Uncategorized

31 July 2018 Executive Summary Sapienta Country Analysis Cyprus

The following is a shortened version of the executive summary in the subscription product. Contact us for a free trial POLITICAL ANALYSIS AND OUTLOOK: Exploratory talks have started for a resumption of negotiations to solve the Cyprus problem. It is not certain that talks will resume, although a threat by the US to veto the renewal of peacekeeping forces may concentrate minds. STRUCTURAL REFORMS AND NATURAL GAS: New laws will bolster the investment fund sector. Electricity liberalization is likely to miss its deadline. ExxonMobil is due to drill in November, while Turkey’s drillship is also ready to drill in Cypriot waters . FISCAL PERFORMANCE AND FORECAST: Fiscal policy remains very cautious and the new public debt issuance related to the liquidation of the Cyprus Cooperative Bank has not yet pushed debt to unsustainable levels. BANKING SECTOR: As part of the liquidation of the co-op, parliament has passed a package of laws that should significantly reduce the room for manoeuvre by strategic defaulters. The package included a loan securitization law. MACROECONOMIC TRENDS AND FORECAST: We have made an estimate for the very significant impact of a no-deal Brexit on the Cyprus economy. Growth in tourism, real estate and car registrations appears to have peaked. For more information about Sapienta Country Analysis Cyprus and a sample visit https://sapientaeconomics.com/country-analysis-cyprus/...

Read More

11 Mar 2018 Can a Cyprus solution fix the bank NPL problem?

This is the English version the article published in Greek in Politis on Sunday 11 March 2018.  If you read between the lines of what Danièle Nouy, the Chair of the Supervisory Board of the European Central Bank (ECB), said during her visit in February, the banks have only a short period in which to take major steps to fix their €21 billion problem with non-performing loans (NPLs). The European Commission is currently examining the proposed ESTIA programme, that is designed to help pay off some of the loans, but it is not yet clear if it will pass state aid rules. Even if it does, it is expected to handle only €1 billion of bad loans. Other drastic measures will need to be taken. Fears about what those might entail have already led to a small bank run in January. Yet there might be a simple solution to the NPL problem that would relieve borrowers of their bad debts without killing bank balance sheets. It lies in a federal settlement of the Cyprus problem. Below I explain how it might work. There are currently around 188,000 hectares of private Greek Cypriot property in northern Cyprus and approximately 330,000 hectares of Greek Cypriot private property in the south (plus another 52,000 hectares of Turkish Cypriot private property). In 2012, the Land Registry valued the Greek Cypriot private property in the south for tax purposes at €150 billion. From this figure, we can infer that the medium- to long-term value of Greek Cypriot property in the north (meaning after it is operating in a normal market) is €85 billion. Earlier studies by the University of Cyprus put the value, based on a different methodology, at €65bn for the period 2009-11. In the latest round of negotiations, there were hints that the property settlement will be carried out on the basis of the “one-third” rule: one-third reinstated, one-third exchanged for Turkish Cypriot property in the south or for alternative property, and one-third compensated. This means that, with a federal settlement of the Cyprus problem, Greek Cypriots will be getting back, either directly via reinstatement, or indirectly via exchange, around 125,000 hectares. Inferring from the Land Registration valuations above, there will suddenly be around €55 billion in property collateral that did not exist before.   Up to €23 billion in available assets How much of this €55 billion will be held by borrowers in arrears? The banks probably have this answer, but as a rough guide, I refer to two statistics. First, research carried out by Djordje Stefanovic (Saint Mary’s University, Canada), Charis Psaltis (University of Cyprus) and Neophytos Loizides (University of Kent) in 2016 showed that, while 19.8% of the adult population had been personally displaced in 1974, a much larger proportion of 51.52% had been either “displaced themselves or through origin or through property ownership”. In other words, half of all adults probably have property in the north. The second statistic is that 52% of all households have bad debts. So at a rough guess, maybe around half of the property that will be returning, or around €23 billion, is owned by borrowers in arrears. This amount is already larger than the total NPLs in the banking system. Borrowers in trouble could be offered the option of using some of that property to conduct what is termed “debt-for-asset swaps”—just as many large companies have recently been doing. Alternatively, since borrowers would now have a larger stock of assets (property), they could keep the land that has been returned to them and swap other property instead. Whichever way it works, it...

