Unfair Estia preserves politicians’ role as middlemen, economist says


By Stelios Orphanides

The handling of the current banking crisis focuses on addressing the symptoms, not the causes of it, and may strengthen expectations among borrowers that failing to honour obligations will pay off in the future, an academic economist said.

Estia, a scheme promising debt relief to borrowers with mortgaged primary homes approved on Tuesday by the cabinet, strengthens the belief that those who have not repaid their loans are ultimately rewarded, said Marios Zachariadis, who teaches economics at the University of Cyprus, in a telephone interview on Thursday, three days before parliament convenes to vote on crucial bills for the banking sector.

Parliament is being asked to vote on Sunday on the extension of government guarantees to Hellenic Bank which will allow it to acquire the healthy operations of the mismanaged state-owned Cyprus Cooperative Bank in accordance with a deal signed by the two lenders more than two weeks ago. The implementation of the deal depends on the European Commission’s approval, which has asked Cyprus to modernise its judicial and legislative system in such a way to allow banks to speed up the reduction of a €22 billion mountain of non-performing loans – 45 per cent of the total.

“The problem is more general,” Zachariadis said in reference to the task parliament is expected to complete. “Are they (politicians) going to set up a judicial system which will render their role as middlmen obsolete? Α well functioning system would render the average Cypriot politician’s middleman role largely obsolete.”

Estia is designed to support borrowers with non-performing loans provided their income is below €50,000, the value of the collateralised primary residence is below €350,000 and the value of their net assets below 125 per cent of the value of the residence. The scheme, which applies to both mortgages and business loans provides for a subsidy of one third of the monthly payment to a restructured loan, reduced to the value of the collateral. A senior finance ministry official said on Wednesday that borrowers may benefit from as much as a 50 per cent reduction to their burden.

The chairman of Disy, the party which supports the government under Nicos Anastasiades, said on Thursday in an interview with state radio CyBC that Estia may also offer relief to bank customers who pledged their primary residence as collateral to borrow money to gamble.

Zachariadis said the banks’ problems with non-performing loans go back to before 2013 when a twin budget and banking crisis catapulted the economy into a prolonged recession.

The Cypriot economy started to grow again in 2015, expanding last year by 3.9 per cent and 3.4 per cent the year before. This year it is expected to grow at a similar pace to 2017.

As part of Cyprus’s bailout programme, the island had to reform its foreclosure and insolvency framework to allow banks to recover non-performing loans faster. In September 2014, three months after Cyprus tested international markets for the first time with the issue of a government bond, parliament passed a new framework which also involved lengthy procedures depriving banks of the tools to enforce borrower discipline.

In June, the International Monetary Fund (IMF), which together with the European Commission and the European Central Bank (ECB) oversaw Cyprus’s bailout programme from 2013 to 2016, said that strategic default enjoyed political and social acceptance in Cyprus. Cypriot politicians from all opposition parties regularly participated in protests against auctions of strategic defaulters’ homes.

According to Eurostat figures, the percentage of the population behind schedule in paying for their housing loan or rent was 8.6 per cent in 2016, 8 per cent in 2015 and 8.9 per cent in 2014. The percentage of the population living in poverty and was in arrears with mortgage and rent payments was 13.4 per cent in 2016, 13.7 per cent in 2015 and 11.7 per cent in 2014.

According to a Cystat survey based on 2015 data, the percentage of households with a gross annual income below €50,000 was 79.3 per cent.

According to figures prepared by the Cyprus division of the Royal Institute of Chartered Surveyors (RICS), in the fourth quarter of 2017 the average value of apartments and houses island-wide was €110,995 and €351,322 respectively.

“The scheme is not about mainly vulnerable groups but a large portion of the population who did not pay their loans,” said Zachariadis commenting on Estia.

While it could be argued that introducing the bill could help banks which are facing fresh stress tests in the second half of the year to reduce their non-performing loans faster, “things in the society don’t work like that,” the economist continued. “The society takes into account past events before shaping its future expectations. With any policy we apply, such are the expectations we create”.

Even after the bailout, which prescribed a series of structural reforms including privatisations, labour market liberalisation and streamlining judicial procedures, political intervention remained in place, undermining meritocracy in boards of directors of both private and public owned companies, which the World Economic Forum has highlighted, according to the economist.

“We didn’t have the most capable to manage these problems which were huge from the beginning, while the framework (itself) was problematic,” he said. “To find the most capable people you need meritocracy and transparency. This practice doesn’t exist in Cyprus”.

