AT THE HEIGHT of the presidential election campaign, the candidates, as well as all the parties supporting them, had promised measures aimed at helping people who had lost money on the Cyprus Stock Exchange. This was dismissed at the time as just another empty election promise that would be forgotten as soon as the polling booths closed. After all, the implementation of such measures would be an exceedingly difficult task, which could only work with the consent of the banks, which stood to lose the most.
Yet the matter was not forgotten and in the last couple of days – to everyone=s surprise –details as to how the plan would work were made public. The rescue plan, a certain vote winner, has the full backing of all the political parties as well as the government. Even the banks have decided to play along for the time being, putting aside their initial misgivings and avoiding taking an openly negative stance. Banks which pay millions of pounds every year on improving their public image recognise the risks of rejecting a plan that is seen as a lifeline by thousands of ordinary people.
According to the plan, people who have taken out investment loans and have seen the value of their shares plunge would only have to pay off about 25 per cent of the original investment loan, part of which will be paid for by handing over the shares they holds. A new government agency, set up to administer the enterprise, would take the shares and give the bank a 10-year bond, covering 40 per cent of the loan. The contribution of the banks would be to write off the interest and management fees, which amount to about 20 per cent of the investment loan, as well as 15 per cent of their capital as bad debt, and everyone would be happy.
Politicians who support the plan have made a range of simplistic claims about its alleged benefits, which seem to be much more a case of wishful thinking than economic logic. The plan would boost the ailing economy, as the investors’ loan repayments would be drastically reduced and their disposable income increased, thus increasing consumer spending; the banks would no longer have to make provisions in their accounts for investment loans, which reduces their profits; people would resume investing in shares and the alleged increase in demand would spark an economic recovery; finally, in 10 years’ time, when the banks redeem the bonds, the value of the shares held by the government would have risen enough to make payment possible!
If any deputies can safely say that share prices in 10 years= time will be higher than they are today, then they should be working on Wall Street rather than wasting their time in the Cyprus legislature. To suggest that a bank would benefit from writing off, not just interest and charges, but also a portion of its own capital (15 per cent of the investment loan), defies belief. As for the assertion that the plan would boost business confidence by stimulating the economy and increasing the number of CSE transactions, the less said the better. We are dealing here with nothing more than wishful thinking, not to mention the plethora of practical difficulties this absurd plan would give rise to.
Has anyone asked whether the shareholders of the banks, which are neither state-owned nor charity organisations, would agree to such an arrangement at a time of falling profits? And why should a bank agree to this arrangement if the investment loan was secure and the customer had been repaying it promptly? To claim that the value of the shares would rise in 10 years’ time when the banks redeem the bonds is an absurd assumption (it is as safe a bet as saying it will rain on August 13, 2013). What if the value is even lower than it is today? What would the state do then?
Is it fair to help out those investors who borrowed money from the banks to play the stock market, but not those who borrowed nothing but lost all their savings? They would be penalised, because we doubt the state would give them back 40 per cent of their savings. More importantly, why should the taxpayer who did not play the stock market subsidise those who did? The banks may have share of the blame for the bubble and for giving out investment loans indiscriminately, but why are they the only listed companies being asked to foot the bill? There are more culpable companies – the ones that deceived investors with bogus accounts and misleading information in their prospectuses – which will pay nothing. Is it just for the taxpayer and the banks to pay the bill for what had been described as the “big CSE scam” while the cheats and crooks are left to enjoy the millions they made on the back of gullible investors?
Deputies should forget compensation schemes, which will cause more problems than they will solve. Every time deputies have interfered in the stock market they have caused huge problems, the law on investment firms being a case in point. By forcing these firms, by law, to invest a large part of their cash holdings in the CSE, supposedly to boost the market, they made them incur huge losses while the market’s downward spiral continued. With the latest plan, deputies could wreak havoc in the banking system and, in turn, the economy. Add to this the possible problems that could arise in 10 years’ time when the banks will want to redeem their bonds and we have a recipe for economic disaster. It would be lunacy to impose such measures, conceived by people with limited knowledge of economics or business and which no country in the world has ever experimented with. Our economy is in bad enough a mess as it is. The last thing it needs is a bunch of populist politicians carrying out experiments that could make things even worse.
