WHEN we invest in the stocks of a company, regardless of it size, we should bear in mind that we are exposing ourselves to at least some risk. This risk can be big if for example a company is new and its prospects of viability or profitability are uncertain, or very small if we are talking about a huge company with years of profitability.
Usually, investors prefer to buy the stocks in companies with low risk. This is why companies whose profit prospects are uncertain raise capital by offering high interest rates to investors. This reality is encapsulated in the economic dictum “high risk, high gain”.
In the light of the above, it is difficult for anyone to comprehend why the Association of Bank Bondholders expect the Cyprus Republic to compensate its members. The association’s demand that the taxpayer compensates members who lost money on a relatively high-risk investment violates every notion of sound management by the government.
Without a doubt, there were cases of individuals falling victim to bank ‘advisors’ in deciding to turn their bank deposits into bonds and being led to believe these were equally safe, but this is an issue between the deceived investors and the banks. It has nothing to do with the taxpayers. On what grounds should the government, and indirectly the taxpayer, become involved?
If bank bondholders are entitled to compensation because of inadequate supervision of the banks by the Central Bank – the state’s bank and supervisory authority – shouldn’t the shareholders of Laiki and Bank of Cyprus also be eligible for compensation? The conclusion is that compensation should be paid by the banks, not by the government, and only to people who can prove they were deceived.
The bailed-in depositors of Laiki and Bank of Cyprus were sacrificed to save the banking sector and the economy from total collapse in 2013. They were the victims of the recklessly opportunistic behaviour of the administrations of the two systemic banks. Violating every principle of banking, the administrations of these banks essentially bet their customers’ deposits on the roulette table and lost.
Contrary to all logic, they invested billions in Greek government bonds at a time when respected newspapers like the Financial Times and Wall Street Journal were warning that a haircut of Greece’s government debt was inevitable. This gambling was the root cause of the collapse of the banks. Ethically, the Bank of Cyprus, which absorbed Laiki, has the moral obligation to compensate the bailed-in depositors, because it was the bank that rendered the haircut of deposits obligatory to avoid an uncontrolled bankruptcy.
No wonder, given these circumstances, so many were surprised to hear the finance ministry urging the legislature to approve – as a first step – the supplementary bill for €25 million for the creation of a reserve in the National Solidarity Fund. In other words, it is an attempt to turn the bail-in into a bailout, something totally unacceptable for the taxpayer who is being called to pay for the sins of the banks.
As an economist, I would like to propose a way of fully compensating the bailed-in depositors by the Bank of Cyprus that is in line with logic and a sense of justice. This could take place as soon as the non-performing loans are reduced from the current 45 per cent to 20 per cent of the loan portfolio, which is expected to happen in 2019. The total value of the deposits’ haircut was €5.8 billion. The bank could issue bonds of a total value of €5.8 billion that could be distributed among the bailed-in depositors in accordance to what each lost in the haircut. These bonds will not have a maturity date but would be perpetual (also known as undated) bonds that could be sold in the secondary market.
The perpetual bond is nothing new. Many banks in many countries, especially in India, have issued such bonds to raise capital. Bearing in mind the interest rates prevailing today and estimating that the recovery course of the banking sector will continue with a marked improvement in bank capitalisation, then it would be possible for the interest on these bonds to be about 2 per cent and exempt from any taxation.
In short, the Bank of Cyprus would initially pay annual interest of about €100 million. Meanwhile, the debt and interest owed by the bank would keep decreasing in real terms because of inflation and in nominal terms as the bank’s objective would be to buy back the bonds from the secondary market. It goes without saying that the bank would do this in accordance with its profitability and would have a time-frame of a few decades – but perhaps even 60 to 70 years – to see it through.
This may be a long time period but a bank is immortal if it does not merge with another, or does not turn into… a casino. There are banks in existence today that were established 300 to 400 years ago, like Sweden’s Riksbank (1668) and Britain’s Barclays (1736).
It is said that all banks suffer from amnesia (of the malignant type) when it comes to the suffering of their customers. The Bank of Cyprus is urged to prove this wrong.
George Koumoullis is an economist and social scientist
15 Comments
alexander reutersward
December 3, 2017 at 16:29well written, but i think they could wait until NPL is below 5% (20% is still a high risk for any bank)
konstabo
December 3, 2017 at 16:13the above article written by an economist offers a very good explanation and solution to the problem with the banks and hopefully it can be implemented in cyprus as it was in the UK maybe the govt can also share the responsibility , contrary to popular belief it is always the taxpayer who bares the burden for the mistakes of the govt and even the banks as we can see happening in so many countrys who even though they were completely bankrupt got a full bailout with out any haircuts to there banks….right now who do you think is paying for the complete catastrophy that occured in cyprus thanks to the incompitent
mismanement of peoples money that was entrusted to them for safe keeping
, the taxpayer is paying for it…..
