Cyprus’ three largest banks have increased their spreads charged on corporate loans and facilities from 1.5% to 2.5% in an attempt to protect margins, which in effect means that the recent decline in euro borrowing costs will not reach thousands of businesses.
The widening of spreads is also in contrast to statements made by Finance Minister Charilaos Stavrakis over the weekend that efforts are being made to lower the cost of borrowing for small to medium sized businesses.
With half of the loan portfolios of banks made up of business loans, according to Central Bank data obtained by the Financial Mirror, the increase in spreads may cost the business community up to EUR 550 mln.
Total corporate loans as at December 2008 amounted to EUR 27.5 bln, or half of all loans given by banks which reached EUR 54.71 bln.
A 2% average increase in lending spreads charged on business facilities means an additional annual cost of EUR 550 mln, which business people now have to contend with in addition to the other woes of declining sales, increased competition and higher expenses.
What decline?
The ECB in January slashed its refinance rate to a record low of 2% and is now expected to proceed with a further 0.5% reduction when policy makers meet in March following news that euro-area growth contracted in the fourth quarter for the first time in 13 years.
The Euribor, or European Interbank Offered Rate to which most loans are tied, has recently been coming lower. The 3-month Libor was last at 1.93%, its lowest in five years, while the 6-month Euribor was 2.03% compared to 5.4% in October 2008.
The reduction in borrowing costs is failing to reach the business community, the only productive sector of the economy, which is responsible for new investments to create jobs and wealth.
Correcting past mistakes
Vassos Shiarlis, Bank of Cyprus Group General Manager Domestic Banking and Glafkos Mavros, Hellenic Bank Group General Manager, insist that the increase in spreads is necessary to reflect the current market conditions.
In separate remarks to the Financial Mirror, both officials pointed out that compared to pre-2008 levels, actual rates paid by businesses are lower.
The argument of both bankers is that before Cyprus joined the euro-zone, the Central Bank of Cyprus lowered its base rate from 4.5% to 4% and issued a directive obliging all banks to tie their base rates to the ECB refinancing rate for all loans granted until that date, which at the time was also at 4%. With the ECB rate and Euribor 3-months now at 2%, both bankers insist that they cannot maintain the same spreads, considering that during the same period, the cost of funds or deposit rates have increased substantially.
Spreads may adjust
Shiarlis said that with deposit rates fast declining during the last couple of weeks — a trend that is likely to continue even more aggressively in the next few months, "there will be room to lower the spreads" considering that the ECB and Euribor rates are also coming lower.
Mavros said a comparison with borrowing rates in other euro-zone member states is not possible since "their cost of funding (deposit rates) is only 2-3%,” when the average in Cyprus was well above that rate in the range of 6.5%, while other euro-zone banks have had easier access to the ECB discount window which allows them to borrow cheap by pledging securitized assets.
Although they have adequate eligible securities to be used as collateral for ECB borrowing, Cypriot banks do not fully utilise this facility as it does not improve their regulatory liquidity indicators (protective liquidity).
