COVID19: Caring about financial wealth of tomorrow’s people

7 mins read

By Phedonas Phedonos

Policies introduced to tackle the economic crisis caused by the COVID-19 pandemic relies on a fundamentally wrong perception of what it actually is.

It perceives the coronavirus crisis as a liquidity crisis rather than a permanent loss of income or bankruptcy.

You do not attempt to save someone who is in danger of going bankrupt, and most likely already in debt, by giving them new loans, as you will only be making their position worse. Such an attitude clearly undermines the future of the economy.

Consequently, the government guarantees to provide loans, with the precondition that there will not be any layoffs by the company receiving them, can only serve short-term pursuits.

The policy to tackle the crisis through loans will not only fail to prevent the crisis but will contribute to its deepening and consequently to mortgaging future generations.

If only the next generations could understand that its future has already been mortgaged as the state, households and businesses, are heavily indebted, they would criticise those making the decisions in the private and public sectors.

However, what is being attempted today is a paradox.

That is, the state guaranteeing loans that will be given by the banks to companies which have already borrowed heavily.

As a result, these loans will over time, legally be converted into non-performing loans, thus further increasing the already high public debt.

As the situation is serious enough, the Institute of Certified Public Accountants of Cyprus (ICPAC) and the Cyprus Bar Association must intervene and express their point of view on this issue.

It is likely most of these loan agreements will end up in court as non-performing.

Moreover, the managers of the companies and the state will end up being dragged to court by the banks as co-defendants and the bona fide third creditors of many of these companies which will declare bankruptcy.

The companies themselves, of course, will blame the government and the legislators for misleading them, giving them loans with state guarantees.

More than 7 years have passed since citizens and businesses that were financially okay saw their deposits lost because bankers and the intertwined political and economic system gave loans to every adventurer who took out loans without anyone considering the money for those loans belonged to depositors.

Depositors had entrusted their savings to banking institutions for safeguarding until they wished to use that money.

In the end, these loans were never paid back and depositors had to suffer a ‘haircut’ since no one returned the money (public figures have deposited this “borrowed” money in accounts in New York banks while others, more cunning, in dollar accounts in Istanbul, Turkey).

The argument that the financial crisis was to blame is pure fiction; the crisis was the outcome of exactly this behaviour, lending to insolvent people.

Moreover, when the amounts they were lending and who they were lending it to became known, it was clear that none of them could repay these loans under the best of economic conditions.

In most cases, in fact, these loans were given after political or other interventions and not on the basis of economic or bank lending criteria.

It now seems the political system remains addicted to ineffective lending, knowing, as in the past, that the vast majority of these loans will not be serviced by borrowers.

Banks, obviously, will not face a risk to the extent that they will get their money back from the state.

No incentive to pay it back

Why would someone who would take such a loan repay it? These loans are 70% guaranteed by the state by 70% and 30% by the banks.

What if a business closes? What if a business is suspended? Will they be taken to Court?

Consequently, the crisis created by the pandemic is not a liquidity problem where we can just give out money for financing purposes expecting that when proceeds start to flow, with some delay, the loans will be repaid.

The crisis must be tackled as a crisis of permanent loss of income or bankruptcy and it certainly cannot be tackled with granting new loans to those who are already in debt.

The bankruptcy law applied in Wall Street and the City of London could serve as an example.

No bankruptcy can be averted if, first and foremost, some sort of restructuring of the already existing debt and business obligations does not take place.

Therefore, an effective economic policy is to deal with the business crisis at an early stage as a crisis of permanent loss of revenue and bankruptcy, hence, to proceed with establishing specific measures to reduce existing debt and existing corporate liabilities.

Only in this way is there a serious possibility that companies will not be led to bankruptcy and others to compulsory redundancies.

Even if the economy recovers in 12 to 18 months, with positive growth rates, the normal profitability will range from 10% to 15%.

Therefore, how will the old loans plus the pandemic loans be repaid (as they will be 5 to 10 times higher than the average profitability of each business) while funding business development?

In Cyprus, today’s generation has proven it does not care about future generations!

They only know how to burden them with weights instead of building a future with prospects. This is what is taking place in 2020.

The writer is Mayor of Paphos