Is Cyprus Heading for Another 2013 Banking Crisis?
Cyprus is experiencing another banking collapse. Currently, Cyprus Co-operative Bank is going through a difficult time. This passes unnoticed among most foreigners and it is not surprising - the bank's main specialisation has always been the provision of banking services to Cypriots rather than account opening for offshore companies.
Until 2017, Cyprus Co-op Bank was not just a bank but a network of cooperatives that could make independent decisions on whom and what loans to grant. In March 2013 during the financial crisis in Cyprus, which led to the bankruptcy of Laiki Bank and the consequent bailout at the expense of Bank of Cyprus depositors and the situation changed. Then, the Central Bank of Cyprus took the bank and it's disjointed structure under control and actually formed a new bank - Cyprus Co-operative Bank.
Unfortunately, Cyprus Co-operative Bank hasn't been working seamlessly and the Cyprus government conducted forced sanctions upon the bank at the taxpayers' expense, amounting to EUR 1.7 billion throughout 2014 and 2015.
Today, the main problems facing the bank stems from the amount of non-performing loans being held, totalling almost EUR 7 billion. In order to somehow assets that still valued something were sold to Hellenic Bank. In January 2018, the Bank signed an agreement with Spanish company Altamira, which deals with the management and repayment of overdue accounts.
Another unpleasant event for Cypriot banks was the Central Bank of Cyprus letter demanding to close the bank accounts of dummy companies registered in tax-free harbours (Seychelles, BWO, Belize, etc.) and provide lists of these companies to the Central Bank of Cyprus in order to assess the scale of the disaster and the increasing pressure from the EU financial regulator regarding the start of real work to reduce the number of non-performing loans, which in Cyprus amount to about EUR 20 billion or 40% of the total banks credit portfolio in Cyprus.
Let's start with the consequences of the Central Bank of Cyprus' letter to the Cypriot banks. It's no secret that quite a large number of Cypriot banking clients are companies from tax-free harbours. These structures were actively used by small businesses from Russia and Ukraine as a result of the low maintenance costs of such structures, which in fact consisted only of an annual renewal cost and, as a rule, did not exceed the amount of USD $1,000 per year. Following the order of the Central Bank of Cyprus, Cypriot banks have already started sending letters to customers either with invasive questions or a notice that bank accounts of offshore company's will be closed. We have already written a comprehensive article on the contents of the Central Bank of Cyprus letter on closing bank accounts for dummy companies.
The wholesale closure of bank accounts start with the shrinking of the Cyprus banks client base. Many lenders, in order to compensate for the decline in the income from banking services, have already started to increase the cost of conducting banking transactions and servicing customers' bank accounts. This is likely to lead to another wave of the customers outflow from Cypriot banks, because the reduced margins of international businesses renders businessmen scraping by for a living. The only thing that is still not absolutely clear what is the right direction to move.
A possible solution for the issue regarding maintaining an existing or opening a new bank account in Cyprus is possible through the opening of a small office, which should create the appearance of a really effective office. However, we immediately face challenges with respect to the recently increased rental cost of an office and accommodation in Cyprus. It must be understood that Cyprus is still a small country and the variety of offers for commercial and residential real estate is not so wide. Cypriots (and whoever else did otherwise) are trying to make hay while the sun shines. As the Cypriots themselves are forced to rent housing so the foreigners face the addtional problem of finding real estate to rent in Limassol. For small businesses that actively cooperated with Cypriot banks before, the entire structure is too expensive now because of the sharply increasing costs for renting office spaces.
Recently I had an intereresting talk with a potential client whose account at the Bank of Cyprus was closed, and he asked us to find an option for opening a new bank account for his Seychelles offshore company. When we offered to incorporate a Cypriot company for him, he replied that it is expensive and most likely he would decide not to use an offshore company structure anymore; and to be honest that's the exact goal of innovations within offshore structures that the OECD and government of many countries want to achieve.
Another unpleasant moment for businessmen having small businesses is the difficulty in obtaining work permit in Cyprus. In order to obtain work permits in Cyprus, there are two procedures - through the Labour Office for local companies, and the procedure for IBC (so-called companies with foreign participation). The visa was introduced especially for start-ups and SMEs in Cyprus not so long ago and also does not resolve many issues.
The inexorable growth of the underground economy is also one of the key characteristics of the Cyprus market. During my last visit to Cyprus, all the Cypriots I met with agreed to carry out only cash transactions in future. Money withdrawal from the banking systems by the local population of Cyprus will also have a negative impact on the banking system as a whole and may be the last nail in the coffin leading to the next financial crisis in Cyprus.
Now, it is worth looking deeply into the problem regarding non-performing loans in Cyprus. Most of these loans were originated primarily for construction companies that wanted to benefit from a real estate investment boom in order to obtain a Cyprus passport through investment for a comfortable life in Cyprus; receiving the status of a resident without the work permit in Cyprus on a visa F or just for investment hoping for capital increase. This has led to the fact that accomodation in Cyprus is often almost twice as expensive as in Spain or Italy. What do you think will happen when banks begin to confiscate real estate properties for non-performing loans more actively? This process has already been launched although everyone understands ineffectiveness of Cypriot legislation regarding the seizure of property for overdue loans. All this property will be in the secondary market sooner or later.
At the moment there are certain restrictions for banks to sell such property. Nevertheless sooner or later this property will enter the secondary housing market in Cyprus through auctions and if it does not collapse it then will certainly lead to the prices decrease. Although this is besides the point when it is worth buying Cyprus property again.
The EU is throwing gas on fire to member states offering their countries' passports for investment. In the EU such programmes are implemented in Cyprus, Malta, Portugal, Austria, the UK and other countries. Cyprus has already reacted to this and has introduced a restriction on the number of passports issued per year and also limited the list of agents who can offer this service. This measure should lead to a reduction in the number of properties purchased in Cyprus and will put Cypriot construction companies into an even more difficult situation.
There is lack of clarity regarding the enthusiasm for the construction of high-rise buildings in Cyprus. Now, Cyprus is experiencing very big problems with fresh water. The increase in the number of residents in Cyprus will lead to even greater strain on the entire infrastructure of Cyprus, which is not highly developed and which in its turn will inflate the prices for living and will reduce the level of comfort and quality of life in Cyprus.
Turning to the issue of whether to wait for a recurrence of the 2013 crisis, it should be noted that signs of the crisis are already becoming evident. To a considerable extent, everything will depend on the foresight and pragmatism of the Cypriot government. The only thing we want to remind our readers is that in Cyprus, a deposit amount of up to EUR 100,000 is protected in accordance with the EU legislation. If the deposit exceeds this sum, then you should be prepared for a so-called "the one in a pickle is the one who's got to tickle" situation.