What type of liq­uid­ity does our econ­omy need?

Financial Mirror (Cyprus) - - FRONT PAGE -

There has been a lot of dis­cus­sion re­cently, es­pe­cially after the suc­cess­ful out­come from the stress tests of our main banks, that it’s time for the banks to start of­fer­ing liq­uid­ity to the mar­ket to fund growth in our econ­omy. True, the real econ­omy (house­holds and busi­nesses) need liq­uid­ity to sur­vive and pros­per, but the main ques­tion is what type of liq­uid­ity? Is it tra­di­tional bank fi­nanc­ing, or should there be al­ter­na­tive forms of fi­nanc­ing?

There are a num­ber of is­sues that would make it dif­fi­cult, or even un­wanted by house­holds and busi­nesses, of the tra­di­tional bank fi­nanc­ing:

1. Banks are faced with very strict cri­te­ria/con­di­tions that are in­cluded in the re­cent Cen­tral Bank of Cyprus (CBC) cir­cu­lar sent to all banks/co-ops as a guide­line for new lend­ing. Loan-hold­ers would have to pass th­ese con­di­tions in or­der for them to re­ceive fur­ther (or new) fund­ing from the banks.

2. House­holds and busi­nesses are over-bor­rowed with debt/eq­uity ra­tios much higher than the ac­cept­able lev­els. Ac­cord­ing to Euro­stat sources, pri­vate debt in Cyprus reached a level of 305% of GDP for 2012, one of the high­est in Europe.

3. There has been a rapid in­crease of the banks’ non­per­form­ing loans (NPLs) that reached almost 48% of the banks/co-ops’ to­tal credit fa­cil­i­ties (for the end of Au­gust, ac­cord­ing to CBC data). Thus, the main chal­lenge that the banks are faced is to con­trol this rapid in­crease and grad­u­ally lower it to ac­cept­able lev­els. Giv­ing more costly debt fi­nanc­ing to al­ready over-bor­rowed house­holds busi­nesses will not help in this en­deav­our.

4. Our com­pa­nies are strug­gling to sur­vive be­cause of the eco­nomic cri­sis, and thus they of­fer ex­ces­sive risk that banks might not be will­ing to take.

5. The bank loans (house­hold, con­sumer, business) come with very high in­ter­est rates (which one would ar­gue is a com­pen­sa­tion for risk) that make it pro­hib­i­tive to bor­row (there­fore, not enough de­mand) and ex­ac­er­bate even fur­ther the NPL prob­lem. As of Septem­ber, ac­cord­ing to CBC data, in­ter­est rate on con­sumer credit stood at 5.59%, on loans for house pur­chases at 4.31%, and on loans for amounts over EUR 1 mln at 5.21%. One can com­pare th­ese rates with a de­posit rate from house­holds with an agreed ma­tu­rity of up to one year at 2.59%.

6. The Cen­tral Credit Reg­is­ter set up re­cently by the CBC after the in­ter­face of the data­base of the two mech­a­nisms “ARTEMIS “and “AIANTAS”, which in the past were kept sep­a­rately by the com­mer­cial banks and co­op­er­a­tive credit in­sti­tu­tions, can now pro­vide de­tailed in­for­ma­tion on the to­tal in­debt­ed­ness of all com­pa­nies from all banks/co-ops, which will in­evitably limit the sup­ply of credit in the mar­ket.

7. The loan/de­posit ra­tio for the banks/co-ops is now about 130% that makes it dif­fi­cult to pro­vide ex­tra lend­ing. Ac­cord­ing to CBC data, as of Septem­ber, the out­stand­ing amounts of de­posits stood at EUR 46 bln (with an an­nual growth rate of -4.5%) while the out­stand­ing amounts of

and loans was at EUR 59.8 bln (with an an­nual growth rate of - 2.8%).

8. Banks/co-ops will need to delever­age fur­ther as their bal­ance sheet has grown too big in re­cent years, and one way is to shrink fur­ther their loan port­fo­lio. Ac­cord­ing to CBC data, to­tal as­sets have shrunk from a to­tal of EUR 154 bln as of the end of 2010 to EUR 77 bln as of the end of June, 2014.

There­fore, cor­po­rate fi­nanc­ing as we knew it (in the form of or­di­nary bank loans), will prob­a­bly no longer be read­ily avail­able in the near fu­ture, thus al­ter­na­tive sources of fi­nanc­ing need to be found.

What house­holds and com­pa­nies need is proper re­struc­tur­ing of their ex­ist­ing loans with the banks/co-ops (that would in­clude a re­duc­tion in the in­ter­est rate, an ex­ten­sion of the re­pay­ment pe­riod, or the sale of some of their as­sets), cheaper source of debt fi­nanc­ing as it hap­pens in a num­ber of for­eign coun­tries (i.e. non-bank debt fi­nanc­ing/peer-to-peer lend­ing), and more i mpor­tantly, eq­uity fi­nanc­ing (i.e. cap­i­tal in­jec­tion).

How can they at­tract non-bank fi­nanc­ing? Well, th­ese could come in var­i­ous ways; through EU-struc­tural funds, through sources such as the Euro­pean Bank of Re­con­struc­tion and De­vel­op­ment (EBRD) or the Euro­pean In­vest­ment Bank (EIB), through other pri­vate in­vest­ment ve­hi­cles (funds) that are will­ing to invest/in­ject cap­i­tal in vi­able sec­tors/com­pa­nies of our econ­omy, or through some joint ven­tures with for­eign firms which might sup­ply apart from fi­nanc­ing, ex­per­tise in op­er­a­tions, tech­nol­ogy, strat­egy, mar­ket­ing, and sales pro­mo­tion in in­ter­na­tional mar­kets.

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