Friday, 2 November 2012

Strange Tactics

To my (and I think everyone's) surprise, yesterday German Finance Minister Wolfgang Schäuble, has stated that he does not expect concrete negotiations between Cyprus and international lenders to start before 2013, suggesting that the island has missed a November 12 deadline and could be at risk of running out of money before the end of the year. In addition, the Cypriot are now fearing that Troika will enforce an increase in the tax rate for businesses, which is now at an attractive 10%. What ever happened to your supporting the Eurozone Wolfgang?

It seems that Schäuble's comments where not the only strange stories on the news. Having heard the estimates for the financial aid Cyprus will need to overcome the current situation I was struck with amazement: Troika suggests a €12 billion pack for the two large Cypriot banks (Bank of Cyprus and Popular Bank) and an additional €5 billion for government needs. If one has a look at the balance sheets of those two companies (you can find them here for the Bank of Cyprus and here for the Popular Bank) the total number of loans of both banks combined does not exceed €50 billion. (To be fair the amount is about €46 billion, nevertheless I will be kind to Troika and round it up to 50). Thus we have: €50 billion in loan portfolio and €12 billion in aid, which means, hmm that essentially 24% of ALL loans given out by the two banks are considered as non-performing.

Really? 24%? How on earth could these banks have survived so far? Were they using nothing as collateral? If the numbers are true, then it would be better to incarcerate all of the top management of both banks, and all officers of the regulatory authority. Nevertheless, if those numbers were true, the banks should have been declared insolvent a long time ago. If one every 4 loans is non-performing I cannot see how a bank could have survived. However, to the extent of my knowledge, (and in accordance to their financial statements) both banks are still functioning and are still profitable.


I do not know how the Troikans have reached these conclusions but they hardly seem plausible. Negotiations seem to reach an impasse on the amount of assistance the island needs. The Cypriot government says €6 billion, Troika insists on €12 billion. I think this is the first time in history when the receiver of the loan states that he does not need more and the loan giver insists on him taking some more. (then again a resemblance with the sub-prime lending policies in the US does come in mind...). Imagine it happening in a bank:

Client: Can I have a €10.000 loan?
Bank Officer: I think you should have a €20.000 one. It is better for you.
Client: But I believe that €10.000 would be sufficient, and besides I would have trouble repaying any larger amount.
Bank Officer: Still, I think that you should take the €20.000.

Thank God the IMF is not a regular bank or we would be bailing them out every now and then. 

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