“With what’s on the table, I don’t think that our problem will be solved without drastic reforms in the financial system and the economy,” Zachariadis continued. “This state all these years failed to create a fast-working judicial system, not in the past 58 years, not in the past five years when changes could have happened that people could understand”.

“We instead apply policies based on exceptions,” he said and added that the current banking crisis, is merely ‘a symptom’ which may reappear. “We entered a vicious circle, and it takes drastic changes to escape”.


About Author

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

  • Douglas

    This outcome can only happen in Fantasy Island 🙂

  • Neroli

    Wow Mr Zacharaides! You really don’t need to be a lecturing economist to come up with that little gem! We have all been commenting on the forum for ages saying exactly that! Problem is like Greece everyone is an economist even Anna Theologou and Cristala !, But it doesn’t make a bit of difference. Really, stop teaching economics it’s not helping!

    • Terryw45

      Obviously a product of the superior Cyprus educational system ! Sharp as a marble !

      • PPetrovicho

        He hοlds a BSc in Economics from the University of Wisconsin (1993) and a PhD in Economics from the Ohio State University (2000). He was an assistant professor at the Department of Economics of Louisiana State University from 2000 to 2005. He has been at the University of Cyprus since May 2005.

        • kimberworth

          Yes,maybe but on paper, in real life no bloody commonsense, it reminds me in my engineering days these so called experts from university could read the operation instructions but no idea about running the job

          • PPetrovicho

            Just countering the comment ‘a product of the superior Cyprus educational system’. He might be a retard, but he ain’t a product of the superior Cypriot educational system. He is a product of the superior US educational system, which is also pretty crap with the exception of some good places. Varoufakis was also not a product of the Cyprus educational system, but rather trained in the UK (Essex and Birmingham). So go figure what these two have to do with being educated in Cyprus!

        • Neroli

          So?? So was Yanis Varoufakis and all the ministers in Greece during their crisis, it didntndo them any good either! Where’s Cristala she’s also an economist, and totally useless

      • Neroli

        It’s unbelievable!

    • Barry White

      As a friend who is a successful economist liked to describe his peers: “Artificial Intelligence was a term invented to describe economists”.

      • Neroli

        If Stelios Orphanides takes time to read our comments, he wouldn’t have to waste time interviewing these ‘ economists’

  • almostbroke

    Dident need an Economics lecturer to point out that ‘populism ‘ and ‘vote catching ‘ supersedes doing what is fiscally correct ! Taxpayers money is not a bottomless well !

    • Bernard Smart

      It is here in the banana republic and if its not enough there is always people’s savings

  • Mike

    I am begining to feel I am a fool for never having borrowed from a bank as clearly paying back is not mandatory just a personal option. Those of us who live within our means are clearly idiots and a means of subsidising those who have no concern for anyone except their own selfish greed and image.

    • Neroli

      You , me and the majority on this forum!

  • Kevin Ingham

    The last global financial crisis was triggered by government interference in the sub prime mortgage market.

    What we are seeing take shape here is a policy that will have equally catastrophic consequences for the Cypriot economy in the long term. There are so many areas where this policy could backfire it defies belief

  • jobanana

    It’s not rocket science. The government rewarding those who do not abide by the rules rather than punishing them, and forcing those who do play by the rules to pay for the bad behavior of those who do not is bound to fail. In many other countries the politicians who came up with this idiotic scheme would soon be unemployed. Rather than simply subsidizing these people how about at least making them work a bit for the money they get from taxpayers like me!

  • John Henry

    The continuation of rewarding, or protecting, wrong doing, can only lead to a much worse situation.

  • Bunny

    The government will provide the funds for clients of the new casino(s).

  • costas

    These are the views of an academic economist with utopic expectations of how the world must change .If this scheme is approved it will come into effect next year.Therefore contrary to what the economist suggests it cannot help the banks with the stress tests which will be finished long before this,or any other scheme is in operation.
    It also gives the impression that people running now the banks in Cyprus are worse managers than bank managers elsewhere.Experts, independent academics and investment bankers were put in charge both in England at UKFI,in Greece ath the Stability Board and we have seen the results.What academnics must appreciate is that investment bankers do not care about what will happen in four or five years but how to increase their bonus.This they will do whether they they are appointed by the Government as independent directors or managers of a fund or by any private firm .
    The Government now and the opposition parties are faced with a reality.SSM is pressing them to take action and this they are trying to do.Under these circumstances no scheme will be fair or effective but it will allow the banks to work without extreme pressure from Frankfurt.