Η λανθασμένη διάγνωση και μυωπική αντιμετώπιση του προβλήματος της οικονομίας εγκυμονεί νέους κίνδυνους

Δηλαδή, αν καλά κατάλαβα, θέλεις τους ιδιοκτήτες των τραπεζών μα γίνουν φιλανθρωπικό ίδρυμα, να συνεχίζουν να βάλουν κεφάλαια (δηλαδή λεφτά απο την τζέπη τους) για να εποφαιλούνται εκείνοι που δεν μπορούν να αποπληρώσουν τις υποχρεώσεις τους. Κανένας δέν πρέπει να αναμένεται να το κάμει. Όσο έχουν περιουσιακά στοιχία στην διάθεση τους που μπορούν να ρευστοποιήσουν δέν θα βάλουν ``σιέρι πούγκα τους``. Και ούτε και είναι θεμιτό/ορθό να αναμαίνεται να το κάμουν

Πολύ αμφίβολο αν το όλο εγχειρημα μπορεί να υλοποιηθεί. Σε όλες σχεδόν τις χώρες της Ευρώπης ίδιες ιδέες για πακετοποίηση και τιτλοποίηση δανείων έχουν προταθεί και σχεδόν πουθενά δεν έχουν υλοποιηθεί. Ίσως κάποιοι καθηγητές/ερευνητές να μπορέσουν να μας διαφωτήσουν επ αυτού. Πιο σημαντικό όμως είναι να έχουμε επαφή με άτομα τα οποία διαχειρίζονται ταμεία τα οποίο πιθανό να ενδιαφέρονται να αγοράσουν τέτοια πακετα και να μάθουμε τι ακριβώς είναι αυτό που ψάχνουν σε τέτοια προιόντα. Για να γίνουν ελκυστικά αυτά τα όποια πακέτα δημιουργηθούν θα πρέπει να πληρούν κάποιες προυποθέσεις και να είναι σύμφωνα με διεθνή πρότυπα. Είναι σχεδόν απίθανο να βρεθούν επενδυτές που θα δεχθούν να αγοράσουν αυτά τα πακέτα με τιμές 20% χαμηλότερες. Να είσαστε βέβαιοι πως οι όποιες εκπτώσεις θα πρέπει να έιναι σημαντικότατες και μιλάμε πάντα για το 50-70% του book value δηλαδή του αρχικού δανείου και όχι του παραφουσκωμένου και διογκωμένου ποσού που καταγράφουν οι τράπεζες μετά τόκων και υπερχρεώσεων. Οπόταν ΑΝ κάποιος επενδυτής αγοράσει αυτά τα δάνεια, θα μπεί στη διαδικασία να κάνει νέες συμφωνίες με τους δανειολήπτες με σημαντικές μειώσεις και πολύ πιο αυστηρές ρήτρες για την εξυπηρέτηση τους. Αν για παράδειγμα έχει πάρει κάποιος 100 χιλιάδες δάνειο, ο αγοραστής του ΜΕΔ θα το αγοράσει για 30 χιλιάδες, θα κάνει μια συμφωνία με το δανειολήπτη να του πληρώσει 50-70 χιλιάδες με κάποιο λογικό επιτόκιο ή και άμεση αποπληρωμή και θα παει στο επόμενο. Αφου είναι προφανές πως ο δανειολήπτης δεν μπορεί να εξυπηρετεί το ποσό που η τράπεζα τώρα ζητά (αφού έχει παραφουσκώσει και το ποσό στις 130 χιλιάδες και η δόση είναι τεράστια) και για αυτό είναι ΜΕΔ και οι τράπεζες είναι διατεθιμένες να πωλήσουν αυτό το δάνειο για 30 χιλιάδες, γιατί δεν κάνουν απο τώρα την πρόταση στον δανειολήπτη να του κουρέψουν ένα σημαντικό ποσό να κατέβει στις 70 χιλιάδες (άρα διαγραφή 30% απο το book value) και να καταστεί το δάνειο του βιώσιμο και να μην χρειαστέι να διαγράψουν 70% για να το πουλήσουν;
Προσωπικά, γνωρίζοντας επενδυτές του εξωτερικού που δουλέυουν σε τέτοια ταμεία και μιλώντας μαζί τους αντιλαμβάνομαι πως η τιτλοποίηση και πακετοποίηση ΜΕΔ είναι μάλλον ευχολόγια παρά πιθανή πραγματικότητα.

Είναι πολύ αισιόδοξο το παράδειγμα που η τράπεζα πουλά δάνεια με ονομαστική αξία 1 δις και με προβλέψεις 35% προς 0,8 δις, που αντιστοιχεί με κέρδος-write-back.
Η πραγματικότητα είναι ότι τα ΜΕΔ βρίσκουν αγοραστές κερδοσκόπους προς μόνο 30% της ονομαστικής αξίας, που μάλλον θα επιβαρύνουν τη τράπεζα με πρόσθετες διαγραφές και μεγάλη ανάγκη νέου κεφαλαίου..
Με αυτά τα δεδομένα είναι ακόμη πιο σωστό το άρθρο του ΣΣ ότι η τράπεζα θα πρέπει να προτιμήσει συμβιβαστική λύση με τους πελάτες της αντί να ξεπουλά με μεγαλύτερη ζημιά σε ξένα vulture funds. Μήπως υπάρχουν άλλα κίνητρα των ξένων συμβούλων που τώρα κρύβονται πίσω από τη δικαιολογία του moral hazard;

Συμφωνώ με ThinkingAloud και Invisible Hand ότι δηλαδή ίσως χρειαστεί ακόμη μεγαλύτερη έκπτωση από αυτή που αναφέρομαι στο παράδειγμα μου. Και δεν αποκλείω να υπάρχουν και αλλά «alterior motives» όπως αναφέρεται και ο Invisible. Οι αριθμοί που αναφέρω στο παράδειγμα στο άρθρο είναι για να γίνει αντιληπτό πως οι προβλέψεις μπορεί να χρησιμοποιηθούν για δημιουργία λογιστικού κέρδους. Όμως η επιλογή των συγκεκριμένων δανείων που θα μπουν σε ένα πακέτο εναπόκειται στην τράπεζα και πολύ πιθανόν να είναι τέτοια που να συγκεντρώνει προβλέψεις πολύ ψηλότερες του μέσου όρου των προβλέψεων της Τράπεζας και να επιτρέπει έτσι και μεγαλύτερες εκπτώσεις στην πώληση.

