By Anna Theologou
Following past failures of the Cyprus banking system emanating from bad banking practices through predatory lending, which caused the economic crisis, banks continued until recently to implement unsustainable loan restructurings, failed to reduce private debt and the burden on borrowers to a satisfactory degree.
Now, the fact of excess liquidity has arisen and the need to address it properly and through viable lending is imperative.
Excess liquidity, which by now has risen to €15 bln, cannot be channelled in the economy for the reasons set out below, having in mind the “criminal” approach of the present government to demonise debts and borrowers, without giving good consideration on how the repayment of loans is affected in times of crisis.
The first reason is that households and businesses are already overburdened with illegal interest-bearing loans and therefore cannot borrow anymore, because they do not have the available income to do so.
The second reason is that most of the restructured private debt has been passed on to the new generations due to age restraints on existing borrowers so that they can increase the repayment horizon of these loans and thus the new generation of debtors cannot take on their own loans.
The third reason is the case of young families who do not have the available income or have very low income to take for example a housing loan, not to mention the high prices for housing and the absence of government policies for affordable living.
The fourth reason is that existing businesses and startups do not have and cannot provide the necessary collaterals to take a business loan and unfortunately, they are liquidity drained or cannot even start the business.
Money circulation is an important function for economic growth.
If money stays stagnant, and in the case of Cyprus €15 bln is now stagnant in the banks and are not channelled in new viable lending.
Not only is circulation problematic but the conditions are creating a ”heart attack” in the real economy as the economy is in an excessive need for liquidity and there is no intention to solve this problem.
A human body needs normal blood circulation to be healthy, and an economy needs normal money circulation to be sustainable.
Unless that happens, then the business sector is not going to be able to increase business activity that would create new jobs.
There would be no new available income for consumption, thus no creation of new economic activity and therefore no increase in the GDP of the country and these consequences are expected to happen if conditions remain.
Uncontrolled and predatory lending in the pre-crisis period has brought market conditions to the other end, where no new lending is given and if given, it will be given under very stringent criteria and with huge delays.
No one disputes that there must be sufficient control over the viable repayment of a new loan, but the market need for liquidity exists and I once again raise the issue of channelling liquidity into viable projects that will be able to repay their loans.
Unless new loans are given, banks will not be able to bear the cost of this liquidity, and we are already seeing them turning to negative deposit rates with the fear of having to face new negative consequences.
The writer is an economist and Cyprus Member of Parliament