from the European Investment Bank will be lent by the banks to small businesses to stimulate the economy in sectors other than construction.  So far so good; new funds provided at a good price given to the banks and lent on at rates businesses can afford.

“NICOSIA, July 10 (Reuters) – The European Investment Bank signed a 228 million euro loan agreement with Cypriot commercial banks on Friday, part of a broader strategy to boost liquidity to European small to medium size enterprises.

As part of the deal, 120 million euros will go to the Bank of Cyprus BOC.CY (BOCr.AT), 50 million euros to Marfin Laiki CPBC.CY (MRBr.AT) and 58 million euros to Hellenic Bank HBNK.CY. The Cypriot banks will also have to make 228 million euros of their own funds available.

The islands business community say the funds will provide additional liquidity to Cypriot SMEs at better rates than are currently available in the Cypriot lending market.

Cyprus is currently preparing a legal framework to allow commercial banks access to cheap European Central Bank funding under its covered bond programme, something that is expected to be in place by next month.

(Writing by Nassos Stylianou, editing by Ron Askew)”
But how long can Cyprus banks continue to report loans to the construction sector as “performing”.  No doubt every degree of latitude and support will be given by the auditors and regulators to see adverse decisions on these delayed as long as possible. But if this cannot be achieved then Cyprus banks Tier 1 Capital Ratios could diminish very quickly.

What would happen if the consolidated Tier 1 ratios of all of the Cyprus banks fell to 3% for example?  Could losses of just euro 4.0 billion do this?

Individual depositors would be covered by the Cyprus banks deposit protection scheme which is understood to have recently been increased from the old euro 20,000 per person. But there have been no announcements by the Cyprus Government, the Central Bank of Cyprus or individual banks. So take care and stick to euro 20,000.

Hopefully that would persuade individual depositors from withdrawing retail deposits but would shareholders and investors respond to another call for capital in that situation?

Or would the Cyprus Government have to step in? And if it does what can it do to revitalise the property sector because the debt will not get repaid by the banks in any other way.

The Cyprus Government has already refused to deal with the title deeds issue saying that the developers must deal with this…….they clearly cannot repay the outstanding loans to release the title deeds.

And The EU Commission has said that it also powerless to act.

The EU Commission can only intervene where an issue of European Community Law is involved and they say that there is no link between the title deed issue and European Community Law. It is up to Member States to take all necessary measures to ensure that fundamental rights are fully respected. To challenge this You would have to take it to the European Court of Justice, after going through all the procedures of courts in the Member State !! Hopefully though someone in the European Commission will act sensibly and see if Cyprus, as a Member State, has infringed European Community Law and take action rather than put the onus on an individual to take action in Cyprus and then at the European Court of Justice.

In the meantime the Cyprus banking system is vulnerable to a real crash if developers default on loans by not paying interest or repayments.  Anything that could occur in financial systems has been seen to happen all around the world and Cyprus is unlikely to be an exception given its exposure to property finance. It might not be “if” just “when”.

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