Dear Savvas,

All the comments and your arguments may be deemed to be right in the eyes of some readers but I would like to take a different approach about the selling of loans, packaged or not.
1. From the point of view of the banks they have the loans principally for residential, SME and large corporate. I hope we agree on this at least. In my view there is little interest in banks selling their residential loans since these have a decent risk weighting and hence a good return on equity once they are performing. Banks would rather restructure these loans and hold. As for SMEs, if these are secured on residential property (as they tend to be in Cyprus) it is unlikely to be of interest again for a bank to sell as it knows the borrower will want to keep his property and the law protects him if it is his primary residence. If it is a loan to a SME unsecured no one would want to buy as the recovery rate is very low. If we look at the large corporate loans with security land or businesses these are likely to be of interest to buyers so long as they can buy and enforce their security and then hope to profit. How long will this take and please note that there is hardly any interest in creditor unfriendly countries such as Cyprus. Even if the banks chose to sell the loans/security acquired I see nothing wrong since these would be already well provided and I would wish the buyer a lot of good luck;
2. Now let us look at the regulatory environment in Cyprus. In accordance with the Central Bank regulations on Sale of Loans a firm wishing to buy such loans has to set up a Credit Acquiring Company and be approved by the Central bank or be present in the EU. Thereafter the sale of loans caries with it the right and obligations which the selling bank had and thus there is protection of the borrowers. I also feel that the foreclosure law in Cyprus, as watered down by Parliament, has made the process inefficient to put it mildly. I would like someone to tell me how many private equity funds/hedge funds have a desire to set up shop in Cyprus and hire people for the sake of buying some of the large corporate loans. These funds have a better route; they can work with the borrower and the bank to improve the cash flow and bring much needed equity to Cyprus which is BADLY needed. What is wrong with this?
3. How about the buyers of NPLs? Cyprus is not a core market for any of the funds that buy NPLs and there is no fear, as some economists and politicians forecast two years ago, that vulture funds would descend on Cyprus to buy the residential loans.

The facts belie any strong buying interest on NPLs other than the large corporate loans of banks and there is nothing wrong in this. The ECB has clearly made it known to banks with high NPLs that they have to accelerate the reduction and I see nothing wrong with efforts to selectively make write offs on loans which have little recovery scope of the original loan. This has to be on a case by case basis and it must not be the case that borrowers who can afford to pay expect a write off as they will jump on the opportunity. The Governor of the Central Bank has understood that property related NPLs will take time since the last property bubble was unprecedented and will need time. In the meantime the banks will have to do what is necessary to reduce their NPLs and continue restructuring and selective sales.

In closing we must not look at sales of NPLs by banks in isolation but in the context of the regulatory environment and the buyers. The buyers, if any, are few and they could bring equity and better asset management and I see no harm at whatever price a bank choses to sell. The regulatory requirements are such that prevent the unscrupulous to take advantage of the borrowers as these funds are not welcome in the EU and are typically Anglo Saxon and operate in countries where the foreclosure on NPLs is easier.

As for the economy and its growth trajectory this requires a lot more space since the re modelling of the economy will need more than a 5 year term and the reforms sadly are unfinished. The small number roof projects undertaken in the last 4 years speaks for itself. The economy still relies on tourism, real estate and services. The real estate may come to an abrupt end if the Chinese restrictions on property and gambling are strictly enforced and we will be left with some other buyers of passports who are non EU and subject to potential capital restrictions. So far so good what next. QUO VADIS?

Dear Erol,

The main reason I wrote this article was to make people understand how a “fictitious” accounting profit comes about by “using/abusing” the provisions. Moreover, as you know, when a bank fully settles a loan (i.e. by selling it to a third party whoever that may be) the provisions which is only an accounting estimate can give rise to losses or profits (write-offs or write backs) depending on whether the proceeds from the sale are higher or lower than the net book value of the loan. Unfortunately, in the case of Cyprus, this is likely to come about at the cost of slamming the door shut on the face of struggling borrowers.

Because the level of provisions for these loans serves as an informal yardstick of how much a bank can afford to write off a loan (without incurring losses) in its attempts to settle with the borrower himself a problematic loan. But what many people do not fully appreciate is that for the provisions to be dismissed and therefore give rise to a write back (assuming the sale price is higher than the net book value of the loan) the loan will have to be fully repaid (settled). It does not happen when you restructure a loan. The provisions stay in place or even may have to increase if at some stage the likelihood of recovery worsens.

Relating this logic to my diagnosis of what is the real problem in Cyprus which I have said time and again, the enormous private debt weighing on the shoulders of economic agents in Cyprus, such sales and the elimination of provisions to create an accounting profit may serve the immediate needs of the current major shareholders of the banks (as it may postpone for a while the need to come up with additional capital) but it makes conditions for overcoming debt for underwater borrowers a lot worse and it is contrary to the direction what should be the economic policy of the country in order to mitigate the effects and duration of balance sheet recession.

There is also the risk and valid concerns that some of the people who have commented on my article have made (but I have not), that there is through this means of selling the loans the possibility to use provisions for more sinister objectives. I am sure you can appreciate these risks as well anyone.

The rest of the stuff you mention I read and we can discuss over coffee the next time you are in Cyprus!

Erol,

Whether it is write-offs or write-backs we can't say. However, if by selling the loans the bank will register a net write-off, I can't see why they would be interested in doing it in the first place. But we are both speculating, so I prefer to leave it at that.

On your other question, "struggling borrowers" come into all categories. Households, SMEs and Large corporates. You are surely not suggesting that this is exclusive to large corporates!

The "struggling borrowers" cannot be referring to the large corporates. They have the means and the ways and probably the assets to resolve some of their issues. The "struggling borrowers" are the SMEs which are heavily indebted, and the private individuals. Unfortunately it is known by everyone who ever tried to do business in Cyprus that all banks (in a collusive manner and the CB should have looked into that) had exactly the same rules of engagement demanding personal guarantees far and beyond what would be fair demands. Personal guarantees are also used in other countries but not to the extent that Cyprus banks abused them. Personal guarantees abroad are only activated if the business owner ran the business aground due to fraud or mismanagement (i.e. treating revenues as net income and not properly managing the inflows and outflows of the business). In Cyprus, the personal guarantees are now being used by the banks in order to force borrowers into surrendering all they own. This is why restructurings do not work and borrowers and banks are in a stand off. The banks are not really incentivized to make the restructuring work as they are only eyeballing again what the business man owns (be that house, apt, properties, etc). So what is the purpose of having a Limited company if the liability extends to the shareholders? This HAS to be resolved with a decree from the CBC cancelling all personal guarantees or defining the personal guarantees as valid to the extent that the business has committed fraud. Most SMEs were hit very hard in 2011 and in 2013 and are still struggling. Many people had borrowed money on a private basis always with substantial collaterals (the banks always, at least for us "commons", demanded that the loan never exceeded the 70% of the forced sale value of the property - the forced sale value was often the 70% of the value so that meant that max loan one "commoner" (this is very important as there were others with friends and backings that got much better terms) would be about 50% of the value). According to RICS, the property values have dropped by 30-40% since the peak in 2008. That means if the bank gave out a loan at the peak of the valuations, the book value of the loan is actually, even today, lower than the valuation of the property! Lets not discuss the malpractice of capitalizing interest on NPLs!! SO, the banks should just take the property wherever possible (even if that is the first residence) as long as they stop chasing that borrower for the rest of the amount that they say they are owed!

