A leading banker believes that the Cyprus banking system, and subsequently the economy, is losing out big time because of the delays to pass a long overdue law on covered bonds.
Marfin Laiki Bank’s CEO Efthymios Bouloutas told a press briefing on Thursday that he doesn’t see the relative legislation introducing the instrument being passed by parliament this year, at least not before the unofficial date of it becoming a reality by autumn.
“Cyprus did not have covered bonds two years ago, and it still does not have them now. It should move faster,” Bouloutas said, while discussing the present and future prospects of the bank and the economies of Cyprus and Greece.
“If Cyprus had covered bonds then the cost of new loans would fall drastically, as the [Cyprus] banking system can raise about 6-8 bln euros very quickly, in about 6 to 12 months after the legislation is passed,” he said.
As an example, Bouloutas said that the group subsidiary Marfin Egnatia Bank had raised EUR 500 mln in Greece from a second series covered bond just two days earlier.
Asked to comment on media reports that the Cyprus legislation on covered bonds is seen as being tabled in autumn, Marfin Laiki’s CEO replied bluntly: “I’m afraid we will not see approval of the bill until after the European Central Bank has considered a rate hike, and definitely not in September.”
As regards the anticipated government measures to reduce the deficit, Bouloutas said that greater emphasis should be given to development funding and projects.
“The government needs to practice some business sense, it needs to have a business plan and see where it would like the Cyprus economy to be in 3 to 5 years and plan ahead,” he said.
As regards the bank group, Bouloutas said that Marfin Laiki recorded “satisfactory” profits of EUR 180 mln in 2009 with steady quarters of profitability throughout the year. He added that the bank continued to offer new credit lines and its loan portfolio grew by 7.5%, raising its Cyprus market share from 16% in 2008 to 22% in 2009.
“Just over one in five loans in Cyprus are given by Marfin Laiki. We are the biggest credit supplier in Cyprus with nearly EUR 97 mln in new loans in January, while the Cyprus loan market grew only by EUR 72 mln, as others decreased their loans and we increased our business by 135%.”
“The current year will continue to be difficult for banks and society as a whole, but 2011 is expected to see things get better as we will see a recover in main markets,” Bouloutas said.
The bank’s housing loan portfolio seems to be doing better as Marfin Laiki has a lot of dealings with mainly Cypriot clients who are better in repayments, while traditional lines such as maritime finance and the bank’s U.K. operations are the group’s star performers – the maritime loan portfolio has reached EUR 2 bln with a zero rate of non-performing loans, while the Marfin Laiki U.K. network that has expended into maritime and non-ethnic markets recorded profits of about EUR 10-11 mln, Bouloutas concluded.
IMF URGES COVERED BONDS
The International Monetary Fund (IMF) published a positive assessment report on the stability of the Cyprus financial system last November, pointing out at the same time that “challenges remain” such as adopting a legal framework for covered bonds to facilitate access to European Central Bank refinancing.
The Finance Ministry and the Central Bank had agreed on the first draft of the bill last August that would pave the way for the issue of some EUR 3-5 bln in covered bonds in a bid to inject additional liquidity into the Cypriot market.
Presently, the legal framework seems to be stuck in bureaucratic channels somewhere, placing its submission and passage by parliament optimistically prior to the summer break or the latest by September.
Last July, Finance Minister Charilaos Stavrakis was confident that the bill could be voted through before the year-end (of 2009).
At the time he had said that the covered bonds bill is the best solution that can bring long term benefits and drive down interest rates.
Covered bonds are issued from credit institutions by submitting their loan portfolios as collateral to the European Central Bank, in a bid to pump liquidity from the Eurosystem.
In an article published in the Financial Mirror in January, Christina Pierides, a Senior Officer at the Association of Cyprus Banks, suggested various measures to enhance Cyprus’s attractiveness as financial services centre such as the need to enhance the sophistication of the local capital market.
“Legislation is now being drafted to permit the issuance of covered bonds. This effort should be intensified. As far as sovereign debt is concerned, there is a need to restructure the primary and secondary market for government bonds since at present there is no depth in the market and the secondary market is practically non-existent,” Pierides said in her comments.
“These problems were identified several years ago and the decision was taken to restructure the operation of the primary and secondary markets, while introducing primary dealers. However, there have been substantial delays in implementation,” she concluded.
