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21 July, 2024
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It's been 10 years since the haircut

70 billion in deposits and 70 billion in lending - A sudden inflow of foreign money and reckless lending

Panayiotis Rougalas

Panayiotis Rougalas

In March 2023, Cyprus will mark 10 years since the deposit haircut. Ten years after the 2013 crisis, Cyprus looks completely different. During this decade, many changes have taken place and its citizens have experienced many different situations, admittedly unprecedented. Banks were forcibly closed, some were voluntarily closed, major reforms were made, others were put in the "drawer," wages were cut, some were reinstated, the country was put in the "trash" and resurfaced. The list is long, but ten years later and without sentimentality, the real source of all the "evil" can be given, leaving aside any political responsibilities.

The source of the "evil" started 10 years before the 2013 haircut, in 2003, when we saw a rapid inflow of foreign deposits in the banks. Cyprus welcomed them without having a plan on how to manage them properly. By 2003, deposits in the banking system were around €25 billion, but one year later, after Cyprus joined the EU, the inflow of foreign deposits started to rise dangerously. In 2004, they reached €30 billion, in 2005 €40 billion, in 2006 €45 billion, in 2007 €50 billion, in 2008, when Cyprus entered the euro, €55 billion deposits, in 2009 €60 billion, and in 2010, they exceeded €70 billion. The deposits for Cypriot banks turned out to be not only expensive but also fatal. On the one hand, banks had to give high returns on deposits in a high-interest-rate environment, and on the other hand, they had to channel them successfully. On the second part, they certainly failed. The banks in Cyprus started to take on liabilities that they were unable to manage adequately.

The source of the "evil" started 10 years before...when we saw a rapid inflow of foreign deposits in the banks. Cyprus welcomed them without having a plan on how to manage them properly.

The lending figures are also available, justifying the reckless credit expansion by the banks as a result of their acceptance of foreign deposits and their attempt to channel them. In 2003, lending was €20 billion, in 2004, it was €25 billion, in 2005 it reached just under €30 billion, in 2006 it reached €30 billion, in 2007 it rose sharply to €40 billion, in 2008 it soared to €55 billion, and this reckless credit expansion continued until 2012, with the lending of over €70 billion.

Cypriot banks made two wrong choices. First, they lent mainly to the real estate sector, a sector to which they should not have given so much weight and with so few safeguards, and second, they invested in government bonds, mainly Greek government bonds. Greece's debt problems brought about the well-known results of the PSI, and the Cypriot banks lost funds that were invested in a product that, because it was sovereign-related, had 'zero' risk. The risk was obviously not zero. After the great financial crisis and the "Lehman Brothers earthquake" in 2008, the resulting tremors reached all over Europe and "shattered" Cyprus. Supervisors realized that Cyprus banks had taken on risks that they could not adequately service, they changed supervisory standards for recognizing losses on balance sheets, and Cypriot banks were left exposed. In the audits that are being carried out on the banks, it has been shown that the provisions that they had made were not adequate, and we end up with the Republic of Cyprus being unable to borrow money, and the state being put on a program. A huge 'hole' was found in the banks that would have had to be covered by a memorandum loan, which would have been repaid by measures that the state had to take. The banks' problem was chosen not to be taken over by the state but by the depositors.

Over the past 10 years, Cyprus' banks have made leaps and bounds as they have increased their capital ratios, dramatically reduced non-performing loans, increased their provisioning on outstanding loans, and improved their image to the investing public, with the impact of this now reflected in their share price. Banks now follow the government's long-term debt ratings, have gained large safety nets in their loan channeling, and supervision is described as 'often-punishing'. Depositors' confidence is also directly linked to the resilience of banks' balance sheets, which we can see in banks' numbers today. The 2013 crisis, which certainly brought many lessons for banks and beyond, resulted in most of the banking supervision being carried out on a "European dashboard".

[This article was originally published in Kathimerini's printed edition of 'Oikonomiki' and translated from its Greek original]

Cyprus  |  banks  |  economy

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