By Christos P. Panayiotides
THE Central Bank of Cyprus recently announced that the “Non-Performing Loans” (NPLs) of the Cyprus banks, i.e. the loans, which the borrowers are unable to repay, amount to €22 billion, representing 44 per cent of all the loans advanced by banks to borrowers.
Against this potential loss of €22 billion, the banks have made a provision of €10 billion, which means that they continue to be exposed to a potential loss of €12 billion. This announcement was made by the Governor of the Central Bank of Cyprus, in her keynote speech at an event organised by the Representation of the European Commission in Cyprus and the Central Bank of Cyprus, under the title “Achievements and Challenges of the Banking Sector in Cyprus: The European Perspective”.
To enable the uninitiated reader to understand the meaning of these figures it is essential to ensure that the basic function of the banking system, in a free economy, is explained, in simple and unambiguous terms. A bank is effectively a “matchmaker” for those who wish to save their surplus funds, usually for a relatively short period of time, and those who are short of funds and wish to borrow, usually for a relatively long period of time. This matching of short-term supply and long-term demand for money assumes that it is unlikely that depositors will simultaneously demand the repayment of their deposits (the funds they have lent to the banks), irrespective of the fact that they may have the right to do so.
This is, indeed, the problem. The fact that non-performing loans, amounting to €12 billion, remain uncovered simply means that, in terms of substance, depositors have lost their money, given that the banks are unable to repay those funds to their depositors. The only thing the depositors can hope for is that they will collectively refrain from rushing to the troubled banks demanding repayment, as it happened in 2013, thus forcing the banks to close down. They can hope that gradually, over time, some non-performing loans will become ‘performing again. That the gap of the €12 billion will be slowly bridged by the profits that the banks will hopefully generate in the future or that the securities (mortgages, guarantees etc.) obtained in respect of the loans will prove sufficient to cover a good part of the €12 billion deficiency.
In the light of the threat posed by the non-performing loans, any suggestion to compensate the wealthy depositors for the “haircut” suffered in 2013 is a recklessly irresponsible act. More so is the suggestion of getting the taxpayers to “compensate” investors – the bank bondholders and the bank shareholders – for losing their ludicrously high yielding investments, thus rewarding their greediness.
Of course, large depositors have advisors, who assess these risks and advise their clients accordingly. In contrast, smaller bank depositors, who obviously do not fully understand the risks they are taking, easily side in favour of compensating large depositors in respect of the losses they sustained in the 2013 haircut and/or compensating the bondholders and the shareholders of certain banks, who lost their investments.
These small depositors easily take to the streets to protest against the expropriation of luxury houses equipped with swimming pools and other similar facilities that hardly suggest lodgings belonging to poor people. It is, therefore, clear that there is a need to explain to those people that the pre-election generosity of our politicians is a gesture that poses a very serious risk to their present-day bank deposits.
The tragic aspect of this story is that the current behaviour of our politicians implies that they have not learnt from their mistakes of the past and, with no hesitation, they are keen to repeat these very same mistakes. Present-day bank depositors take notice. In a future economic crisis, which many uncontrollable factors can easily lead to, you will not be able to claim that you have not been warned. So keep a close watch on the behaviour of the political establishment and, to the extent that they continue to behave in an irresponsible fashion, take corrective action.
Christos Panayiotides is a regular columnist for the Cyprus Mail and Alithia