Socialising the Losses and Privatising the Gains (The Case of Cyprus Five Years After the Bail-in of Bank Deposits)

Abstract

Private sector indebtedness in Cyprus remains extremely high. Yet the Government and the banks in Cyprus continue to define the problem as being the non-performing loans (NPLs) and the proposed solution as being any tools and legislation which will improve repayment but also enable the banks to take these off their balance sheets. It is argued that reducing the NPLs in this manner is treating a symptom of the disease. Such sale of loans will not reduce the private debt which is the real problem of the Cyprus economy. On the contrary, it is likely to make private indebtedness a lot worse as the allowed provisions that the banks have been making will be used as discounts to entice the funds and other “investors” to buy them. This is likely to throw the country into a balance sheet recession. This means that because of the excessive and quite unprecedented levels of private debt (3 to 4 times the size of the country’s GDP) weighing on households and corporations alike, it is practically impossible for the country to overcome the recessionary effects of the austerity and forced repayment conditions that would be imposed through the adoption of such myopic and one sided Government policy. The article concludes that the government should not create a bad bank for the NPLs of the banks but rather should establish a reconstruction and development financing institution that will be able to provide solutions and spin back into the economy economically viable projects.

Keywords: Repayment capability, project evaluation, corporate lending, credit risk

JEL Classification: D61, G17, G21, G32, G33, H43