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BY SHAVASB BOHDJALIAN
In response to the deepening debt crisis and strains in lending rates, the European Central Bank (ECB) is widely expected to reduce its main refinancing rate (borrowing rate) this week, but once again, such a reduction will only benefit the banks with absolutely no benefit passed to Main Street – the consumers and the millions of business establishments operating in the 17 member states sharing the euro.
Mario Draghi, the new head of the European Central Bank signaled he was ready to take stronger action to fight Europe's debt crisis if political leaders agree on much tighter budget controls in the euro zone. His remarks came a day after the world's major central banks took joint action to provide cheaper dollar funding for starved European banks, as he painted a dark picture of the state of the banking system.
Draghi did not spell out what action the ECB might take, but it is under huge political and market pressure to massively step up purchases of euro zone government bonds or to lend money to the IMF to support ailing Italy and Spain.
In response to lawmakers' comments, he added that the ECB had scope to act within the European Union treaty and the most important thing was to make sure that frozen credit channels start to work again.
In the short-term, economists expect the central bank to relieve pressure on banks and an economy heading into recession by announcing longer-term cheap liquidity tenders with easier collateral rules and cutting interest rates but once again, none of the officials said anything how they will force the banks to pass on the easy credit terms to the Main Street.
As EU leaders rush to save the banks by providing them with unlimited access to cheap funding from the ECB, new swap lines in dollars and direct aid from the taxpayers, they fail to impose any conditions on the banks on how they will also pass the cheaper cost to their customers.
EU citizens would expect that our clever central bankers, finance ministers and other senior officials who are allocating so much of their time and resources to saving the banks, would at least impose participating conditions on the banks for bad management, irresponsible decisions and rampant speculation.
Hard core eurozone led by Germany is demanding that all eurozone states agree to fiscal union, which in layman’s terms means sovereign states agreeing to automatic penalties and agreeing to scrutiny by Brussels if they don’t check in their deficits, which can only be achieved if governments proceed with painful measures including thousands of layoffs, salary cuts, dramatic reduction in social spending and so much more to balance their budgets. The same hardcore group however, does not seem to be in a rush to ask for the resignation of the entire boards of the banks for gross negligence and drastic pay cuts for Bank management and staff for irresponsible speculation simply to generate huge bonuses for their own pockets at the expense of the general public.
The nine-month results by the major Cypriot banks says it all. Bank of Cyprus posted a EUR801 mln net loss after provisions, followed by Marfin Popular with a EUR282 mln loss and Hellenic with EUR72 mln losses. If MPB had applied a 50% haircut on its Greek government bond holdings like BOC did, its losses would have been substantially bigger.
In an effort to increase their profits, bank management decided by late 2009 and early 2010 to invest in Greek bonds, which had a high yield so that they would meet their profitability targets and in turn be eligible for bonuses. If bank management received a bonus for 2009 and 2010, then those bonuses should be refunded in full. And for their reckless behavior, all senior management members should agree to a drastic pay cut, no more bonuses until they fully recover the losses and a cut in their luxury payouts on retirement, which equals to approximately 80 times their last salary. They currently contribute nothing to the fund, which is paid wholly by the banks.
Bank bonuses speculated (with other people’s money) and it backfired, so now its only fair to ask them to share in the pain.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nominated Advisor for listings on the Emerging Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
