Our View: No alternative to keeping the banks afloat despite the cost
THE BROADSIDE fired at the banks by DISY chief Averof Neophytou, a few days ago, may have been seen as a communications ploy, to answer public criticism that the party was protecting the interests of the banks, but it was more than justified as it touched on many truths.
One truth was that in Cyprus we did not have a functioning banking system, because banks operated, solely, as debt-collection agencies. The granting of new loans and facilities had become a negligible part of the business as banks focused on loan recoveries. Neophytou also accused them of refusing to comply with the Central Bank’s code for the restructuring of loans, urging the Governor to inform citizens what measures she would take against them for non-compliance.
And to add insult to injury, Cypriot banks were charging extortionate interest rates – the highest in the eurozone by far – making loans even more difficult to service. But while the country has been in the worst recession in its history as direct result of the banking sector’s problems without any sign of recovery, bank personnel were still enjoying their fat salaries and benefits. Neophytou pointed out: “We sat at our offices and on boards as if nothing had happened. Our only concern is to charge and overcharge. We did not take the trouble to reduce our costs – our expenses and our benefits.”
He was absolutely right in highlighting this point. There may have been pay-cuts ranging from five to 20 per cent but the standard of living of the bank employees of Cyprus, who were among the best-paid in the world, was largely unaffected compared to the rest of private sector workers that bore the brunt of the banking crisis. And these people are also paying extortionate interest rates, because bank employees’ salaries and super-benefits such as zero-interest loans had to be preserved. Drastic cuts and downsizing might not have greatly improved the situation but it would have shown, what Neophytou described as ‘social sensitivity’; interest rates might even have come down a percentage point.
With foreclosures looming, public hostility and resentment towards the banks can only grow. People who would have property used as collateral seized will blame the bank for their predicament and would have a point – the banks’ bad management and reckless investments had created the recession that caused them to default on their loans. Others, who had been persuaded by banks to invest their savings in convertible banks bonds, justifiably felt duped as they ended up with worthless shares when the crisis hit.
Then there were the people who saw half their deposits taken to re-capitalise the Bank of Cyprus. And as if this were not bad enough, they will soon see the shares they were given in compensation for their seized deposits being diluted because the bank needs additional capital to get through the planned stress tests. Russian and Ukranian depositors are now protesting, with ample justification, because they would not be given the option to buy enough of the capital issued to maintain their shareholding. Should we also mention the old shareholders of the Bank of Cyprus who saw their shares reduced to one thousandth of the pre-haircut number and will now see them further reduced?
There are also the co-op banks, the re-capitalisation of which cost the taxpayer one billion euro. Their loan portfolio consists of housing loans and it will not improve without foreclosures of primary residences and the premises of small businesses. People will be outraged that taxpayer’s money was used to save the co-ops so they could repossess homes, but what would be the alternative?
The argument constantly used is that the banking sector must be supported because if it were allowed to collapse the consequences for the economy would be even worse. However, the way things are going there will be many that will start to question this reasoning and argue that the situation could not become any worse if the banks were left to sink. But the truth is things would become worse as the economy would collapse completely and debtors would still have to repay their loans or face foreclosure.
Unfortunately, there is no alternative to keeping afloat the debt collection agencies formerly known as banks, even if the cost, economic and social, for doing so keeps on rising