THE RE-CAPITALISATION drive of Cyprus’ two biggest banks has not gone well. They still have a couple of months to meet the capital targets set by the EU, and it is looking increasingly likely that they may have to seek state assistance.
The Bank of Cyprus failed to raise the €1 billion it needed through a rights issue and the exchange of convertible securities, the deadline for which was a week ago. The capital it raised was short of the target by €400 million. It could still try to find investors abroad to make up the shortfall, but in this economic climate and with the banks short-to-medium-term prospects less than rosy it will be far from easy.
As a last resort it would have to appeal to the government for the capital. It should not be difficult for the government to come up with the amount, even though it would have to go to the European Central Bank for guarantees of any government bonds it issues to help out the bank. This should not be so difficult as the amount is not too big.
The real difficulties are being faced by the Popular Bank (Laiki), which suffered much bigger losses from its exposure to Greek government bonds and would require in excess of €2 billion for re-capitalisation. The Bank’s new board has tried to find investors but negotiations with Russia’s big state-owned VTB bank, considered the best shot, have not yielded results and Popular is back to square one.
Unless some big investor appears out of the blue in the next few weeks, Popular’s board would have to turn for help to the government, which does not have the funds and cannot raise them in international markets. The government would have to turn to the European Financial Stability Facility or the European Financial Stabilisation Mechanism for assistance which, inevitably, would come at a price.
Before receiving any funds, the government would be obliged to take a range of measures to reduce state spending such as public sector cuts in pay and pensions; it may also have to raise taxes. As long as it maintains the corporate tax at the 10 per cent level, to keep foreign businesses here, the rest of the measures could only be good for state finances in the long run. By helping the banks, the government would also be obliged to put its own house in order.
We do not know if consultations between the government and the banks, over the possibility of a bailout, have begun yet, but prompt and decisive action is essential to maintain a degree of confidence. The problem must not be left to fester. We know what the options are and the sooner decisions are taken, the sooner things would begin to improve. A bailout is not a disaster if it is handled decisively.
