Politics may prevent state from collecting from Co-op NPLs

15

By Stelios Orphanides

Political considerations prevented the state-owned Cyprus Cooperative Bank from collecting from borrowers not servicing their loans, leading to its demise, and may also continue to weigh-in after the government took over its non-performing loan portfolio, an economist said.

“The Co-op had many primary homes (as collateral) and old loans and it was politically too difficult as a government-owned bank to foreclose,” economist Marios Clerides said in a telephone interview on Monday. “And we are of course going to have the same problem in the ‘bad Co-op’. Non-foreclosures are a burden for the budget”.

Failure to act on non-performing loans of the Cyprus Cooperative Bank will further impact public finances with the part of the Co-op which the government wants to operate as a bad-bank.

On June 7 the International Monetary Fund said that the political and social acceptance of strategic default undermines the Cypriot banking system. In August last year demonstrators, among them lawmakers, protested at the headquarters of the Co-op after the bank announced an agreement with Spain’s non-performing loans specialist Altamira.

On Friday, after Hellenic Bank and the Co-op announced a preliminary deal subject to approval by the Co-op’s extraordinary shareholders meeting and a capital increase by Hellenic Bank, the government announced that it would deposit another €1bn at the Co-op, receiving additional assets as collateral.

In April the government issued almost €2.4bn in bonds in favour of the Cyprus Cooperative Bank and deposited €2.5bn receiving assets worth €7.5bn consisting of mainly non-performing loans as collateral. The government recapitalised the Co-op with €1.5bn in 2014 as part of Cyprus’s bailout agreement and injected another €175m the following year.

The additional €1bn deposit announced on Friday is part of an asset protection scheme and in exchange for additional assets, the acquisition of which Hellenic Bank rejected, such as low-interest loans extended to the local administration. The government also agreed to compensate up to 900 workers of the Cyprus Cooperative Bank who will chose to benefit from a voluntary retirement scheme.

Finance Minister Harris Georgiades said on Monday in an interview with state-radio CyBC that the decision to break up and sell the Co-op was made necessary after it experienced €2bn in deposit outflows in the first three months of the year, after “depositor confidence was shaken”.

The lender which made only very slow progress compared to Bank of Cyprus and Hellenic in reducing its non-performing loans stock accounting for roughly six tenths of the total, also had to comply with additional capital requirements which shattered its initial plans for a Cyprus Stock Exchange listing that would have allowed it to reduce the government’s stake to 25 per cent, he said.

“The Co-op was heading towards privatisation via capital raise, however because of the large capital requirements resulting from the continuously changing European framework, capital needs increased,” he said.

In the case of the Co-op it would have been difficult to attract the private equity required, he added.

The assets acquired from the Co-op will generate revenue which will help reduce public debt, the minister said.

The government said in its stability programme submitted to the European Commission in April, outlining its general economic policy framework for 2018 to 2021, that it expected public debt to increase by 12 percentage points of gross domestic product as a result of the €2.4bn issue of government bonds in favour of the Co-op, increasing public debt to 105.6 per cent of the economy this year from 97.5 per cent in 2017. This is not taking into account the additional €1bn deposit announced on Friday.

In the stability programme the government also outlined its strategy to reduce non-performing loans in the banking system, currently €22bn, by one third by the end of the year. The plan provides for the sale of the Co-op, the creation of a bad bank and the introduction of a scheme that will aid vulnerable groups affected by the crisis repay their loans.

Economist Clerides, who served as chief executive officer at the Co-op until mid-2015 and before that as a senior economist at Hellenic, said that the latter will be as a result of the accumulation of a high-stock of Cypriot government bonds in a similar situation to the Bank of Cyprus and Cyprus Popular Bank before 2011. The two banks had a large accumulation of Greek government bonds and lost almost €4.5bn in Greece’s 2011 debt restructuring.

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About Author

Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • Evergreen

    Phewwww!!!

    • Philippos

      That sounds like the wind being taken out of the Co-Ops Sails, if you could just hold it for a little longer!

      • A is B

        ImI going to stop paying my mortgage.

        • Philippos

          Careful, if anybody actually notices, your name will be on a Ballot Paper at the next House Election and then it will be “A is an MP”. There is also a Greek Language joke there somewhere too! (Mee Pee to get a hard “B”)

          • A is B

            You are my hero. In a straight way. No disrespect to gay people.

  • Neroli

    How’s many MPs members of the ‘elite’ have NPLs with the coop ‘bank’

    • Jeremy Rigg

      It would appear that the majority have them!

      • Neroli

        Precisely the reason they won’t be foreclosing on primary dwellings!

  • SuzieQ

    In that case, I’m going to take out an NPL with the co-op.

    • Philippos

      Don’t be boring and limit it to only one!

  • Bob Ellis

    The first paragraphs insinuates the Co-op is already dead, isn’t this about 6 months premature. We all know it will die, it’s just a case of when and what the collateral damage wilo be.

  • Copernicus

    Gross incompetence, mismanagement and favours for DYSY borrowers were the reasons not the capital requirements. The government should have acted early to take off the balance sheet of the Co Op the NPLs in held an entity which is not a bank; this is what other countries did. This would have cost less than the amount spent but the arrogance, ignorance and incompetence of those they appointed has cost the tax payer nearly €5 bln. Will the real truth ever come out? Another cover up unless the bankers who resigned from the top positions come out and explain what was going on at the Co Op which made them quit!

  • guest

    What is the read through for Bank of Cyprus?

  • costaskarseras

    Cyprus’ banking problems are the same as in the rest of the world. The only difference is because of the small size of the banking system it is more vulnerable and was easily affected by the turbulence of the capitalist economic crisis. The crisis caused much larger financial institutions to disappear or they had to be saved by further squeezing the long suffering taxpayer. It cannot be denied that there have been problems with US, UK, German and French banks, although these banks appeared to be strong but only on paper.

    The banking system imposed on the working people across the world, who are have been forced to rescue it at great cost, has proven beyond any doubts over the last ten years that it is not worth saving. What is urgently needed is the return of the coop-bank back to its original and traditional principles of serving the community and not to risk by speculating investor’s money. The coop-bank has played a vital part in Cyprus’ development and prosperity of the people after independence and the Turkish invasion of 1974 and is urgently needed today to navigate us out of this economic crisis.

    The privately owned banks should be solely responsible for their speculating actions and not to expect public money to save them.

  • Philippos

    So thoughtful. thank you! Just a small one for ten million or so will do fine and they can have my rusty low mileage mountain bike as security and could take over the loan on that, maybe? I don’t want to make any repayments while I am still alive and could it be interest only, as well?