January 21, 2014

The Economical Recovery of Cyprus

Sometimes even the greatest minds of all times can find themselves in a position where they fail to see what can inevitably be right in front of their nose.

Whilst the majority of people in our country no doubt question why and what happened to lead us into such an economic state of despair, the skeptics like myself think about what could possibly be the quickest way to recover.

I believe I have found a solution to our current banking and general economic crisis which I have set out as follows:
A quick bail-out of our economic stand still without any funding of additional investments

This is the solution for our quick and most efficient economic recovery at no additional cost to the banks, the consumer or the government.

The goal is to create a positive cash flow for every household and business in the country which currently has non-performing loans, without the need to generate new capital.

Bearing in mind that currently in Cyprus the default rate on all loans in general has reached an all time high of non performing rates.   We must act immediately in order to reverse this non performing ratio into performing loans.

We can achieve this very easily by simply lowering the interest rates on the balances of all existing consumer and business loans from 3.0% to 2.5%.  I emphasise this practice simply because banks will not have to contribute additional funds to provide this facility to existing loan holders.  Simply refinance the existing loans to a lower interest rate.

This will not only achieve the generation of positive cash flow, which consumers can apply to improve their standard of living as well as pay any currently unpaid obligations, but consumer confidence as well will be created, which is the driving force for economic growth.  Consumers will begin to act and spend again without the fear that a new unforeseen crisis will appear bringing our economy to another stand still.

It is an urgent matter to cure all of the economic concerns immediately in order for this crisis to become a thing of the past and soon forgotten.

Creating and reversing non-performing loans into performing loans.

It is critical for banks to begin to regain their momentum again both locally and internationally.   In order to achieve such a task in a relatively quick manor we must implement this refinancing strategy.

Once consumers as well as businesses with non performing loans begin to resume their monthly payments to their lenders, immediately banks will have performing loans to show on their records therefore their ratings will begin to rise from companies such as Moody’s, Standard and Poor’s, Bloomberg etc.   Please keep in mind that a non performing loan will never recover unless a remedy is immediately applied and in this case the remedy is the application of refinancing.

Some lending institutions and banks are procrastinating thinking that foreclosures on real estate will compensate their investments.  Unfortunately to the contrary, foreclosures have proven to have incurable consequences as well as the devaluation of properties resulting in an epidemic, which will take decades to cure.

By applying solutions such as the one I have outlined here, financial institutions as well as banks will begin realising profits partly due to the fact again that consumers will remit their payments on time.  Therefore profitability, consumer confidence, issuing of new loans and new deposits will be realised.   With their portfolios of performing loans as well as high ratings from the rating companies, they can now attract foreign investments as well as local investors due to the confidence which will be gained by the strategy and rating results.
Maintaining real estate values at a steady pace by turning non-performing loans into performing.

An additional and critical matter is the fact that when we have performing loans, the real estate values increase rather to decrease as we have in our case in Cyprus.  Of course we do not anticipate that the real estate values will reach the values we had three years ago but by applying the above steps the recovery of real estate values will be not that far from reality.

It is a known fact that primary residences are the pride of every homeowner and it is as well known that they will never let banks foreclose on their heritage, pride or as we all know it as a metaphor “their castles”.   In this case we will make it easier for them to maintain their properties by making the reasonable new monthly payment, therefore securing their investment as well as payments to their lending institutions and banks.

Increasing bank-performing records from a low to higher rating due to the fact that now, by implementing my suggestion, most loans will become performing rather than non-performing.

The above strategic manoeuvres are at no additional cost to the banks and the result will enhance our banking ratings from rating companies as well as creating cash flow for all consumers as well as a healthy banking system.

Once this goes into effect, capital investments will start coming into our system because a level of credibility and confidence will be regained by investors and rating companies.

Prolonging to apply such measures will enhance the problem we currently have and the consequences will hurt not only the banking system but all homeowners as well and the economy in general.

In cases where developers have hundreds of millions of loans attached to their companies, and they are all non performing as we well know, we must create funding programs for interested and qualified consumers to purchase properties, immediately after this refinancing plan goes into effect

The Central Bank of Cyprus must create loan programs for qualified buyers where they can purchase apartments or houses as their primary residence, with a low financial contribution, as well as low interest rates.  These schemes can apply to newlyweds, families with multiple children and others, provided that the proper due diligence takes place and they qualify.

This method will cure one of the biggest problems we currently have with developers having non-performing loans, unfinished housing units and having the real estate values declining due to the luck of interested buyers.  This method will also cure the spreading epidemic of declining real estate values in our country.

None of the above suggestions require any additional funding, with the exception in some part of the last section, which applies to the developers, and that will incur only moderate funding. Overall this method requires only good will on the part of the Cyprus Government, as well as a prompt decision.

As a basic fundamental rule, developers have already, as I stated above, pools of nonperforming loans.If we subdivide all the current loans into multiple qualified recipients, we are going to generate higher performing rates, at a minimum cost to the lenders, due to the fact that the existing loans will become performing with this multi division loan approach.

I believe this to be the most expedite and mutually beneficial solution for the consumer and banking entities and will assist in re-establishing the credibility of our government and banking institutions.

Phanos Theophanous
CEO, Frontview Holdings Ltd