Erol and Savvas, I am no banker but I believe I understand what is happening in the markets (here and abroad) in simple and realistic format. If I am wrong in my thought process please do correct me.

So what is the stumbling point? It is the stubborness of the banks to accept their own fault in this whole debacle we all live through! Wealth has been slashed, property prices dropped, deposits disappeared, banks vanished, CSE tanked! Yes people might have been able/willing to personally guarantee their loans in the past due to their comfort with the size of their wealth, the prospects of their business, the mandatory acceptance of the bad terms of the banks (again I must stress that banks had ALL the same terms and thus people had no choice) but today this is NOT possible. Banks must realize that they have the majority of the blame! They are the ones with the army of analysts, the highly paid bankers who peered into the borrowers business and wealth and approved the loans! Now they just have to shut up, do the necessary write offs and move on! The state should force them to do just that as they forced shareholders of BOCY to accept the loans of CPB and now have no more wealth! Problems are deeper than just skin deep and thus the actions must be much more drastic in resolving the issue. NO sane fund manager will ever buy a portfolio of NPLs for more than 10% of the value. The Cyprus banking system needs a massive overhaul! Throw out the old rulebooks and bring in new ones. Align practices with what is happening in the other developed markets and lets make this a European country.
PS:whereever I say Banks I also include the COOPs, although they were actually probably worse as they pretended that they knew about loans and all they did was approving loans for friends and family based on the guarantors (10 guarantors for an auto loan???)

Struggling borrowers for me are those families or SMEs which have had a loss of revenue sources and were lent money on unrealistic assumptions or values of collateral. Also those divorcees whose husbands have left home and left their former wives with debt (either as co borrower or guarantor). Surely not those who have moveable or immovable wealth, at home or abroad!

All,

I think we all have our economy's (and all stakeholders') best interests at heart. I believe we all agree that our country and our society at large cannot move ahead with this immense private debt (individual and corporate) burden and the unmanageable stock of problem loans.

What we ought to be looking at is setting up some sort of forum or platform to incubate realistic ideas and ways of making these ideas heard and actionable. If state and stakeholders keep beating about the bush, not doing anything tangible, then our future is doomed.

Any ideas to make this happen?

I should clarify that the example I am giving in the article where I use the total loans in the denominator is a simplification of how total loan exposure is calculated, as each type of loan is weighted (multiplied by a risk factor from 0 to 1) depending on the classification of risks by the Basel Accords (II & III). Hence, the complete formula is:

Common Equity Tier 1 (CET1) / Risk Weighted Assets (RWAs) > or = a minimum capital requirement (%)

Hence, for example, loans to Governments and public sector bodies with a triple AAA rating are zero risk weighted and therefore do not add anything to the total loan exposure of a bank (in Risk Weighted Assets) for purposes of calculating its regulatory capital requirements.

Having clarified that, the risk weighting of loans in Cyprus is only reducing the total value of loans marginally (5%-15% but it varies from bank to bank) and therefore the total loans value, generally speaking, is not a bad proxy of RWAs of Cyprus banks.

If the Banks decide or forced to write off a percentage of all NPLs there will be no incentive for any other borrower to continue repaying their loans. They will simply stop paying and wait until the Bank reduces the amount of the loan. A Bank can agree a reduction in exceptional circumstances when the borrower is in a position to repay the remaining debt in full immediately. Selling packaged loans at a discount to investors makes more sense as the buyers will pursue the borrowers with repossessions if necessary to recover the debt. That will also deter all other borrowers from even thinking about stopping their loan repayments. There is no other option, borrowers have to repay their debts otherwise there will be no Banks left.

Αυτή η ιστορία με τα μη εξυπηρετούμενα δάνεια νομίζω ότι έχει καταντήσει το σχοινί του πελλού που μονό δεν έφτανε και διπλό περισσεύει. Η ουσία είναι να αναλυθεί το καθένα από τα δάνεια αυτά και στη βάση αδιάσειστων στοιχείων να βρεθεί ποια είναι πραγματικά αδύνατο να αποπληρωθούν και σε ποια ο δανειολήπτης απλά δεν πληρώνει διότι δεν βλέπει τον λόγο να το κάνει αφού είναι φανερό ότι όσο περνά ο χρόνος οι υποχρεώσεις του μειώνονται και οι πιθανότητες κατάσχεσης του ακινήτου είναι ανύπαρκτες. Π. χ. ποια περιουσιακά στοιχεία όπως άλλα ακίνητα, μετρητά, εμπορεύμστα, απολαβές έναντι υποχρεώσεων κλπ έχει ο δανειστής; Για τον σκοπό αυτό θα πρέπει ο μη εξυπηρετών το δάνειο του να εξαναγκάζεται να επιτρέψει την πλήρη αποκάλυψη (π.χ. από τίς φορολογικές αρχές, το κτηματολόγιο κλπ) όλων των περιουσιακών του στοιχείων. Με αυτό τον τρόπο θα ξεχωρίσουν όσοι σκόπιμα δεν πληρώνουν ενώ μπορούν, από τους πραγματικά άπορους που θα τύχουν χαριστικής μεταχείρισης. Χωρίς τέτοια μέτρα, με τη νοοτροπία που μας διακατέχει δεν βλέπω πρόοδο και με το να απαιτείται από τους με χίλια βάσανα προσελκυόμενους ξένους και ντόπιους, κουρεμένους και μη, μετόχους να πληρώσουν τα σπασμένα, ματαιοπονούμε.

Essentially agree with comments of " Thinking Aloud" that banks must mainly incur the losses associated with their past wasteful lending practices. And agree with Savvakis that struggling borrowers, especially SMEs, should be provided with debt relief in a way that allows the continuation of productive activities and even support for viable new investments.Reducing NPLs per se to meet ECB targets may help the banks in the short run, but will inflict much damage on the private sector economy.
Indeed, there has to be a massive overhaul of the banking system including its rulebook and its management and professional staff, greatly facilitated by non-interference from the political leaders, but overseen by competent supervisors ( not just box-tickers ). However, presently the Cyprus banks are very fragile and unprofitable given the chronically poor quality of their loan portfolio, facing the overwhelming need to inject substantial amounts of capital from outside sources.There is the IFRS 9 regulation on boosting provisions to be implemented from Jan.2018 onward and EU( essentially German) proposal that the creation of full Banking Union and a unified deposit protection scheme needs to be accompanied by individual banks across the euro area substantially raising their Pillar II capital so as to be much less vulnerable for bail-outs by EU bodies.Unofficial estimates from Government sources suggest that Cyprus banks might need to raise over 5 billion euro to satisfy these new capital requirements.
With banks' low profitability, their unattractiveness for raising large sums from abroad, and their discontinued access to state aid, this need for very large capital injection looms as an impossible task.
Faced with this dire situation what can the Cyprus authorities do? How long can they delay addressing the problem? Can they sweep the problem under the carpet until after the Presidential election?
My view is that the Cyprus authorities including the inactive Central Bank "top brass" must deal with the capital-raising problem as soon as possible and enter into a program with the EU institutions in exchange for official financial and technical assistance, that is, another MOU.Failure to act risks fuelling the increasing perception that Cyprus banks are in trouble and could ultimately precipitate bail-in action.