Igor Simatovic
December 3, 2017 at 15:00Dear Technocrats,
I strongly recommend state to pursue a BOC to compensate depositors that have suffered bail-in only.
The best possible way to do that is to offer an option to bailed-in depositors to get compensation versus handing back over shares of BOC to bank. Si BOC ussue bonds and raise funding to get theis own shares back from bailed in customers. Its a reversal equity to fund compensation since the bank is now performing well and shrinking a NPL portfolio…
All happy
mazuate
December 3, 2017 at 10:21the perpetual bond proposal is nothing new and sounds reasonable – the UK used it to finance 2 world wars – in bananaland the mickey mouse politicians are always very generous with other people’s – taxpayer money
Luke Coolhand
December 3, 2017 at 09:42I believe the single mistake the bailed in depositors made was to think that the banks in Cyprus were like the banks in a serious, respectful country. Most people deposit their money in a bank for safe keeping. If there is a little interest forthcoming, all well and good, however the underlying principle is that YOUR money (not the banks and certainly not the States) was available as and when you needed it. Nobody could envisage that a ECB functionary like the German Assmussen would announce on a Saturday morning that Cypriot Banks were locked down and that nobody could get their money out (unless as the rumour goes, people went to their well placed contacts and got their money out through the back door). I think that we can all accept as a given that the money in the Laiki was long gone. If the Statements issued by the Laiki before it’s eventual demise are to be believed, the deposits were taken by the Cyprus Central Bank. Ipso facto: the State! Who benefited from this? The taxpayers? It is a pipedream to believe that the depositors will ever see a penny of their stolen money when the real thieves; those that have borrowed without any intention of repaying are still enjoying the benefits of their ill gotten gains, albeit with the complicity of the State. My advice? Forget your money and keep taking your blood pressure tablets.
Terryw45
December 3, 2017 at 10:35‘when the real thieves; those that have borrowed without any intention of repaying’ That just about sums it up, we choose to live here, sympathy for those that have no choice.
divadi bear
December 3, 2017 at 10:50I take a keen interest in anything associated to Cypriot banks and it has “paid-off”.
I am a resident of Cyprus, and was angry at the German Pension Dept., in Berlin when they refused to transfer my German pension to my account in the BoC. It was the rule that they could only transfer it to my German bank account.
I found it inconvenient to first transfer my automatic Pension pay-out first to my German bank then a further transfer to the BoC, after all Cyprus was an EU Country !
To maintain residency on Cyprus, one must deposit a certain amount in a Cypriot bank. This I did/do, but with a reduction of 20 cents !
The haircut did not affect me and I will never “allow” it to happen to me !
George Philis
December 3, 2017 at 09:27Very reasonable point of view. It is shocking that the taxpayer was ever brought into this mess in the first place. This piece offers a practical option, all things considered.
Douglas
December 3, 2017 at 08:35The responsibility lays with the final decision maker on the bail in.
GSP
December 3, 2017 at 06:47The purchase of Greek bonds by Laiki bank was not only against advice by international financial experts, it was against the express instructions of the bank board. But it went ahead and remained unpunished. A few of the ‘elite’ made millions from it and many ordinary people lost a lump of their savings.
Regarding George’s solution, the only way the NPLs in Cyprus will ever drop to 20% is if loans are written off. And THAT is not the way to make any business profitable.
The banks here are generally run by incompetent managers who handed out loans to anybody and everybody – that they knew.
The government is also complicit in that it passes laws that effectively mean a person never has to pay a cent towards his or her mortgage.
Without a drastic change in government thinking and banking procedures the banks here will never be a safe place to leave money.
Evergreen
December 3, 2017 at 09:28Well said.
Peter G
December 4, 2017 at 05:55A stale reply, sorry, but I just read this: It was Bank of Cyprus not Laiki that bought the Greek debt from the German banks that were desperately trying to get out. Agree with all the rest.
GSP
December 4, 2017 at 06:17No, Peter. The head of Laiki, in cohouts with one of his Greek chums, bought Greek bonds. The bank had some bonds and was told to sell them. The head, in his ultimate wisdom, bought more – or so he claimed – after being told by the board to get rid if any that were left.
He is now reported to be dead so cannot answer to those he stole money from.
Peter G
December 4, 2017 at 07:25May I refer you to a February 20, 2017 article by CM entitled “Former bank CEO tells court BoC flush with funds in 2012” to which you contributed a response to Slomi/Vlora/Evergreen’s comment?
Vgenopoulos (“if truly dead”) and his cohorts looted Laiki outright with fraudulent loans and bonuses and transfers to various Marfin entities . The additional crime there was all the emergency liquidity borrowed by Christofias to hide the fact that Laiki had gone tits up.
GSP
December 4, 2017 at 09:30I am too busy just now to check what you have written. My memory of the events is as I stated in the comment above.
I am losing internet access after today for a couple of weeks so must close by saying ‘we disagree’ and leave it there.