Read More

17 December 2017 Addressing Cyprus’ international reputation

This article first appeared in the print edition of Phileleftheros on Sunday 17 December 2017 Addressing Cyprus’ international reputation By Lefteris Adilinis and Fiona Mullen This year has not been a good one for anyone involved in trying to improve Cyprus’ international reputation for probity. International media outlets have zoned in on the relationships of various personalities with Russian business, and more often than not have found a link with Cyprus. Moreover, they continue to describe Cyprus in unsavoury terms. Just to give the most prominent examples, the description of Cyprus by the New York Times, when writing about the Russian links of the former vice-chairman of Bank of Cyprus, Wilbur Ross, was that it is “long regarded as a favorite financial haven of wealthy Russians”. Similarly, the US-based The Atlantic said Cyprus “was a favoured destination as a tax haven”, when writing about the financial activities of the former campaign manager of the US president, Donald Trump, adding that Manafort had “laundered money through shell companies and foreign bank accounts in Cyprus”. Bloomberg said that “Passports for sale lure rich Russians” and said Cyprus was a place where Russians are “hiring sham employees for the investment vehicles they set up on the island”. Only as recently as October, the Financial Times called Cyprus “a popular tax haven favoured by Russian oligarchs and businesses”. It is not just the English-language press. Investigations into suspected Russian interference in the presidential election of France and into a former Austrian finance minister on corruption charges also found a financial trail through Cyprus. Last but not least, of course, the activities of the de facto second in command at the Legal Services of the Republic have also drawn the world’s attention.   The public and business are concerned Cypriots are also concerned about probity. A survey of Cypriot residents (93% of whom were Cypriots), published by Eurobarometer on 11 December, gave Cyprus the (joint) second highest corruption score with Spain. Only Greece was considered to be more corrupt. In the Eurobarometer survey, 57% of respondents said that the problem of corruption is “very widespread” in Cyprus, compared with an EU average of just 26%. Another 37% respondents in Cyprus thought it was “fairly widespread”, compared with an EU average of 42%. The total (very/fairly widespread) was therefore 68% in the EU and an astonishing 94% for Cyprus. Cyprus was among only five countries that scored more than 90% for corruption. The others were Greece (96%), Spain (94%), Croatia (92%), Lithuania (92%) and Portugal (92%). In another blow, Cyprus came bottom of the class of the Eurobarometer survey when people were asked whether corruption has deteriorated. Some 68% of respondents said corruption had worsened, compared with 63% in Greece (the second worst score). Businesses are also worried. In the World Economic Forum Global Competitiveness Index, corruption climbed from the 11th most “problematic factor” for doing business in 2006-07 to the second most problematic factor in 2016-17. It did improve in the most recent 2017-18 report, however, as other issues, such as red tape, infrastructure and access to financing, overtook corruption as primary concerns. The score for judicial independence has also been worsening. In the Global Competitiveness Report it dropped from a peak score of 5.5 in 2010-11, when it was ranked 22nd best in the world, to 4.7 in 2017-18, when it was ranked 40th.   Frustrated professionals Accountants, bankers and lawyers working in the professional services sectors are understandably frustrated by the international press coverage and the public opinion surveys. After all, they have spent the best part of the past four years...

Read More

02 Sep 2017 The Turkish Cypriot property dilemma

If my hunch is right, then Turkey’s ‘Plan B’ after the collapse of talks in early July to solve the Cyprus problem involves four key steps. The first two are to offer permanent residence to the Maronites in their traditional villages and to open up Varosha to its original inhabitants (under whose control seems to be still under discussion). The third step would be to speed up compensation for Greek Cypriot dispossessed owners in the Immovable Property Commission (IPC), while a fourth step could conceivably be to offer other displaced Greek Cypriots to be able to reside in northern Cyprus permanently. These four steps would remove much of the litigation risk faced by Turkey, thus ‘normalizing’ the permanent partition of the island. Speeding up compensation payments at the IPC is not straightforward, however. So far, Turkey has paid £238.6 million (it pays in sterling) in compensation for 1,028 cases. However, payments have slowed down because the Turkish Cypriot administration reportedly spent the money from Turkey on 13th salaries instead of on the IPC. Turkey is now pushing for other ways to fund the compensation. The primary idea is that those who obtain ‘clean title’ to the properties they are currently using, should pay. In my view, this is perfectly justifiable, since ‘Greek titles’ in northern Cyprus are sold at a discount to ‘Turkish titles’. This is because the market recognises that there is a legal impediment, even if the Turkish Cypriot authorities treat both titles the same. As soon as the current user obtains clean title, therefore, the value of the property will rise. It seems only fair that those who benefit should pay the difference, rather than Turkish taxpayers. This is, of course, politically unpopular for two reasons. First, it seems that many mainland Turks who came in the 1980s received this property for free, and second, because Turkish Cypriots probably received more property in the north in than they had left in the south. There are 1.4 million donums of private Greek Cypriot property in the north, compared with only 0.4 million donums of Turkish Cypriot property in the south. Even if there is an agreement that the current user should pay, the IPC also needs a considerable increase in resources if it is to compensate every single Greek Cypriot dispossessed owner. To date, the IPC has only concluded cases on 30,572,567 square metres (22,849 donums). That is just 1.6% of the 1.4 million donums of Greek Cypriot private property in the north. Even if you take the most productive year (2015) in which the IPC concluded 2.4 million square metres of cases, I calculate that it would take the IPC over 400 years to process every single square metre of Greek Cypriot private land in northern Cyprus. If there is indeed a ‘Plan B’, therefore, it is going to take years to roll out. That leaves a very small opportunity for those who still want a federal solution to keep trying. By Fiona Mullen, Director, Sapienta Economics...