Addition: I would add to my third last paragraph above after "Jan" the following " 2018 and that a EU initiative ( essentially a German proposal) requires that if a fully-fledged banking union and a unified deposit protection scheme are to be established individual banks across the euro area will need to raise substantially their pillar II capital to reduce markedly their possible requirement for bail-outs from EU bodies.According to some Government sources the capital of Cyprus banks would need to be raised by a huge sum to comply with the IFRS 9 regulation and the " making banks safer" EU initiative".

As long as there are no mass repossessions and a prospect of a possible haircut of NPLs, there is no incentive to start repaying these loans. Especially when there are a lot of people who are not willing to change their lifestyles.
Once repossessions of homes begin and people are left with a choice of continuing with the same lifestyle and become homeless or reduce their excess expenditure to keep a roof over their heads we will quickly see a massive reduction of NPLs.

Dear Les,

Thank you for your very sobering contribution to the discussion. As always it is very insightful. You and I have of course been very concerned for some time now about the perils of private debt and even wrote some papers on the subject which were published in reputable Journals, such as our latest in the World Economics Journal with the title "Neglect Private Debt at the Economy's Peril". Unfortunately, once again, people outside Cyprus are listening and even seem more concerned than the relevant authorities and our peers in Cyprus.

On a different point – the author emphasises that “economic growth stems only from financially sustainable projects”. This statement reminds me of our parliamentarians. Anyone with basic economics knowledge knows the factors for long term economic development : human resources (skills, training) technology & innovation, natural resources and investment (could be machinery or the author’s favourite: infrastructure projects). If this article makes such a simplification of this basic point in order to convince us, am i wrong to doubt its whole credibility?

ThinkingAloud (and Erol),

It cannot be assumed that "probably" large corporates have enough assets and "probably" they can cope. I know quite a few that I am pretty sure they can't. And the simple reason is that all these large corporates were overloaded by debt as they were the prime targeted borrower from all the banks during the "happy years". Whether the people at the helm of these large corporates have amassed private fortunes here or abroad is a different matter (and it does not apply only to large corporates, if it happens).

There is also an unnecessary confusion created from the use of the word "struggling". I agree with Erol that perhaps distressed is a more appropriate word to use. The point is, large corporates are not immune from going under water. Many of them are like other companies in negative net worth territory. And moreover because they are indebted to so many banks with cross securities and collaterals resolving these issues and finding viable solutions becomes very difficult.

Large corporates can be sorted out more easily than the rest. The companies should go into administration and sold either as a whole or in part to investors at current prices. The shortfall will be covered by the Banks provisions for bad debts and the new investors should be able to manage them better, rather than continue as zombie businesses.

On the question of whether banks should sell loans at a discount just to get rid of NPLs, thus leaving the thick profits to the funds; or whether they should apply the haircut themselves and keep loans on their books, thus creating a moral hazard for the borrowers to not keep up with repayments:
There is a middle way.
Assuming the banks want to keep the loans on the book by offering a discount to the client, one way to remove the moral hazard is by applying the discount at the end of the loan.
For example, say client borrowed €100k, which now has NPL status and due to penalties and charges now stands at (say) €120k. Say the bank is prepared to take a hit of €50k (i.e. recover €70k). The bank can then agree to restructure the €120k loan for X years, and provided the client has repaid what would correspond to €70k + interest over a pre-agreed period of time without significant delays, then the bank will write off the rest.
That would be the most tidy and appropriate treatment, which would give real incentives to the economic agents to perform. This would put the economy as a whole on the right path.
The issue is that such treatment is not appealing to the banks. It would not give an immediate solution to the NPL situation: banks would have to wait for each restructured loan to run a continuous 6-month period of strict conformity with the restructured repayment programme, in order for those loans to come out of their NPL status and for provisions to be released back to profits. And throughout the remaining life of the loan banks will be living with the risk that the loan may fail again, thus fresh provisions will be needed.

You are right that some corporate borrowers have collaterals and securities spread over several Banks, but the two biggest Banks, BOC and Laiki, have now merged into one. There are now a lot of corporate borrowers that owe money to BOC only who are over borrowed, but also own substantial assets such as hotels and large development sites that would attract interest from overseas buyers. Some of these assets have been taken over by BOC in exchange of debt but more needs to be done. These assets need to be marketed for sale asap, instead of being held by the Bank. Selling these assets to overseas investors will bring in funds to the Bank that can lend to other businesses creating employment. The problem though is the elite in Cyprus want to remain the elite with the help of the politicians and to the detriment of ordinary people looking for a decent job.

Nearly hot off the press from FT

Number of European weak banks rises sharply......

In its report, Bain wrote that “any bank at any point along the spectrum can return to good health . . . if the regulators, board and senior executive team have the commitment to carry out the hard decisions required over three to five years”.

It cited case studies of two banks that had moved from the weakest category in 2010 to the strongest now, by reducing their loans, cutting problem loans, increasing deposits, reducing wholesale funding and aggressively tackling costs. 

For the distressed borrowers the government may lend a hand as per ECB otherwise the course is the same for all. The banks in Cyprus will have to take the hard decisions and the large corporate borrowers who are zombies may need to think again about inviting equity investment and losing control, with bank support in the form of partial write offs. The time horizon cited by Bain is very sensible and could mean NPLs are down to 20%, or better still lower!

We do not need Bain & Co to tell the obvious in Cyprus but sometimes if foreign experts repeat what some say in Cyprus it carries more weight.

Erol, the depth and extent of private debt in Cyprus is unprecedented. It affects most of the economic agents of the country. This is why the recovery cannot be as easy as that for other countries. Moreover, we need the Government to be willing to adopt policies to stimulate demand and even a program of infrastructural public sector and PPP projects which will help get us out from the drag of balance sheet recession. And we also need to have a RDB, as I mention on my comment to Renos. I don't think that they are willing to destroy their fairy tale story in order to do that. Especially now that we are only months away from the elections. But we can only hope.

So prof. Savvides I see that you challenge all the assumptions of the current solution and describe them as not applicable and irrelevant to the special case of the Cypriot Economy debacle.

What is exactly that you are proposing to solve the challenge concerning the NPLS?

Systematic write off? Are you stating that all the people that received ridiculously large loans with ridiculous terms and unrealistic assumptions should enjoy all of them or most of them a reduction of their loan values and thus continue to enjoy within their standard of life which normally they would not be able to support?

