The allegation contained in the title of this article is very serious and it needs to be explained and justified. I am specifically referring to the problem of the non-performing loans and the just-avoided repetition of a ‘thunderous no’, similar to that which precipitated the total loss of the share capital of the two largest Cypriot banks and the related haircut on deposits.
Our MPs do not seem to understand the essence of banking, namely the fact that, save a relatively small amount of the capital of the shareholders, banks borrow funds from depositors and lend them to borrowers.
The differential between the borrowing and the lending rate is intended to cover the bank’s operating costs, primarily staff compensation and expenses and, hopefully, leave enough profit for a dividend distribution to the shareholders of the bank. Of course, no such distribution has been made since the financial crisis.
To the extent that borrowers are unable or unwilling to repay the funds they have borrowed and they can get away with it, the consequences of their default are inevitably borne first by the shareholders and then the depositors, or by the taxpayers as it happened in the case of the cooperative banks, where the government chose to force the taxpayers to foot the bill in order to avoid a haircut, similar to the one Bank of Cyprus and the Popular Bank were subjected to in 2013.
The financial burden that is thus passed onto the citizens of the Republic entails either the imposition and the collection of additional taxes, or the reduction of public expenditure in other areas such as the economic support of disadvantaged people, who, as a rule, are not borrowers, or additional public borrowing up to the point of running the risk of causing a new financial crisis, similar to that which we experienced a few years ago.
This is the brutal truth and I challenge anyone who disagrees with me to come out publicly and say so in order to clear up whatever ambiguities may exist in the minds of all those involved in the process. These issues I have explained in the past on repeated occasions and I will continue to do so until the point is driven home and is understood by all Cypriots.
The European Central Bank (ECB), acting within the Single Supervisory Mechanism (SSM), was forced to highlight the adverse consequences on the Cyprus banking system of the threatened action on the part of Cypriot MPs in the direction of rendering it more difficult for the banks to press on with foreclosures as a solution of last resort for securing the repayment of non-performing loans.
It is true that the chorus, which was in favour of such populist moves, consisted of opposition parties, supposedly supporting defaulting borrowers, who – through no fault of their own – have been dragged into a position that was claimed to cause extreme hardship.
But the Democratic Rally (Disy) has also been exhibiting a peculiar reluctance to explain to the people of Cyprus that, if the country’s banking system were to collapse again, the consequences of such a failure would again be borne by the people at large, i.e. by those whose interests the members of parliament claim that they are keen to protect.
Let us then be thankful to the supervisory authorities of the European Union that had the decency and the courage and, of course, the obligation, to sound the alarm bells and to warn us about the consequences of our foolishness. At the very last moment, the members of the Cyprus parliament backed down and accepted a “self-devised compromise”.
In private discussions on these issues, one hears various explanations justifying the behaviour of our MPs. One often hears the argument that our MPs lack the understanding of banking, which is necessary in order to comprehend the practical impact of the decisions they make.
Another argument which is often heard is that the MPs themselves have personal interests that they are served by the line taken. A third argument heard is that the sole objective of the MPs is to stroke the ears of vocal voters, irrespective of the costs that may be generated by the line taken. On the last occasion of confronting such a problem – this was the case with the co-operative movement – the taxpayers were effectively forced to pay several billion euros to salvage the situation. No MP appeared to be concerned with what happened because the impact of the decisions taken was not readily apparent, nor was it immediately felt by the public at large.
As Patroclos has succinctly pointed out in the Coffeeshop, in Cyprus, as a result of the behaviour of our MPs, “people that refuse to honour the loan contracts they signed and do not repay their loans have the status of victims being persecuted by the greedy and evil banks that, quite unreasonably, want their (I would say the depositors’) money back and are ruthlessly resorting to the law in an effort to recover it so as to avoid bankruptcy”.
When, at last, will we be in a position to learn from our past mistakes?
Christos Panayiotides is a regular columnist for the Cyprus Mail, Sunday Mail and Alithia