Comparing the continued structural weaknesses within the banking system with the actions of politicians leads to the conclusion that the latter are either completely clueless, ignoring what led to the painful events of the 2013 crisis, or they are deliberately trying to cause as much pain as possible to investors, depositors and – in the case of the Co-op – taxpayers.
Following the crisis in which depositors lost €8bn of their savings – roughly half of the economy’s annual output – and taxpayers had to recapitalise the Cyprus Cooperative Bank with almost €1.7bn, Cyprus agreed with its creditors to modernise its economy in order to avoid a repetition of a similar financial disaster.
However, politicians in both the government and the opposition only paid lip service to that commitment. They intentionally delayed the introduction of the foreclosure and insolvency framework, after making sure it was watered down so much that it could hardly be effective, especially in the case of the Co-op where it was a common secret for decades that only fools repaid their loans.
In the meantime, Cyprus managed to revive its old economic development model which relies on opportunistic land development. This, combined with a beneficial impact of geopolitics on the performance of the tourism industry, has helped the economy return to growth and labour market conditions somewhat improve. As a result, certain groups are apparently under the delusion that the economy is out of the woods. But it isn’t.
The slowdown in the reduction of non-performing loans in the first four months of the year and the banks’ failure to meet three out of four performance indicators in reducing delinquent portfolios set by the central bank are alarming but not surprising.
As expected, the banks went for the low hanging fruits and they will have a difficult time further reducing their bad loans in the future. The Co-op even posted an increase in its bad loans in the first quarter of this year.
All of which makes the behaviour of the political elite disappointing at best. On the one hand, the government, which faces re-election in February, gives the impression it can simply donate Co-op stock to its customers when it is likely to need fresh capital in the future in the absence of margins for additional state-aid.
On the other hand, the presence last week of opposition politicians at a demonstration by borrowers who bought homes using depositor money to protest the Co-op’s agreement with Altamira, the specialised Spanish unit which goes after bad loans, demonstrates their cluelessness which is effectively steering Cyprus towards another banking crisis.