So people like me which were responsible, and planned their budgeting within reasonable constraints should be punished we did not participate in the party?

Help me out here I am trying to understand what exactly it is you are proposing.

Towards Non-Indebted:

If you have read all that I have written in my article (and possibly all my other published work on the subject) and all that I tried to explain in my comments and you have concluded that this is about winners and losers and that the salvation will come through some defunct econometric model, there is nothing further I can to say to you to persuade you otherwise. You are of course, as am I, entitled to your own opinion.

Towards Ex Banker:

As I commented to Non-Indebted above, I don’t think we are on the same wavelength and it is not productive, or even worthy of the attention of the public at large who read this blog, to pursue this discussion further. At least, I did not call your analysis (or lack of it more accurately) flawed. And I sign everything I write with my real name. Always did, even when I was employed and risking making unhappy my employers.

Three steps in dealing with a problem:

-Immediate/temporary fix, so that the system stays alive.
-Investigate to determine real causes of the problem.
-Fix the problem permanently to avoid recurrence.

-The system (banking) in Cyprus is still heavily injured but yet alive. They have applied harsh measures (bail-in on deposits) to resuscitate the patient.
-No investigation has taken place to find the real causes.
-Based on above there was no permanent fix.

Some may think: hang on a sec the system is now being supervised and monitored by the ECB. Capital requirements have been established and imposed on banking institutions, liquidity requirements are safeguarded….and let’s not forget AQR (asset quality reviews). True, but has the system been really fixed?

We had a bail-in on deposits, the haircut is still at the forefront of people’s minds, so bank runs can and will occur at the drop of a dime, until at least older generations die off and/or become afflicted with amnesia……provided of course that in the meantime there is no other occurrence.

Trying to fix the NPL problem is of course a must, a symptom and a cause at the same time. The implications are dire for everybody, whatever the fix may be. There is no easy way out. You can hide the problem, but it will keep cropping up whatever you do. Still, nobody wants to accept the reality of the situation (nurtured by populist politicians), so the problem keeps resurfacing…..over and over again.

But the real problem is the shortfall of fully liquid assets against deposits i.e. the "alchemic gap" (see Mervyn King’s “End of Alchemy”). The banking system in this concern is “light years” away from being liquid. This is the main cause of bank runs and now bail-ins on deposits, i.e. The Fractional Reserve Banking. Now bring into the picture the Banking System in Cyprus with 50%+ NPLs and you can see the immensity of the hurdle. Here is where the root of the problem lies…. and this is what needs to be fixed.

I do not think that his thinking is flawed, and this comes from a present banker with over 17 years of lending experience between the UK and Cyprus.
The point that the author is making is not, of course, that lending should be lax and borrowers should be able to get away with it. Nowhere in his writing is this suggested. In fact, he has criticised the bad lending that had gone on for so many years, with the blessing of bank boards and with hardly any meaningful intervention from the Central Bank.
The point, I think, the author is trying to make is one of size. When you have such a large portion of the national economy suffering from loan defaults, then carrying out an aggressive repossession strategy and selling those loans cheaply to funds that will then be harsh on borrowers, this will amount to a significant transfer of wealth from the sufferers (in this case middle class or below) to those with ample liquidity (i.e. the wealthy).
Without meaning to sound a communist (which I am not), any person with a basic grasp of economics knows that the size of the middle class in any economy is a pivotal factor of that economy's prosperity. When you have the rich becoming richer and the poor getting poorer, the long term prospects of that economy deteriorate.
All the above are in addition to the author's argument of fairness, in effect implying that the masses were conned by the commercial banks' policies and practices.
And let me be clear, these practices and policies were not merely endemic to Cyprus banking. Greed and amateurism are unfortunately common in financial institutions world wide. The difference with Cyprus is again size: all banks behaved in similar fashion; and over-borrowing was widely encouraged and carried out for such for a prolonged period of time without consequence

Dear all
When we are talking about the Banks writing off debts, who is supposed to lose this money? Because when someone gains, someone else loses. Who does the Bank money belongs to? The current shareholders who had nothing to do with the creation of the NPLs? The Banks retained earnings, which there aren't any since the Banks are not making any profit, but also belong to the shareholders? Or the depositors? The previous shareholders who were responsible for the appointment of the senior Bankers and the creation of Banking policies have already lost their money and gone. Why should the current shareholders lose? Banks were operating within the environment created by the governments and the regulatory authorities. Why isn't anybody calling for the gonernment and/or the Central Bank to pay? If anyone one of you bought shares or deposited money in the Banks recently be happy to lose your money for the sake of people who do not or cannot afford to repay their debts? If anybody loses their home due to inability to repay their debt, it is the governments and charities responsibility to provide housing, not a business such as a Bank.

Οι τράπεζες ισχυρίζονται ότι η πώληση δανείων σε ιδιώτες θα μείωνε την επιβάρυνση των τραπεζών και θα ελευθέρωνε τα κεφάλαια και τους πόρους για να στηρίξει νέο δανεισμό.

Συμφωνώ ότι θα βοηθούσε τις τράπεζες να ξεφορτωθούν το πρόβλημα των ΜΕΔ, χρησιμοποιώντας (αλλά και εξανεμίζοντας έτσι) τις προβλέψεις για να δείξουν πλασματικά λογιστικά κέρδη ούτως ώστε να μην χρειαστούν να βάλουν νέα κεφάλαια, αλλά όμως αφήνοντας τους πνιγμένους δανειολήπτες στο έλεος των τρίτων και εκτός επιτήρησης και χωρίς πλέον περιθώρια για έστω μερική διαγραφή χρεών. Δηλαδή βοηθούμε τους μεγαλομετόχους να παραμείνουν στο πηδάλιο των τραπεζών ανακεφαλαιώνοντας τις τράπεζες χωρίς ίδια κεφάλαια αλλά δυσχεραίνοντας όμως το πραγματικό πρόβλημα που μαστίζει την οικονομία που είναι το τεράστιο ιδιωτικό χρέος.

Συμφωνώ επίσης ότι αυτό θα αυξήσει την ρευστότητα, αλλά σε ποιους δανειολήπτες που δεν είναι καταχρεωμένοι και σε ποια έργα που θα είναι βιώσιμα θα δίνουν οι τράπεζες τα δάνεια. Ρευστότητα υπάρχει και τώρα και δεν δίνουν δάνεια. Οι προϋποθέσεις για βιώσιμες επενδύσεις είναι το ζητούμενο, όχι και άλλη ρευστότητα. Άμα λύσουμε το πρώτο, το δεύτερο λύνεται από μόνο του. Αν δεν πάρουμε μέτρα για να δημιουργηθούν υγιής συνθήκες για βιώσιμες επενδύσεις, η αυξημένη ρευστότητα μόνο χειρότερα μπορεί να κάνει τα πράγματα.