Read More

31 Aug 2017 Country Analysis Cyprus: short executive summary

CYPRUS EXEC SUM 31 AUG 2017: SAPIENTA COUNTRY ANALYSIS CYPRUS The following is a shortened version of the executive summary in the subscription product. Contact us for a free trial Political analysis and outlook: The Cyprus problem is likely to remain in limbo for a while, as the UN has taken a step back. Rumours have resurfaced about Greek Cypriot plans for a two-state solution, while Turkey has been sending mixed messages about abandoning a federal settlement. Structural reforms and natural gas: Initial results of the offshore natural gas drilling will be delivered to the government in September. The government has started the process of privatizing the state lottery. Fiscal performance and forecast: Revenue growth continues to accelerate and pre-election spending has also started to rise. We continue to expect the debt/GDP ratio to fall below 100% in 2018. Banking sector: BOC continues to cut NPLs aggressively but reported a loss of over €500m in the first half after a higher than usual increase in provisions. RCB has received a credit upgrade and banks have started lending again. Macroeconomic trends and forecast: Real GDP grew by 3.6% in the first half of the year and we have revised up our forecast for 2017 to 3.5%. However, there are some potential signs of a slowdown from the second half of the year and Brexit will affect UK tourism in 2018. For premium access to the full report on your Bloomberg terminal find our contacts at {SEOR} <GO> For more information about Sapienta Country Analysis Cyprus and a sample visit https://sapientaeconomics.com/country-analysis-cyprus/ Copyright © 2017 Sapienta Economics Ltd Full report: ISSN 2301-2439, Sapienta Country Analysis,...

Read More

20 Aug 2017 Politics of identity: Right or wrong?

There is a theory doing the rounds in US politics at the moment which goes something like this: the rise of white supremacists is all the fault of the Democrats, because they have focused on the ‘politics of identity’, also sometimes called the ‘politics of victimhood’ or the ‘politics of hate’. Kinder analysis simply says it is a vote-loser and the Democrats should focus on something else instead. Below I explain why the vote-loser argument might have some merit. But the logic of blaming the Democrats for white supremacists seems wobbly. Let’s start with the assumption that to create a free, fair and democratic society, you need equality of opportunity. If schools, employers or networking clubs either deliberately or inadvertently exclude you on the basis of religion, class, race, sexual orientation, identity and so on, then this automatically puts you further down the ladder. Poverty levels One indication that the US suffers from inequality of opportunity is the State of Working in America website, which finds that “Workers earning poverty-level wages are disproportionately female, black, Hispanic, or between the ages of 18 and 25”. Just in case you are tempted to put this down to genetics, another paper from the Equality of Opportunity website, which measured the impact of moving young children to better neighbourhoods, found “no systematic differences” by gender, race or location. “[T]he effect of the experimental voucher on earnings are positive for all five experimental sites, for whites, blacks, and Hispanics, and for boys and girls for children below the age of 13 at RA [random assignment],” it said. Another paper from the Equality of Opportunity website showed that upward income mobility (earning more than your parents) has deteriorated. It says: “rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s”. The researchers found that unequal distribution of economic growth was a key factor. “We find that most of the decline in absolute mobility is driven by the more unequal distribution of economic growth rather than the slowdown in aggregate growth rates.” The research found that a more equal distribution of GDP, even at today’s lower growth rates, would have reversed more than two-thirds of the mobility decline. Focusing on the causes Equality of opportunity does not come out of thin air. As a woman a hundred years ago, I would not have been able to vote in Britain. Two hundred years ago, as a Catholic, even if I were a man I would not have been able to sit in parliament. Within my adult lifetime, British police spent resources chatting up gay men with a view to arresting them as soon as they made a pass. All of these stopped because a group of people organised and made ‘an issue’ out of it. Was that divisive? Probably. Does that mean we should forget about those whose opportunities are more restricted than ours? Only if you believe in the law of the jungle, the survival of the fittest. But even that philosophy is self-destructive. A world in which only the rich can afford healthcare is one in which you might get struck down by a nasty infectious disease. A world in which even a significant minority are poor or angry is one in which the wealthy have to restrict their movements, living behind big gates and spending a fortune on security. If we are to ensure that everyone gets the same chance at life and that we can all live peacefully in our neighbourhoods, we have to focus on what holds people back. This...

Read More