Cyprus Mail

One year on: alive, but not kicking

By Elias Hazou

STILL STANDING, but barely. That’s how a prominent economist describes Cyprus, a year on after the bailout/bail-in. The economy may have shown itself to be more resilient than most expected, but there’s evidence to suggest the impression may be an artificial one. What commentators do agree on is that 2014 will be the year of reckoning.

The decisions reached in that crucial week in 2013 – which started on March 16 and culminated in the Eurogroup determination on March 25 to impose the toughest of conditions on Cyprus in return for a 10 billion euro bailout – have been likened to an economic train wreck.

The memorandum (MoU) imposed by the troika of lenders – the European Commission, the European Central Bank and the International Monetary Fund – included the winding down of Laiki bank, with Bank of Cyprus (BoC) being saddled with its debt. Uninsured deposits over 100,000 euros at Laiki were wiped out, those at BoC slashed by 47.5 per cent.

A year later, unemployment is at record levels. The jobless rate was bad enough (14. 8 per cent) just before the March 2013 decision, but by the end of the year it soared to 17.2 per cent. According to the latest data released by the statistical service, there were 53,204 people registered unemployed in February 2014. In January, the unemployment rate eased off slightly to 16.8 per cent.

Year-on year (February 2014 data), the hardest hit were people employed in the finance and insurance sectors, followed by accommodation and catering, public administration, processing and commerce. And joblessness is projected to jump to 19 per cent by the end of this year.

Hardship is now part of the landscape. Food banks, and even some soup kitchens, have sprung up. The Cyprus Institute of Statisticians said recently that 5.7 per cent of the population over 18 years old is dependent on municipal food banks or other charities for food.

Virtually all the indices are disheartening. From January to December, manufacturing production fell 12.8 per cent. Turnover volume of retail trade shrank by 6.1 per cent, and registration of private saloon cars fell by a whopping 29.6 per cent. The trade balance deficit at the end of 2013 was €3.2bn.

On the flipside, and despite a 2.4 per cent drop in tourist arrivals, revenue from tourism held up well, even rising by 8 per cent compared to 2012 – as Russian high spenders again came to the rescue.

The banking sector took the proverbial (and literal) beating. In January 2014 total deposits of non monetary financial institutions in banks were €46.9bn, compared to €68.4bn for the same month last year.

The bleed-out – heavily influenced by the seizure of Laiki’s uninsured deposits – began in February 2013, when rumblings were first heard of a bail-in. That month total deposits were €67.4bn. In March, the month of the Eurogroup decision, they fell to €63.7bn, and from then on it was all downhill.

There’s a silver lining, if one could call it that: the rate of the deposits leakage started slowing down around October, although lenders – especially the flagship Bank of Cyprus – continue to seep millions to this day.

In March 2013 households held €32.7bn deposits. That figure plunged to €27.8bn by January this year.

Despite the drastic deleveraging of Cypriot banks, lenders are still highly exposed. In January total loans to households and corporations stood at €63bn. Overall, lenders had €16.1bn more outstanding loans than deposits on their books.

At the end of last year, 53 per cent of Bank of Cyprus’ loans were non-performing (more than 90 days overdue in payments), up from 36 per cent in June. With the economy and property market still falling, this bad-debt mountain will get even bigger, while the collateral will shrink further.

Bank of Cyprus clings on, for the time being. Despite half of its loans portfolio classed as non-performing, the lender has a respectable capital ratio of 10.2 per cent; though it has dropped since July, when the index was at 10.5 per cent.

As anticipated, the country’s output took a hammering. Gross Domestic Product fell by 5.1 per cent last year, though this was nonetheless milder than the 8.7 per cent decline forecast last April by the troika of international lenders.

But the reason may have been a spike in consumption, as people spent cash they took out of banks they no longer trusted after savings were raided. The boost in spending somewhat offset the fall in GDP, but this is something that will likely not last, says George Mountis, director of business development at Emergo Wealth, a venture capital firm.

Meanwhile as bank administrators seek to recuperate loans, predicts Mountis, more companies in the red will be wound down, leading to more layoffs.

“The single largest challenge lying ahead is restoring confidence to the banking sector,” the economic analyst tells the Sunday Mail.

Short on cash, and desperate to clear their books of bad loans, banks are being extremely stingy with new loans, depriving the market of badly-needed liquidity.

Given that sorting out the non-performing loan mess may take years, says Mountis, lenders will need to get creative to both attract foreign investors and lure back wary would-be savers.

“Right now there’s a great deal of interest from investors in distressed real estate assets. But the banks won’t easily let go of these assets because then they’d have to write them off, which would sap at their equity.”

Cypriot banks may be creaking, but meantime there are other things that could be done to jumpstart the economy.

Such momentum, proposes Mountis, might come from privatising state-owned enterprises sooner rather than later. Privatisations are a condition of the €10bn international bailout the government got last March.

Alex Apostolides, lecturer at European University of Cyprus, likewise thinks that implementing the bailout agreement is a must.

Improving the quality of government services, which impacts the performance of the private sector, is one reform right at the top of his list.

“2014 is the year when we have to make the MoU our MoU,” he stresses.

Other than the economy’s weak competitiveness, the economist highlights other concerns: the “silent sufferers” out there who are getting close to the six months of unemployment benefits they are allowed.

Also, by the end of the bailout programme, Cyprus must slash the civil service by 5,000 in order to tackle the massive public payroll. But so far the government apparatus has been reduced by only about 2,000.

Title deeds are another major issue. Under the MoU, by the fourth quarter of 2014 Cyprus must ensure that the title deed issuance backlog drops to fewer than 2,000 cases of immovable property units with title deed issuance pending for more than one year.

Looking back, the largest blow to the economy in the last 12 months has been the huge withdrawal of liquidity, says Mike Spanos, a consultant with M.S. Business Power Ltd.

“Within a split second, a huge amount of money ceased to exist,” he says, alluding to the seizure of customers’ uninsured deposits at Laiki and then Bank of Cyprus.

“That was a massive shock,” he adds. “Liquidity is the fuel of an economy. Less liquidity means less employment, less disposable income.”

Spanos, too, is a believer in strict enforcement of the troika-imposed MoU.

“We need smaller government. Ideally, governments should account for around 25 per cent of GDP. Before the March crisis, the state here accounted for 48 per cent of GDP. Public debt was 80 per cent of GDP. Had the debt been lower, that would have given the government leeway to borrow more from international lenders without causing the debt to GDP ratio to skyrocket. It might also have allowed the government to backstop the banks in trouble, thus avoiding the bail-in.”

No figures are yet available on direct foreign investment inflows during 2013, so the picture isn’t clear.

Despite initial fears, foreign businesses have not fled the country en masse. In fact, anecdotal evidence suggests that several foreign-based investment and private equity firms have opened up shop over the past year.

But Spanos says this should be taken with a grain of salt. First, companies thinking about relocating cannot do so overnight. Moreover, one shouldn’t look at how many foreign companies are registering, but rather how many of them are actually banking in Cyprus.

Asked to sum up the one year after the bail-in, Spanos offers this punch line: “We’re still alive, though maybe not kicking.”

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