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BY SHAVASB BOHDJALIAN
Cyprus should seek support from the EU to strengthen the capital of the island’s banks with a comprehensive plan on how it can achieve a budget surplus to repay its debts, rather than copying Greece which announces half measures, sets unrealistic targets and after missing revenue targets proceeds with more cuts. This can only add to the misery of the people and is very counterproductive.
The Central Bank Governor Panicos Demetriades is very correct in stating that such an application, if it’s made, will have to be planned and prepared in such a manner to allow Cyprus to secure the funds it is seeking on the best terms and conditions.
All officials are now waiting to see how the Cyprus Popular Bank (Laiki) rights issue goes, where the Bank is seeking up to EUR 1.8 bln in funds to shore up its capital. Since the government is the underwriter of the issue, it has pledged to cover all unexercised rights. If private investors do not subscribe to the issue, then the government has to find the money to inject it into the capital of Laiki.
The government has 3 options; borrow from international markets, which it cannot do because it has lost its investment grade ratings, borrow privately, which looks difficult or tap the EU’s support mechanism, which will be done subject to negotiation.
In my opinion, if the government takes most or all of the Laiki rights issue obligations, then it’s best if ALL the Cyprus banks are forced to perform a very strict evaluation process to also cover non-performing property related loans made in Greece and Cyprus, so that when the application is made, we do this once and after bringing out all the “dirt”.
The Central Bank has the obligation to perform a correct audit of the books of all the Cyprus banks and not allow them to sweep problematic loans under the carpet. It is very immature for the other banks to insist on keeping their so called independence only by hiding their problematic loans through various rescheduling exercises. The state of the economy is going to become worse before it gets any better, so the banks need to come forward and tell us the truth about their situation.
Once the government knows the true state of affairs at Cyprus banks, then a plan has to be rushed through parliament on how state expenses will be cut so that the country will start recording a surplus and be in a position to repay the loans that it will secure from the EU and perhaps also from the IMF.
Cost cutting is not a bad exercise. Just take a look at the cost cutting exercise that the government and the House managed to secure from Laiki Bank before agreeing to become underwriter for the rights issue. The maximum cap of EUR 120.000 for every senior manager and the across the board 7% to 12% salary pay and operational expense cuts are forecast to achieve cost savings of EUR 50 mln to EUR 65 mln annually. My question is why did the Board wait for the government and the House to do this when it was obvious that they should have done this themselves. The same goes for the other banks who lost big in 2011 and the same is true for when the government will seek EU funding. It needs to cut its expenses before it submits the case to the EU/IMF.
By cutting the 13th salaries of civil servants and all allowances, as well as proceeding with across-the-board cuts in operational expenses, Cyprus will be in a strong position when it asks for help. In such a case, Cyprus will be able to defend its corporate tax regime, which everybody wants to preserve. Alternatively, if Cyprus does not put its finances in order and applies to the EU with half measures, then even if the support is given, the country will be obliged to keep making new cuts, just like Greece is doing, plunging the country into an endless game of cuts, low growth, missed revenue targets and more cuts.
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(Shavasb Bohdjalian is a certified 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 Nomad for listings on the Emerging Companies Market. Eurivex offers complete packages and solutions for all types of listings on the ECM/CSE. The views expressed above are personal and do not bind the company and are subject to change without notice)
