Fi­nanc­ing the New Econ­omy

Financial Mirror (Cyprus) - - FRONT PAGE -

One of the big­gest ob­sta­cles to kick-start our econ­omy and re­turn it to growth is ob­vi­ously the lack of suf­fi­cient liq­uid­ity in the mar­ket to fi­nance con­sumers and busi­nesses. This is a nat­u­ral phe­nom­e­non given the fact that al­most all fi­nanc­ing comes from the bank­ing sec­tor, and we all know the prob­lems that they face and their need to delever­age. This will take some time and in the process the banks will be re­luc­tant to give out new loans. So how can we deal with this press­ing is­sue? Can some­thing dras­tic hap­pen with the banks that will al­low them to pro­vide liq­uid­ity to the mar­ket? Could we dis­cover or de­velop al­ter­na­tive forms of fi­nanc­ing, i.e. non-bank fi­nanc­ing?

The fact that Bank of Cyprus re­cently raised ?1 bln of new eq­uity from for­eign in­vestors is very im­por­tant as it will in­crease its cap­i­tal ra­tio, al­low it to pass the up­com­ing ECB stress tests with ease, and thus bring back con­fi­dence to the sys­tem. I hope that Hel­lenic Bank will also find ways to raise its share cap­i­tal prior to the stress tests (by is­su­ing more shares, or con­vert­ing con­tin­gent con­vert­ible bonds into share cap­i­tal), and that the Co­op­er­a­tive Cen­tral Bank will also man­age to pass the stress tests with­out any ex­tra govern­ment sup­port. Fur­ther­more, the le­gal frame­work in re­la­tion to fore­clo­sures and the forced sales of mort­gaged prop­erty will need to be put in place, mainly to put pres­sure on the loan hold­ers that can, but are re­luc­tant now to ser­vice their loans, to start do­ing that. Un­for­tu­nately, there is no other way. If these things hap­pen, I ex­pect that by the begin­ning of the next year the sit­u­a­tion can im­prove with at least more ef­fec­tive re­struc­tur­ings hap­pen­ing on prob­lem­atic loans. It’s also im­por­tant in the re­struc­tur­ing process for the lend­ing rates to grad­u­ally drop as it is very dif­fi­cult for in­di­vid­u­als/busi­nesses to ser­vice their loans. But as I have al­ready pointed out, I don’t see many new loans be­ing is­sued as the delever­ag­ing process will have to con­tinue.

There­fore, since the bank­ing sec­tor will not be able to fi­nance ad­e­quately the new econ­omy, we will need to find al­ter­na­tive ways. This is a trend that we will see not just in Cyprus, but across the whole of Europe. As cap­i­tal re­quire­ments have be­come stricter fol­low­ing the re­cent bank fail­ures, bank fi­nanc­ing will grad­u­ally be re­placed by other sources. Re­cent sta­tis­tics showed that in the US, bank lend­ing con­sti­tutes only 25-30% of the avail­able fi­nanc­ing, with the rest com­ing from the cap­i­tal mar­kets and the shadow bank­ing sys­tem.

SHADOW BANK­ING

But what is a shadow bank­ing sys­tem? A sys­tem that pro­vides bank-like ac­tiv­i­ties through non-bank fi­nan­cial in­ter­me­di­aries, such as hedge funds, money mar­ket mu­tual funds, and se­cu­ri­ti­sa­tion ve­hi­cles. These en­ti­ties re­ceive fund­ing through short-term bor­row­ing and use these sources to pro­vide lever­age for cor­po­ra­tions, or for se­cu­ri­ties trad­ing. They have the ben­e­fit that they are not sub­ject to the same strict reg­u­la­tions im­posed on the tra­di­tional bank­ing sys­tem.

In Europe though (in­clud­ing of course Cyprus), it’s the re­verse, with the ma­jor­ity of fi­nanc­ing com­ing from the tra­di­tional bank­ing sec­tor, but this trend will grad­u­ally change. If we had a well-func­tion­ing cap­i­tal mar­ket, we would not be in such a dif­fi­cult sit­u­a­tion right now.

We will also need to turn to in­no­va­tion in order to help the fi­nanc­ing of our small and medium en­ter­prises (SMEs), which form the bulk of our econ­omy. What could be such an in­no­va­tion? “Peer-to-Peer” plat­forms, such as Mar­ketIn­voice, or SME Mar­kets that op­er­ate in the UK could be such an in­no­va­tion. Mar­ketIn­voice brings to­gether small firms with in­vestors through an elec­tronic mar­ket­place, whereby small firms sell their un­paid in­voices at a dis­count. Small firms re­ceive the liq­uid­ity they so badly need, while in­vestors get a rate of re­turn for the ser­vices they pro­vide. SME Mar­kets is an on­line mar­ket­place that brings to­gether and matches bor­row­ers and lenders, and op­er­ates as a fa­cil­i­ta­tor of­fer­ing ex­pert fi­nan­cial as­sis­tance. The ben­e­fit is that it makes lend­ing more ac­ces­si­ble to com­pa­nies in need, but also more cost ef­fi­cient.

We also need to utilise more for­eign struc­tural funds. The re­cent in­ter­est in Cyprus of in­sti­tu­tions such as the Euro­pean Bank of Re­con­struc­tion and Devel­op­ment (EBRD), the Euro­pean In­vest­ment Bank (EIB), the In­ter­na­tional Fi­nance Cor­po­ra­tion (IFC - a mem­ber of the World Bank), or KfW (a Ger­man govern­ment-owned devel­op­ment bank) is in the right di­rec­tion and we need more of that, if we want to kick-start our econ­omy.

Fi­nally, in order for these al­ter­na­tive forms of fi­nanc­ing to have an ef­fect, there needs to be the right le­gal frame­work, com­pa­nies in Cyprus need to start pro­vid­ing re­li­able and timely fi­nan­cial state­ments for lenders to as­sess, and the new eco­nomic model that is en­vi­sioned by the govern­ment needs to in­cor­po­rate other in­dus­tries (apart from the tra­di­tional ones, such as en­ergy and tech­nol­ogy) to give choices to for­eign in­vestors where to lend.

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