A general comment for the three thoughtful comments added by ThinkingAloud (who more or less expresses my position and sentiment), the useful contribution by Nagual Paulsen and Costas who puts matters in perspective.

The problem with the Cyprus Economy as I mentioned a few times is one that Richard Koo coined as one of “Balance Sheet recession”. It basically occurs when private debt increases rapidly and to levels that are in such magnitude where the normal adjustment of “creative destruction” and through additional lending/financing cannot happen. Even if it was possible to pursue such an adjustment it would most likely, as we know from Japan, take many decades to overcome. Austerity, which is the usual pill given by IMF and naïve economists in the EU does not even begin to solve the problem. On the contrary, it makes it even worse as it kills the prime requirement for economically viable projects which is a strong domestic demand. The reduction of private debt (on a case by case basis) is a must and a necessary measure in such circumstances. And as ThinkingAloud points out, the banks are not victims or innocent bystanders. They have in the main caused this balance sheet recession crisis through their irresponsible lending practices. In the USA, the State of NY has enacted into the constitution the law of Fraudulent Conveyance which is designed to protect borrowers from vulture bankers to give out loans that can’t be repaid solely on the basis of collateral (with the ultimate purpose to acquire the asset of the collateral). The law stipulates that if the bank cannot prove that they have taken due care to assess the repayment capability of the borrower, the latter can walk away from that loan. So, moral hazard cuts both ways. It is not just a stigma on the borrower. This, to put an end to this one sided frenzy of moral hazard preachers.

Moral hazard cannot be one sided. There should be laws and bylaws to protect both sides of the equation. While debt forgiveness is considered a moral hazard, the rescue of the banks at all costs is not?
I am hugely disappointed by Erol's superficial and naive comments that Cypriot businessmen have their wealth abroad. That is pure nonsense that serves the populists and more dangerously the dumb unionists! Cypriot business people have worked their asses off their whole lives to create and grow. Yes, there are cases of strategic defaulters who managed to take their money abroad and now are in a position of power to negotiate with the banks. This is however not the norm. Most people are hard working honest people who got scammed by the banks and their fraudulent behaviors, their super high interest rates, and although working honestly for decades, they saw their wealth and efforts disappear overnight. I know for a fact that despite making several viable proposals to the bank to reduce overall debt by surrendering property, restructuring remaining amounts and allowing the business to operate in order to create the needed cashflow to escape the NPL spiral, the bankers are unwilling to budge as if they know best. Well, THEY don't and this was proven again and again in the past with their ill advice and their bad behavior. It is very easy to find out if someone has extra assets abroad or if they are hiding money and frankly the banks know exactly who these people are. They are the same ones who used to get the best interest rates, the best terms and the bankers were making some extra money under the table for themselves. Huge amounts as wedding presents, long term contracts for their sons and daughters companies to provide services to these businessmen, free travels etc. Bankers act as if they are the innocent bystanders.
I am not in favor of widespread, blanker write offs. I am in favor of proper laws that will protect the participating parties in the economy from fraudsters like the bankers. I am in favor of partial write offs in cases where people are really coming to the table with proper potential solutions for their NPLs where both sides take some hit and potentially survive.
I am not sure that a Reconstruction and Development bank would help at this stage. Proper monitoring of the banks and retrospective enforcement of proper controls would. As Mr. Savvides said, the State of NY has the law of Fraudulent Conveyance, designed to protect borrowers from vulture bankers. This is absolutely necessary in Cyprus and whoever has been involved in banking in Cyprus in the past 20 years can attest that this has probably been the biggest weakness of the Cyprus banking system.
Cypriots are not greedy bastards as conveyed by the bankers today or our politicians at some point and sadly by Erol in this post. But the system has to be designed to work and be a fair game. It is about time we stop protecting the banks, as it is about time to stop protecting the borrowers with laws that stop foreclosure. BUT first things first! Even the field, so the big guys (banks) stop having the upper hand, take the bat off their hands, take away the brass knuckles and then remove the protection from the small guy (borrowers). Let them go at it! I am obviously routing for the underdog!

I'm trying to understand your reasoning. In 2013 ALL Cypriot banks went bust. They were insolvent. They were saved by the injection of money of foreign investors. Are these the big shareholders who should lose their money? If that is the case, why should anybody else invest money in Cypriot banks when they will need recapitalisation very soon? Like it or not, Cyprus like any other country needs strong solvent Banks.

This post is triggered by Thinkingaloud's commentary but is addressed to everyone on this blog.

Thinkingaloud's thinking is, in my mind, quite robust, clear, to-the-point, rational and realistic.

My experience tells me that the truth is always somewhere in the middle. It is true that all should take a hit, a hit that they can actually afford. Dogmatism is not a good guide. Each case should be determined on its own merits. There are strategic defaulters, there are people who really cannot make ends meet, there are shareholders who should be kicked out of their positions (if only our legal system would accommodate this) because they are tricking the system, and there are shareholders who are lifelong fighters and should be assisted. There are borrowers who should be relieved by reducing their exorbitant debt, and there are borrowers who should be vehemently chased after.

And let us not forget that around 90.000 of our 90.200 business enterprises, or so, in Cyprus are micro, small and medium enterprises, which provide around two thirds of employment; and the vast majority of these enterprises needs pragmatic professional help.

All these arguments going back and forth are, I think, futile; what everybody wants, is for our country to start operating rationally, efficiently and equitably, both economically and socially. Can we, for once, agree on this simple statement and put our collective minds on finding constructive solutions, instead of fighting, amongst us, over futile theoretical concepts? It is, after all, an acceptable fact of life that people will have different opinions, differing views, diversified theories and ways of thinking; it has always been like this.

The real fact, however, is that this country is faced with excessive private debt and little practical hope of how to resolve it. So then, if we put our collective minds constructively to trying to find - and force - real solutions, that would be rational economic and social (not in the political sense) thinking. I think we can actually make it! But we must push aside our egos. Are we mature enough? Can we make the difference? Can we snowball our common deep wish for a sustainable and equitable economic growth into something real and tangible or are we just going to be arguing amongst ourselves endlessely and pointlessly? It's up to us. Savvakis's previous suggestion of bringing the matter up to the Cyprus Economic Society, or to some similar platform or even a new-to-be-established platform, is worth exploring.

Thank you Renos for the kind comments on my thinking!
I do hope that my thinking is really all that!

