The Current Issue with Excess Liquidity in Cyprus Banks

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A recipe for potential problems and symptoms of a troubled economy is when the main banks have what is known as excess liquidity. When citizen have to borrow money, however have nowhere to borrow from, then it may as well just be spent on daily consumerism or travel. That is, to support the car industry or into the pockets of other neighboring more favourable holiday destinations.

Mitigating with the Introduction of Bank Charges
Significant liquidity was recorded this year in first quarter results with Bank of Cyprus and Hellenic Bank. Like other lenders, Bank of Cyprus itself pays the European Central Bank (ECB) a fee of 0.5% for maintaining any excess liquidity. This is becoming hard to cover costs, with the bank struggling to make profits and introducing new charges for clients.

Bank of Cyprus’ Corporate Affairs Director released a statement regarding their plans to combat the hard-economic times; at this stage he reveals the bank will start charge 0.4% interest on all corporate account deposits, however this will only apply for large clients with corporate accounts. They hope to include semi-governmental entities like the Electricity Authority of Cyprus with multi-million euro level accounts in a bid to increase funding to cover costs associated with the increasing checks and more strict procedures; as per the European Central Bank.

In the long run, this recorded excess liquidity will not be treated with zero or negative interest rates and investments abroad. In the medium term, it certainly makes sense for banks to try to cover some of the cost of negative interest rates charged by the European Central Bank; however, these should be accompanied by new and targeted lending. In other words, banks need to see how their liquidity reaches the productive economy, and this seems to be the hardest to complete.

Investment Opportunities Slowing Down in 2020
The limited number of investment opportunities is at the heart of the country’s financial problem. It is what has led banks in recent years to senseless lending and bubble in the real estate market. The issue is not only addressed by a strict supervisory framework and control. If banks have nowhere to channel their liquidity, they will sooner or later resume their past practices or be trapped in a Japanese-style zero growth bubble. The island needs the state, together with the financial sector to see how to get into a productive economy.

This isn’t a type of collectivist structure that will be decided by bureaucrats; however it cannot continue sustainably without a strategy and target for sustainable development. The suitcase will not go away with opportunistic plans, grabbers of the moment and young people dreaming of rehabilitation on the island. Nowhere in the world did these practices end well, and Cyprus will not be the exception to this golden rule.

In the first place, officials should answer, or at least reflect, what industry to conquer? After all, Cyprus cannot become Germany or France with heavy chemical industry. It could, however, if it were to encourage investment in other sectors and SMEs. In other words, the creation of a new group of small and medium-sized enterprises in Cyprus should be supported. The category of business was hit hardest by the islands ’06 financial crisis, which is vital to the local economy.

Allowing SMEs to Receive a Favourable Loan Portfolio
Small innovative businesses that will meet the needs of the 21st century market and with their revenues will support the real economy. Enterprises that will generate new and steady revenue for the state. Investments in mild mountain development, but also lending for investment in agri-livestock farms that will meet part of the country’s needs for agricultural and organic products. All of them should end up with liquidity rather than overseas business pockets and a few more square feet of first and second homes.

That’s why they need cuts, both in taxation and in the way decisions are made and executed. Reforms that make sense as they aim to serve the bigger picture and not just balance the books. All these sporadic little steps, the plans offered by the state, should be part of this wider planning and based on the big picture, they should be evaluated and judged.

Banks and the state are trying to create the conditions and environment for small businesses to grow. As long as lending will only benefit large projects; private or public deposits become consumption-based and the government thinks about its payroll firstly, the economic environment will remain poor and the economy vulnerable to adventures and risks from abroad.