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Cypriot report
by Euro Reporter
2012-08-06 08:48:09
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Nicosia and Limassol home price falls accelerating

Property prices for buyers may be down but so are rents on apartments, warehouses and offices, the latest figures show. The latest index from the Royal Institute of Chartered Surveyors (RICS) shows“significant falls across Cyprus’ major urban areas, with prices and rents falling across all districts” in the second quarter of 2012. Over six months, the average rental price of a Nicosia two bedroom apartment went from €555 in March to €535 in June. In Limassol, rental prices for apartments went down from €502 to €479 in the same time period.

In just three months, about €2,631 got shaved off the average buying price of a two bedroom apartment in Cyprus falling from €131,120 in March to 128,484 € in June. Compared to the second quarter of 2011, prices dropped by 10.2% for apartments, 6.4% for houses, 10.8% for retail, 9.0% offices, and 12.0% for warehouses, according to the RICS Cyprus property price index. “[Prices] are going down. The country’s bankrupt and so are the banks. It’s as simple as that,” said Pavlos Loizou MRICS who is in charge of the RICS Cyprus index. “Eighty-three per cent of Cypriots own their home so we don’t really have lots of people who want to buy… at this point you have almost 11 percent unemployment which means that people who want to buy are putting it off,” he said.

Most investors in Cyprus and abroad, such as property developers who would have an interest in buying a property, are “also sitting on the fence waiting to see how they play it out,” Loizou said. If the state of the economy and property prices were the only thing concerning investors then they might be buying, Loizou said. What is going on is that no one knows if and what changes there will be in taxes and legal requirements. Cyprus is due to borrow money from its EU partners and will be asked to restructure its economy and increase its income. Property developers cannot calculate what their income will be from renting out a property for the following year, since they might soon be asked to contribute a bigger proportion of their turnover, Loizou said.


Varosha: a bridge for peace and hope

Varosha can act as a bridge of peace and hope provided Turkey returns to the negotiations it abandoned because of Cyprus’ assumption of the EU presidency, President Demetris Christofias said yesterday. Speaking in Dherynia last night, in an event marking the 38th anniversary of the seizure of Varosha by Turkish troops, Christofias said Varosha “can, as in the past, be a bridge of peace, hope, cooperation and cohabitation as long as Turkey decides to put threats and insults aside, and re-enter the dialogue it abandoned due to the assumption on the part of the Republic of Cyprus of the presidency of the European Council.”

Christofias said the Greek Cypriot side has proposed opening Varosha under the aegis of the UN with the simultaneous opening of the Famagusta port under the EU and the opening of Turkey’s EU accession chapters which have been frozen. Such a development, he said, would give a significant boost to the procedure to solve the Cyprus issue and could constitute proof of good will for cooperation on the part of Turkey and could also be an economic boost for both communities.

Varosha was captured by the advancing Turkish troops during the second phase of the Turkish invasion, in mid August 1974. It has remained sealed off, under the control of the Turkish military, ever since.


The economy needs recapitalisation of the banks soon

THE political establishment does not seem to understand the gravity of our economic crisis and some business officials, who really should know, talk about supporting the liquidity of the banks to save the economy when what they mean is that the banks need capital.  The latter obviously confuse capital with liquidity since the banks in Cyprus need to strengthen their balance sheets to cope with the growing size of Non Performing Loans (NPLS) to meet regulatory requirements and to provide the necessary funding for the economy to recover. All the talk about growth from politicians is not backed by any serious proposal of where the funding will come from. Historically in Cyprus the banking system provided the capital for investment and there is no such possibility now unless the banking system’s financial soundness is restored. 
There is no merit in perpetuating the blame game over who is to blame for the huge losses incurred by the banks and more than likely the NPLs which are set to grow in Greece and possibly from within Cyprus. The latter will be the case if the loans to developers which are secured on land and not paying interest for more than 90 days are included in the NPLs on the insistence of the troika. The banks in Cyprus had to raise equity from the private sector by the end of June but they failed. The government saw this coming and instead of readying their application to the EFSF left it till the last minute, choosing instead to look for funding from China or Russia. This has left the banks in Cyprus without the equity and funding they need to lend and help the economy to recover. In order to understand the immediate need to recapitalise the banks it is important to understand how banks fund themselves to lend. The best funding banks can access are domestic deposits; secondly they can seek funding either unsecured by issuing bonds or with secured borrowing in the form of covered bonds (on balance sheet securitisation) and thirdly the interbank market/ECB repos. The bond market and the interbank market have been closed since 2009 and hence only ECB repos (using government bonds) was an option but this has also closed recently as Cyprus’ bonds are not accepted by the ECB as collateral. In the last two years, liquidity - badly needed by the economy - has been taken by the government and hence the private sector has been crowded out. 

In the current situation there is no hope of funding for lending being available for the economy unless the banks are recapitalised as soon as possible. If one looks at the history of loans versus deposits and compares their annual growth rates it is blatantly obvious that the growth rates in credit of 30 per cent per annum in 2006/07 (which created the property bubble) were not matched by growth in domestic deposits but by deposits of other Euro residents, principally from Greece and partly from non euro deposits by Russian entities of which 25 per cent could be lent. These sources are not stable and can go into reverse quickly, further damaging the banking system. The growth in domestic deposits is over time closely linked to the growth in the economy and thus banks, in the current negative growth environment, will not be able to lend as deposits are not created. In fact the data shows negative growth for domestic deposits in 2011 and early 2012. The lack of growth in deposits, coupled with deleverage (cutting lending to restore capital strength), will undoubtedly be bad news. The government cannot pretend not to understand since the minister of finance and the governor of the Central Bank are well aware that the recapitalisation is an absolute must and as early as possible. There are no other sources than the EFSF that can provide the amounts needed and on terms that will alleviate the position of the banking system. 

The posturing of government officials and union leaders that some measures are not be acceptable is not a negotiating tactic that will win the day. The government can only hope to lessen the impact on growth from the measures to be proposed since there is no other option than to agree an economic programme with the troika so that the banks get the necessary capital they need to strengthen their balance sheets and resume lending. The banks in their turn have to put their houses in order and get back to being prudent and sound financial institutions; this means good corporate governance. They will have to shed entities that are not core to their business but also, and possibly a wise move, to sell assets in order to free up capital and source liquidity. The financial industry has the tools and the knowledge to undertake such transactions and the management of the banks has to be bold and not live in the past. 

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