DISY CHIEF Averof Neophytou is right to express big concerns about the very high interest rates being charged by the banks. High interest rates, apart from discouraging investment and job creation, were also making it more difficult for households and small-to-medium businesses to meet their loan repayments.
Neophytou pointed out that while deposit rates had been drastically cut, interest on loans had increased. He felt the government and the political parties needed to take the initiative because waiting on banks and co-ops to lower their interest rates was ‘wishful thinking’ – it would not happen. While his analysis was correct, his proposed remedy – legislation lowering the interest rates – was unlikely to solve the problems of the economy as it would make even less cash available for investment.
If the banks considered the interest rate imposed by law too low they would simply not lend any money. There could be no law forcing the banks to give loans at rates they consider too low. Imposing lower rates would also eat into the banks’ profits and lower their capital adequacy, one economist pointed out, adding that the measure would be “good for borrowers, but bad for the banks.”
It is also ‘wishful thinking’ to believe that the lowering of interest rates would automatically lead to businesses taking out new loans for investment. We should remember that we are in a depression and consumption spending has fallen drastically as a result. In such economic conditions there would not be too many businesses applying to the banks for loans even if the interest rate was two percentage points lower than it is now.
The market should be left to determine interest rates, because it can do this better than any politician. The banks have low reserves of cash available to lend and can charge higher rates as per the law of supply and demand. If rates were lowered they would not have more money to lend and even if demand for loans increased banks would lend even less. Then there is the big number of loan restructurings, which are also pushing rates upwards as banks want to maintain an adequate return on loans.
The politicians’ intentions are good and we would all welcome a reduction of interest rates, the highest in the euro-zone, but the issue is not as straightforward as they make out. In fact lower rates would not improve our situation as they would put the banks under more pressure and renew the risk of capital inadequacy, which has just been dealt with.
All this debate might be academic because it is highly unlikely the troika would sanction a move that is clear intervention in the operation of the market and in violation of the basic principles of the euro zone.
