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Cypriot bank guarantees carry no weight abroad

By Angelos Anastasiou

LETTERS of guarantee from Cypriot banks are no longer acceptable abroad, causing major problems to local construction companies trying to secure contracts in other countries, they say.

The Cyprus Federation of Associations of Buildings Contractors (OSEOK) head Costas Roushias met with President Nicos Anastasiades on Thursday to convey their despair at the industry’s dramatic decline, and to propose ways of addressing the issue.

According to Roushias, among the key problems facing the construction industry is the fact that Cypriot banks’ letters of guarantee are no longer accepted by foreign banks due to the state of the banking sector following the March 2013 Eurogroup decisions, which have left Cypriot companies less competitive in the international field.

“Construction companies can guarantee themselves in Cyprus, but the problem is that Cypriot bank guarantees aren’t recognised abroad, because of the March decisions,” Roushias said.

OSEOK proposes that the government underwrites bank guarantees in the same manner it did following the 1974 Turkish invasion, successfully propping up the entire economy.

After the meeting, Roushias reported having received the president’s assurance that the government has made “significant enquiries” with various governments and foreign banks regarding this issue, and expressed the hope that these efforts bear fruit as countries like Saudi Arabia, the United Arab Emirates and Iraq present construction companies with considerable opportunities.

Giorgos Charalambous, member of the Independent Commission on the Future of the Cyprus Banking Sector (ICFCBS) – an ad-hoc body designated by the Central Bank of Cyprus in 2012 to investigate the causes and effects of the Cyprus economic crisis – argued that post-1974-style government guarantees were not an option at this point in time.

“In 1974 the state had options available to it due to its currency positions – it maintained account balances abroad, which it could use to underwrite Cypriot banks to foreign banks, in the sense that cash could be seized if the guarantees fell through,” he said.

“This is not an option today, because there are no currency positions in the eurozone, and Cyprus has been shut out of international bond markets – which means just that: international lenders do not trust the Cyprus government enough to lend it money. So why would anyone think that they would trust the government’s guarantees, even if such guarantees were to be issued?”

“Therefore, what was done in 1974 can’t be done today, because the conditions today aren’t the same as then.”

Charalambous felt there was no realistic way of addressing the immediate problem – of foreign banks rejecting letters of guarantee from Cypriot banks – facing the construction industry, in isolation.

“The only way government guarantees could mean anything right now, is if the Cyprus government were to request a foreign government – say, Qatar – to guarantee Cypriot banks to Qatari banks, on the Cyprus government’s behalf. I don’t think that is a realistic prospect,” he explained.

According to Charalambous, focusing on resolving the short-term problem would equal seeing the forest for the trees, as the designated way to address the bank-guarantee problem would be for the entire Cyprus banking system to regain the trust of depositors and investors.

“The ICFCBS report proposes that the EU be convinced to commit to Cyprus lifting all capital controls and issuing a state guarantee on all deposits in Cyprus banks. This would be the fastest way of restoring confidence in the Cypriot banking system,” he concluded.

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