CYPRUS has paid a very high price for the reckless populism of its irresponsible politicians. Former president Demetris Christofias led the state to bankruptcy because he did not want to take unpopular decisions and the struggling banking sector was dealt a fatal blow when short-sighted deputies, a year ago, rejected the first Eurogroup decision for a levy on all deposits.
There have been more manifestations of this deplorable populism since then. A few months ago EDEK and AKEL rejected the bill for the re-structuring of the co-ops, even though they knew approval was a condition for the recapitalisation that would prevent bankruptcy; the bill was passed after an irregular second vote was agreed. In late February, these same parties plus some DIKO deputies voted against the bill for the privatisation of SGOs that was a condition for the release of the fourth bailout tranche of €236 million; a few days later the bill was approved with the vote of the DIKO deputies.
This brinkmanship was on display again on Friday, when deputies of the House legal affairs committee ignored the exhortations of Governor-designate of the Central Bank Chrystalla Georghadji, to shelve the bill on protecting primary residence and business premises, and unanimously decided to send it to the plenum on April 10. Several deputies claimed that Georghadji’s warnings had been taken on board and amendments would be made to the bill before it was sent to the plenum.
The demagogues in the legislature could not be swayed, obdurately refusing to acknowledge the broader implications of such a law for the banks and economy, despite these being spelt out by Georghadji in plain language. Posing as the protectors of home-owners and small businesses was all that mattered for the demagogues, perhaps hoping that there would be enough responsible deputies to defeat their bill.
The law, if passed, would also protect premises of small to medium businesses, originally defined as businesses with up to 10 employees or with an annual turnover of up to €2 million, which may qualify more than 80 per cent of Cypriot companies for protection from foreclosures. On what economic grounds would businesses that cannot repay their loans be protected in what is supposedly a market economy?
The truth is that the bill would be a licence for borrowers not to repay their loans, even if deputies have been assuring everyone that appealing to the court for suspension of loan repayments would be an option of last resort. First there would have to be an attempt at restructuring a loan, then the dispute would go to the mediator and if there was no agreement the borrower would be able to go to court to seek a suspension. It could take a couple of years before the case is heard by court – this is an optimistic estimate considering there would many thousands of people opting not to repay their loans – in which time no repayments would be made to the banks or co-ops.
Things are bad enough for credit institutions – the number of NPLs rising every month – without offering individuals and businesses legal grounds not to repay their loans. As Georghadji pointed out, the passing of the bill preventing asset seizures would worsen the balance sheets of the banks and increase their capital needs. It would also push interest rates even higher and make it almost impossible for the banks to offer loans. Would the Cypriot banks pass the ECB’s stress tests scheduled for later this year if the bill is approved? And who would be covering any additional capital requirements of the banks?
The House demagogues, without any economic or banking expertise, are doing the exact opposite of what the IMF and the European Commission had advised – the creation of “a strong legal framework to facilitate foreclosures”. In its Tuesday report, the IMF made it clear that the only way of tackling the increasing number of NPLs, now at a staggering 50 per cent of total loans, was the facilitating of asset seizures. With their bill, the deputies would be doing the exact opposite – making asset seizures even more difficult and helping increase NPLs.
Would banks or co-ops survive such a situation? And if they are on the brink of collapse would deputies pass a law prohibiting their bankruptcy? There seems to be no limit to the damage these ruthless populists are prepared to cause the country for the sake of few votes. If they are not stopped now, things can only become worse.