Banks and Cooperatives have pledged to accelerate efforts to reduce interest rates in Cyprus after the government said it will inject an additional liquidity of EUR1 bln in the banking system.
Banks and Coops accuse each other of keeping high rates and for siphoning deposits to meet their funding requirements, which is blamed as the reason why lending rates have remained stubbornly high in contrast to efforts by the European Central Bank to steer rates lower.
At a time when the ECB refinancing (borrowing) rate is 1.25% while the deposit rate facility rate is at 0.25%, banks in Cyprus are offering loans at 5-5.5% plus a 3-4% spread, while for deposits the minimum offered is 3.5%.
“The Coops are to blame because they are offering deposit rates above 4%, thus stealing away customers from us, so we are obliged to fight back,” a senior banker told the Financial Mirror.
The large banks had reduced deposit rates to 3-3.5% recently but were obliged to raise them back to 4-4.28% after they said the Coops were keeping deposit rates above 4.5%.
The Managing Director of the Cooperative Central Bank, Erotokritos Chlorakiotis, in charge of the 116-strong Cooperative Societies, rejects the charge, insisting that the Coops have been lowering rates gradually. Chlorakiotis blames the banks for starting the whole deposit war when last year they pushed deposit rates to 7% to 8%.
He told the Cooperative Central Bank annual meeting last month that it’s calls for a reduction of lending rates more than a year ago were ignored, but that the competition, supposedly the commercial banks, eventually followed their example.
CCB Council chairman Demetris Stavrou echoed Chlorakiotis’ statements on interest rates, saying that the Cooperative movement had warned from June 2008 against interest rate hikes and that the Cooperatives have been spared from investments in toxic products.
“The situation today has improved, as the trend of reduction in interest rates is on the right path,” Stavrou said, adding that the Cooperative movement “has the strength to respond to all difficulties.”
Liquidity into banking system
Finance Minister Charilaos Stavrakis announced the government’s decision to inject an additional liquidity of EUR1 bln in the banking system in a bid to stimulate the decline of interest rates and to refinance expiring public debt.
Speaking after a meeting with Commerce, Industry and Tourism Minister Antonis Paschalides and representatives of the island's commercial banks and cooperative societies, Stavrakis said the government will issue a short-term bond to Cypriot banks worth EUR1 bln, which expires in late December, at a rate of 1.5%.
According to Stavrakis, this bond can be used by the Cypriot banks as collateral to pump liquidity from the European Central Bank at a rate of 1.25%, while the government will deposit these funds in the Cypriot banks.
The government will deposit the funds back with the banks and Coops at 1.75% until end of December.
Stavrakis noted that banks and cooperatives have pledged to help reduce interest rates in Cyprus, adding that it has been agreed to publish the average deposit and lending rates on a monthly basis.
This is the second time Cyprus issues bonds to domestic banks, after a 1.4-billion-euro bond issued last December. Furthermore, Stavrakis said that the government will proceed as planned with the issue of a 1 bln euro bond to international markets, in a bid to cover financing needs, which will reach EUR 2.5 bln in the next ten months.
Cyprus’ financing needs include approximately 2 bln euros of expiring public debt, 400 mln euros due to government pledges to the Social Insurance Fund and a housing scheme for young couples, as well as from the decline of public finances due to the global financial crisis.
