.
Until recently, the average Cypriot thought that the four most trusted forms of investment was in real estate, government bonds, purchasing the shares and bonds of local banks and buying an investment linked life insurance policy.
To be fair, the four trusted pillars of investment – real estate, government bonds, investing in bank financial instruments and buying unit linked life insurance policies had over the years and especially after the 1974 Turkish invasion produced very satisfactory returns.
But the four-pillars are crumbling fast and in the process, the average Cypriot cannot explain and understand how and why this is happening and even more importantly decide what to do from here onwards. After all, when the stock market bubble of 1999/2000 burst, everybody blamed the stockbrokers for the mess and promised never to return and instead searched for alternatives.
The best alternative investment was in real estate, which produced spectacular returns and became the new bubble by 2008-2009, after which prices started heading south and would have declined substantially lower, if it had not been for the price-supportive mechanism of the banks, who believe that if they hold prices artificially up, new idiots will come and purchase the property sitting on their books at still inflated prices.
Putting money in government bonds was also a risk free and tax-free form of investment. I still remember the time when people used to give government bond certificates as wedding gifts, which used to have a monthly raffle. Now, the prices of Cyprus government bonds have declined sharply and they are rated as “junk” or below investment grade by the rating agencies.
The next rude awakening for the average investor is the massive losses that they have sustained by investing in the shares and bonds of the local banks. The share price of the three invincible banks is now a fraction of their previous levels and below nominal value, causing billions in losses for the public. Those who invested in the bonds of the banks were in for a nasty surprise after both Bank of Cyprus and Popular Bank suspended interest payments on their bonds. Though the terms and conditions may allow the banks to postpone interest payments at will or force bond holders to swap their old paper for new ones with probably even more disadvantageous terms for the public, but for the person who was counting on receiving the interest, his trust in the banks has been destroyed and betrayed.
Having burned their fingers in real estate, government bonds and banks, the fourth rude awakening for the average investor will come when they realize that the value of their unit-linked life insurance policies has not produced a return and in fact if they strip out the so-called up to 40% tax relief, the value is substantially lower than the total money that they have been paying to the insurance companies. This was also the reason why I cancelled all my unit-linked life insurance policies years ago after losing half of the money that I had painfully and over a decade given to the life insurers.
Fortunately, Cyprus is a euro-zone member state and because of the EU support mechanism our banks are safe and more importantly, all deposits placed with Cypriot banks are safe. Not because the Cypriot managers have done their job, no, they have failed miserably and they don’t deserve the salaries they are still collecting after the mess they created. Cypriot bank deposits are safe because of the EFSF and similar funds setup by the Eurogroup, which guarantee all deposits.
Since the average does not trust the stock market and has burned his fingers by investing in real estate, government bonds, shares and bonds of banks and the unit-linked insurance policies, the only alternative is to keep the money in bank deposit, which at least pays 4.5% after taxes.
Is this good for the country as a whole? Of course not, because the money parked with the bank stays with the bank and is not channeled back into the economy. With banks unwilling to risk by lending money to business, more and more business establishments are cutting back and or closing down, adding to the unemployment ranks and reducing economic activity, which in turn reduces government revenue, causes higher deficit and more pain.
Unfortunately there is no quick fix to the problems facing the Cypriot investor. They either keep to bank deposits with the 4-4.5% net benefit and risk having all their investment in one particular asset type, or they diversify their risk and invest some of their money abroad in search of a better yield.
(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 trades in international shares, bonds and offers forex solutions. The views expressed above are personal and do not bind the company and are subject to change without notice)
