Cyprus Mail
Cyprus

‘Back to the brink of bankruptcy’

By Elias Hazou

THE FIRST and instant effect of the foreclosures bill not passing within the deadline specified by Cyprus’ international lenders will be to throw the whole adjustment programme in limbo, returning the country to the brink of bankruptcy, analysts say.

“It’ll put the entire programme in jeopardy, not just the next tranche of assistance, but the ones after that as well…count on it,” economist Mike Spanos told the Mail.

Evdokimos Xenofontos, former deputy chairman at the Bank of Cyprus, concurs.

“This is not scaremongering either,” Xenofontos said.
“It’s common sense. If you fail to live up to an agreement with your lenders, whoever they might be but especially the troika, then why they would they ever consider giving you the next tranche, let alone the tranches after that? In my view, they’ll stop discussing the MoU altogether, until we’ve taken care of our pending obligation, which at this stage is the foreclosures bill.”

The interior minister has said that the government has enough cash to keep operating and pay salaries until November. But what happens beyond that?

Spanos says that it is not just the government that would come to a standstill. Empty state coffers would trigger a chain-reaction throughout an already fragile economy.

“Think of contractors already working on government projects, they’d stop being paid, to give you just one example. The effects would spread like cancer.”

With the debate on the foreclosures bill deadlocked, Spanos says it’s time to think out of the box. He advocates that the government ask the troika to disburse the next bailout tranche (some €400m) come September, but in installments.

In return, the administration commits to passing both the foreclosures bill along with the insolvency law by October – just before the state goes bust – thus meeting the opposition parties halfway and overcoming the current impasse.

“I can’t fathom why the government says it can’t bring the insolvency law to parliament for many months to come. I don’t buy it. They could write up an entire constitution by October if they really wanted to.”

In addition to causing fiscal troubles, non-passage of the foreclosures bill could have other knock-on effects, some less clear-cut than others.

But one thing is as sure as night follows day, says Xenofontos: Cyprus can forget about borrowing from international markets once news gets around that it is not implementing its adjustment programme.

“Expect Moody’s and other rating agencies to downgrade us all over again, and then good luck accessing the markets,” he added.

Further, Xenofontos says it might put at risk the €1bn capital issue by the Bank of Cyprus, as the new investors may decide to pull out if it looks like the bank won’t be able to quickly recover non-performing loans on mortgages.

For the moment that is an unknown, as it depends on what explicit guarantees the bank gave prospective investors when it was opening its books. The agreements struck with investors are bound by confidentiality agreements.

And there have been unconfirmed reports in the local media that Wilbur Ross, the US billionaire leading a group that agreed to invest €400 million in BoC, has been strongly urging authorities here to pass the bill.

However Spanos downplays the likelihood of the foreign investors walking away: “No, they’re already committed.”

That aside, a more immediate concern are the upcoming EU-wide stress tests for banks. Unless the foreclosures bill is passed before the tests, the European Banking Authority will have to conclude that a large chunk of non-performing loans are unrecoverable and thus discount their asset value.

Even though an accounting exercise, that in turn would adversely affect Cypriot banks’ balance sheets, making it necessary to raise more capital.

This was a danger alluded to by the Central Bank governor on Tuesday.

As for the possibility of jittery depositors pulling their cash out, fearful of a new haircut should the banks fail the stress tests, both experts think that’s a remote scenario.

“Where are folks going to move their money, abroad?” quipped Xenofontos, referring to the capital controls still in place.

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