I believe we can all agree that what we all seek is the best solution out of this mess that we were all pulled into. We must make rational proposals that would be potentially accepted by all stakeholders. We in effect must act as the mediators in this stalemate and offer realistic solutions.
We all agree that borrowers must pay! No one can walk away scot free from their loans! If they made bad decisions they have to take the hit. Equally the banks must take the hit for their bad decisions and processes as well. We must all find a solution that will save the banking system (not reward it but help it survive) while allowing the real economy to function by not draining all potential economic activity! I again will focus on the biggest hurdle in my mind which is the personal guarantees which were shoved down the throat of every borrower in Cyprus. That is the "GET OUT OF JAIL" card that the banks hold and is keeping them from offering realistic solutions. As the majority of businesses in Cyprus are small to micro family owned businesses, the personal guarantees are choking the economy. The personal guarantees were a way for the bankers to hide their incompetence in understanding a business proposal and properly evaluating its prospects. They offered loans not based on the business proposal but with the comfort of the personal guarantees. Personal guarantees must only be enforced in the case where fraud was what brought down the business and thus the loan became an NPL. If the banks provided the borrowers with loans they could not afford, why is it only the borrowers problem? The banks evaluated the collateral, the banks had the mechanisms and the knowledge to properly evaluate the borrower and yet they failed to do it right! Why are the banks not liable? Why are the bankers involved with these loans not investigated and sacked? The collateral for the loan should be deemed a sufficient resolution of the NPL. If the bank inflated the loan to an unbearable loan with surcharges and increased interest rates, then it is the bank's fault and problem! It is not a liability of the borrower! It is afterall just accounting gimmicks!
I believe we can all work together to find solutions. I do hope that the discussion on this board is not wasted and some suggestions are made to the gatekeepers and stakeholders of the system.
At the same time I do hope that the presidential candidates don't just take the views expressed here and spin them in a populistic way because Fereos will be right that more people will just hope that the loans will be forgiven! :)

Some of the discussion has focused on who is more at fault and who should now be paying the price of failure. However, we need to realise that this is not about winners and losers. This is not a zero sum game. We have all messed up badly as an economy. This includes bankers, borrowers, politicians, regulators, even professionals like lawyers and accountants, to mention just a few.

If we engage in an unproductive debate of who was the biggest culprit we will expose ourselves to even bigger dangers and risk sinking the economy into deeper waters. Nevertheless, we need to identify what we did wrong in order not to repeat it and to come out of this wiser for planning and building a better future. We are all at fault and I agree with those who have contributed in this conversation (notably ThinkingAloud) but even some of you who have been a little partisan in your views but helped in bringing out the issues and the constructive discussion that ensued that we have to get our act together in order to avoid the worse and start the rebuilding process. The problem will not go away by looking the other way or by denying its existence.

The main point I wanted to pass through my article and the discussion that followed is my grave concern that if we eradicate the bulk of the provisions through permitting the current major shareholders of the banks to sell the loans outside the banking system we will aggravate the negative impacts of the already enormous private debt and render the prospects for a quick recovery for the economy to extremely slender.

I hope, as Renos suggests, that there will be a continuation of this pertinent discussion in other forums.

Dear Fereos,
You are unfortunately totally missing the point! You are purely aligned with the banks and bankers without really looking at what is at stake here.
The banks are NOT brand new! They are the same faulty institutions they were before with new shareholders and new management! If I change the management of my company and even I am ousted as a shareholder and new shareholders come in, is the new management and shareholders not liable for the mismanagement and fraud of the past??? This is exactly why due diligence is performed before you buy a new company! This is exactly why equity ownership has pitfalls! Because you are liable for all the crap that entity carries!
Now, if we keep on protecting the banks, like we have done in the past because they are too big to fail, then we have failed!!! Lehman was too big to fail and it failed. Bear Sterns was probably too big to fail and it also did. Goldman Sachs was saved by Warren Buffet who did not buy equity but instead handed a hefty loan with unprecedented benefits for himself in a convertible bond structure.
No investor/shareholder rescued the banks in Cyprus! They invested well after the debacle and that is exactly why we have the whole mess we have today! They knew what they invested in! They invested in Cyprus's too big to fail bank knowing that the government will NOT let the bank collapse as it is necessary for the economy! They were right! They know people like you will always support the banks at any cost!
I am arguing here today to let the banks collapse! Allow Bank of Cyprus to go bankrupt! There are more banks to serve the Cyprus economy today! And probably new investors will come into the bank again or even better a wholly new bank will take its place! Why should we protect the bank of Cyprus? I seriously don't get it!
Anyway the point is that all we are saying here is to level the playing field!
Here's a thought! Do you know why people/borrowers keep on trying to hold on to their properties until the real estate market recovers?? Do you know why banks do not readily move in to seize the collateral? Because the system is all designed wrong!!
Example: I, decided to buy a house in 2008! Peak of the market! I have a decent job, my wife has a decent job bringing in an annual combined income of 60k a year. We have some money saved, our parents helped too with some savings! We found an apt, 3 bdr, 400,000. Stupid of us to even consider it but hey, Cypriot mentality! You MUST own a place and not "waste" money on rent! We apply for a loan and the bank values the property. Because the developer, is banking with the same institution and the bank prefers to hand out 10 loans to 10 people rather than one big loan to one developer we have very good chances of getting that loan! Better diversification! Less risk! According to the bank's "rules", the loan can only be for 70% of the forced sale value! Forced sale value is about 70% of the valuation! So the loan will come to be about 50% of the 400k. Well, I don't have that 200k required so we rediscuss. The developer joins in and the banker says, you know what, we will get another valuation and since this is a housing loan, we can give you some better terms. So the new "valuation" comes in the apt is now worth 500,000. Brilliant! Forced sale value is no longer 70% but 80% and the loan can be about 80% of the forced sale value. So about 65% of the 500,000. So 325,000 loan, I have the rest in the bank. Everyone is happy! Interest rate, because this is a home loan is the super low of 5%!!! Yeap ONLY 16,000 a year in interest! I should be better off just renting the place for about 1,500 a month but that never crossed my mind.
So, we buy the flat and start paying our mortgage and everyone is happy. All of a sudden the bank collapses, our parents who had always since inception bought shares of the bank and they had a couple of hundred thousand worth of shares for the rainy days lose that money, I lose my job, my wife's salary gets a 30% haircut and all of a sudden we cannot make ends meet. The bank, comes in and says, you are not paying your loan so the new interest is not 8%! Yeap, couldn't pay the 16,000 interest per year, I have to know cough up 24k a year (had already repaid about 25k and now have only 300k loan). Well, obviously I can not meet payments! My property value by the way has tanked! It is worth 250k max IF i find a buyer! So I rush to the bank and offer the bank the solution to seize the property! The banker looks at me and says "what is the bank going to do with the flat? And if we take it in we take it at the new forced sale value which is about 70% of the 250 so that's 175 max SO you still owe us another 150k! Remember those personal guarantees?? And, by the way since you have a car in your name and so does your wife, we will want those too. BUT we can't take the flat because we cannot handle it! We might have a unit to handle such things in a couple of years!".
So I walk away with no real options there. So my NPL is growing exponentially with 8% plus penalties every year and my flat's value is deteriorating. I can't really move out of it and I can't sell it either! The bank has no incentive to actually find solutions with me and I am stuck!
Had the bank had the mechanism to handle foreclosures, had I not signed off on personal guarantees, problem would have been solved before it spread! So WHY is it the borrower's fault??? If the bank had no mechanism to handle seized properties why did they demand the property as a collateral?? Why are they ballooning my loan and the(ir) problem??
Long story, short! Lets' just go back to the drawing board! The Central Bank should come in and demand all personal guarantees are void except in the cases of fraudulent behavior! All loans proven to be handed out without proper evaluation of the borrower's ability to repay are void because there was malicious intention from the bank's side. This will incentivize people to surrender their houses if the value of the flat (monetary and sentimental) is less than the loan it carries! If it is, then the fault is with the bank for not making the right evaluation and taking the right cautionary measures from the start! Prices have not dropped by 50% (70% of the forced sale value of the valuation, where forced sale value is 70% of the valuation - 49%) in most cases! So all in all everyone is hurt equally and the economy survives!

