MANY important points about the banking sector were raised yesterday by David Lascelles, chairman of the Independent Commission on the Future of the Cyprus Banking Sector. Lascelles painted a gloomy picture about the future of the sector, saying that the bailout terms “created a critical banking situation and will make it very difficult for Cyprus to recover.” He also questioned the wisdom of the forced takeover of Laiki by the Bank of Cyprus.
Having criticised the poor supervision of the sector and the failure of banks to deal with risk, Lascelles stressed the need for a complete overhaul of the co-op banks as Cyprus was “no longer the agrarian economy they were set up to serve 100 years ago.” The disparaging comments he made about the co-ops, came as a breath of fresh air, given that the co-op movement has been treated as a sacred cow by everyone in Cyprus, particularly the politicians who are always publicly praising it.
Even the Governor of the Central Bank was praising the alleged soundness of the co-ops last year while lambasting the banks; he was also speaking like a politician rather than like central banker. Lascelles, in contrast, pointed out that the co-ops had an exceptionally poor business record, their structure was obsolete and had become “quite a cost to the economy.” He also argued that co-ops which will be given €1.5bn from bailout funds for their capital needs should have been bailed in the same way as the Bank of Cyprus.
The truth is that no politician in Cyprus would have ever dared make such a suggestion because of the big political cost of attacking an institution perceived as benevolent and helpful to the poorer classes. They would rather the country was lumbered with an additional €1.5bn debt than harm the co-ops. Interestingly, this will be the third time that the state will have bailed out the co-ops, having also done this in the late seventies (22m pounds) and the late eighties (67m pounds). These amounts may have been affordable, but €1.5bn is not.
Co-ops, despite the political mythology, have always been monuments to mismanagement and rusfeti, run by people with strong connections to political parties – especially AKEL – that exercised almost complete control over them. This explains why the co-ops are in such a big mess today and have to be bailed by the taxpayer, yet again.
Now there is an opportunity to put co-op banking on a sound business basis. Lascelles proposed co-op banks were merged into a single joint stock entity, with commercial management, which would become a competitive force. This would cause many job losses and end the toxic control exercised by the parties – which is why our political establishment is certain to oppose it. Our only hope of this radical proposal being adopted is the troika, which is lending the money for the co-ops’ capital needs and should insist on the dismantling of the old structure.