THE ABSENCE OF BAD BANK IN CYPRUS- GOOD OR BAD? April 24 , 2015 Paris Sophocles Parapanos
Emercis Frontier Ventures Ltd www.emercisfv.com
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Road Map to Bail-in, Cyprus • Between 2004-2010 Banks grew to 9 times GDP • Imprudent lending policies and abundant liquidity • Expanding abroad (Greece, Russia, Ukraine etc) • Lending based on Bubbled Real Estate not based on Cash flow • Joining the EUR in 2008 expanded liquidity without control of Credit- no monetary means • Private sector debt at 300% of GDP 2
The Bail-in- March 2013 • Laiki Bank ( 2nd largest) is resolved, shareholders, bond holders and depositors over EUR 100k wiped out • Good assets transferred to Bank of Cyprus • BOC recapitalized through deposit/equity conversion (47.5%) to shares • In 2014 recapitalized, raised EUR1 billion
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Deal with Troika • • • •
EUR 5.8 bil contributed by Bank depositors Collect EUR 1 bil from Privatizations Limit Cyprus Government Deficit Structural reforms to restore competitiveness and fight money laundering • Capital controls ( lifted 10 days ago) severely limited withdrawals and overall banking
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Resulting Banking Map • Banks blamed by people for all evil • Bank of Cyprus recapitalized, EUR 1 bil from private sources- led by Wilbur Ross • Hellenic Bank raised EUR 100 mil plus EUR200 mil recently- Led by Third Point LLC • COOP Bank taken over by the RepublicEUR1.5 bil injected
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Current Situation- Banking • • • • •
Banks basically dealing with NPLs/ restructuring Expected approx. 70 % NPLs by Summer No clear thinking- fear of new lending Basic Banking activity , a major struggle Healthy sector of the economy without adequate Banking- min. liquidity
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Problem Loans 60% 50% 2009 2010 2011 2012 2013 2014
40%
30% 20% 10% 0% Cyprus
Greece
Ireland
Portugal
Spain 7
Resulting Situation • Continued Rise in NPLs- EUR 29 bil today (over 1.5 times the GDP • Semi- effective foreclosure legislation only passed April 18 2015- Troika to rule on it today • Political intervention evident everywhere • Inexperienced Banks and Authorities prolong Inertia and Inactivity in tackling issues • No clear road map in restoring Banking and thus returning to norm and growth 8
The Government • Applies pressure to Banks to lend • Promises Growth in Economy- Current state of Bank B/S not helping • Believes that NPLs are the problem of Private Banks owned by Foreign Shareholders • Currently voices suggest that a properly structured AMC for NPLs may still be neededStructure not yet clear
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Why AMC not created • Unwillingness of Government to take the cost of about EUR 2 bil initially • Troika not applying enough pressure ( AMC was part of the first MOU though) • Varying/conflicting agendas; Government, Troika, Central Bank, the Banks • Bad Bank sounding Bad- Politicians utilizing the clientele system ( see: Land developers, Distressed borrowers) 10
Not too late for AMC? • Summer of 2013 NPls at 30%, now at 65% • Aligning interests of Government with Banks • Estimated that total of about EUR10 billion to be moved to AMC • Better to create one Global AMC or apply better treatment on setting up AMC per Bank?
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Potential Difficulties in setting up the AMC • Defining burden sharing between Government and Banks • Transfer price of Assets fairly stated and executed- NPLs still valued at 60% in Bank B/S • Funding structure; share capital vs Bond • Allowing complete for Profit handling of business without political intervention • How outside investors may be tempted to participate in this? 12
Dealing with NPLs will: • Open road for new Investments locally • Lending to Healthy companies resumed- Banks focusing on important forward looking aspects • Re-enforce transparency at market and real estate level • Cyprus to achieve better privatization deals • Cyprus to better explore potential Gas reserves • Resume growth 13
Opportunities • • • • • •
In Privatizations: Telecom, Ports, Electricity Co In Real estate- Hotels, Villas In Portfolios of Distressed Assets In Financing Trade and other Business activities In overdue receivables In Private equity deals