Call it oversimplification but I tend to think that way!

Just another thought!
How about we correct the discrepancies with the personal guarantees and the loans that were approved based on the collateral with no consideration of the ability of the borrower to repay first at the Coops?? The government is the main shareholder (which means all the tax payers of this country) and thus we are not penalizing foreign investors since some of you are so concerned about them. The government will in effect help the economy by improving its own financial institution and can set the precedent for the rest to follow.
Come on Harry Georgiades!! You can make it happen! It will be a great way to help the economy!

Dear ThinkingAloud,

Thank you for describing so simply and lucidly the real problem we are up against as an economy and how it emerged to a large extent out of irresponsible banking practices. I totally feel for you and so many others who have fell into this web of traps set up to enable zombie banks to earn an income on dubious money that the Central Bank irresponsibly allowed and even encouraged to flow into our small economy.

I said many times that the practice of personal guarantees is at the root of the problem. And it is these personal guarantees (and the obsession of the “banks” with taking all sorts of security covers), as I mention in another comment, which incidentally were reserved for the many small and regular borrowers (the rich and powerful often managed to get off very lightly) that are now not allowing the economy to restart and rebuild.

As you say, no one is suggesting that debts should not be repaid. But what can’t be repaid will not get paid by just demanding it and letting it accrue interest for ever!

In the United States that some of our contributors who seemed to be supporting the extreme “save the banks” view have pointed out there is a quick resolution of the problem. But they forgot to say, or perhaps are just unaware, that in the United States one can just hand over the collateral to the bank and walk away debt free. No personal guarantees, floating and fixed charges, assignments, life insurances or even memos there like the good Cypriot lawyers have advised the banks to have in their loan contracts. Mind you, these are the very same lawyers who have in their pursuit of profit and riches for themselves have brought into the Cyprus banking system the tens of billions of oligarch and other elite money in the first place that were the prime cause of the demise of the Cyprus economy. Not to mention that many of these lawyers happen to be also politicians.

The title of the very serious issue about the economy and the wrong diagnosis has degenerated sadly into banker bashing as if in the rest of the world the laws prevented the financial collapse, unseen in financial history. An amount of $200 billion in fines by the US Treasury on banks internationally testifies to how much was wrong in the banking industry. Where there no laws to protect the borrowers or shareholders? Indeed there were and yet when the regulators were asleep on their watch this is what happens. The problems were global and this has been the case for the last 40 years I have been in banking. Cyprus is no different for we must not forget what the political reaction was in Cyprus when the Central Bank tried to increase the deposit developers had to invest from 30% to 40%. The decision was reversed within weeks.
One might ask should the blame game and banker bashing end right now. Yes, to my mind it has to stop as we are missing the trees from the forest which is what the title is if I am not mistaken. In the cases where the law has been broken the due legal process must be allowed to take its course and we must look at what goes on in the EU where we belong.
The key to investment and growth is an increase in productivity and upgrade of the product which Cyprus offers to those who buy goods and services from overseas. By increasing productivity and hence making Cyprus more competitive the attraction of Cyprus will increase as a destination of foreign direct investment, be that in energy, shipping, healthcare/medical tourism or business services; the key was to privatize some state owned entities to attract investment and improve governance; sadly the opportunity to attract foreign investment, if it was there, has been lost thanks to union reaction.
If we want to see the banks to play a role in financing, if this is within their scope, they should be allowed to use their balance sheets to do so. The legal environment in Cyprus has become hostile to banking as if the borrowers and parliamentarians are blameless. It is now 4 years after the crisis and there is a need to leave purgatory and get back to the fact that banks have a role to play and that for those who have borrowed excessively and have wealth, be that locally or abroad, to face up to their obligations. I have not suggested households or SMEs with their homes at risk to be foreclosed. On the contrary I consider this a social issue and the rest follows. However, to read that the CEO of Bank of Cyprus appeals to borrowers to pay up and not delay any further begs a serious question. How long should a bank be patient?
I think the argument about economic growth and investment is currently blurred by good fortitude in that tourism has performed exceptionally well and passport sales have attracted foreign investment. But who has benefitted from this only time will tell. Has productivity been improved? Has it made Cyprus more attractive for the other sectors not supported by incentives been able to attract investment? Have the issues of good corporate governance been addressed? Have the foreign investors been convinced that Cyprus is friendly and stable investment destination? I think these were the issues which the article should have addressed and not banker bashing. I think we should read between the lines of what the rating agencies and the EU Commission/IMF have repeatedly told us and face up to the fact that there is need to live in the global market and the nature of capitalism' if we fail to understand how technology, innovation and productivity are the source of wealth and losses we will still be looking at who blame.

Dear Savvakis, the example I gave earlier is not my situation! It is an example that describes the majority of the NPLs in Cyprus and why there is stalemate! The problem is real! Personal Guarantees (PGs) is one of the problems. It helps bankers do a less than optimal evaluation of the borrower and it also locks the borrower in for the bank. As you well said in the US, if the loan did not make any sense any more the borrower would walk away from the asset surrendering it to the banks. That way the bankers had to do a very good job when analyzing the potential loan. As we all know this was not really the case and the "free money" syndrome resulted in the 2007 collapse with housing leading the problem.
So I am not sure if anyone that should be listening is listening but the CBC should readily give orders/instructions for the PGs to be void, especially in the cases where the bank failed to do the proper evaluation of the borrower's ability to repay. In most cases, where PGs should have been effective, they are not as they were abused by people who intended to defraud the banks (among others) and transferred their assets in the names of their kids, wives, BVI companies etc. The banks (and so does the public in a large extent) know who these are and they should try to recoup as much as possible.
I think that people with access to politicians/economic advisory boards, bank boards etc should act responsibly and convey this message and pursue a resolution to the problem before it is too late. The government has designed systems to assist the collapsed world of developers (the naturalization by investment for example) but the rest of the economy is not really improving. We are only building empty houses for some russians, chinese, etc who never come to live in cyprus so the economy is not really growing.