THE AGREEMENT of the Greek bail-out plan, in theory, should have settled the nerves of the Cyprus business sector, but it appears to have had the opposite effect. Bank shares were given a merciless battering on Wednesday, the share-index falling by 10 per cent. This may have been a direct reaction to the Bank of Cyprus’ announcement of losses of €1.01 billion for 2011, the previous day.
Then again, nobody could have been surprised by the news, considering that in its nine-month results the bank posted losses in the region of €800 million. If anything, investors should have been re-assured by the fact that the loss banks would have to take on the Greek government debt was agreed at 53 per cent, significantly less than the worst case scenario of 60 per cent. Things would still be very difficult for Marfin Popular because of its bigger exposure to the Greek debt, but this was something investors already knew.
There were also the doom and gloom forecasts about the future of the Cyprus banking sector which contributed to the negative psychology. Comments that the Greek haircut would incur losses for the country equivalent to 20 per cent of GDP, by the former head of the Securities Commission, Giorgos Charalambous, were not very helpful. Charalambous also predicted that banks would face big difficulties in their re-capitalisation drive, because they would unable to raise the required capital from their existing shareholders.
But even if they failed to raise the capital, it does not mean they would collapse or that people’s deposits would be at risk. A bank in need of capital would have to seek investment from abroad, which may dilute the shareholding of Cypriot investors but would be no bad thing for the bank or the economy. Laiki Bank would have been in much better shape today if HSBC had not sold its 20 per cent shareholding to Andreas Vgenopoulos’ group. So it would not be a disaster if Cyprus’ banks came under foreign ownership. Ten per cent of the Bank of Cyprus is already held by a Russian businessman, without this having any negative effect on the bank.
The other possibility, which should be avoided at all costs, would be for the banks to seek a bail-out from the state that would inevitably seek financing from the EU. This is a terrifying prospect because the Cyprus state cannot be trusted to run any organisation, much less so the banks, the life-support of the economy. As long as the re-capitalisation of the banks takes place without any interference or help from the state – foreign investment should be welcome – the Cyprus banking sector will be able to cope with the difficulties that lie ahead.
