MacroPolis

No country in an island in today’s integrated world. Thus, the lessons learned in one place can be used to identify problems elsewhere. Despite starting from a different source, the banking collapse in the USA has lessons for Cyprus and parallels to what happened on the island.

One of the issues that became apparent in the US was that of government guarantees, both implicit, and explicit. In 2008 the US bailed out Fannie May and Freddie Mac with 200 billion dollars. These two companies were government agencies that would guarantee mortgages of families in order for them to receive a lower and more affordable interest and a longer repayment period. Although these were established by the government they were not given explicit guarantees by the Federal state.

Fannie May and Freddie Mac were set up in the 1930s amidst the Great Depression and guaranteed long term (30yr) mortgages to the middle class. They became essentially private corporate bodies in law and culture by the 1990s and were key in driving the property bubble that burst in the US in 2007. Although the state did not have a legal obligation to come to the aid of Fannie and Freddie, it did so, as in reality the agencies were very close to the state in terms of both economy and politics.

In March 2013 the decision was made to bail in Cypriot banks that were undercapitalised, but bail out the Cyprus Cooperative Sector to the tune of 1.5bn euros or 15 percent of the total Cyprus ESM/IMF loan. Although the co-operative sector was independent of the Cyprus government, it had a symbiotic relationship that was similar to Fannie and Freddie: it helped the lower middle class receive mortgages at rates that it would not be able to get in the private banking market. The fact that the sector was a big lender to the government, and a big supporter of local government must have been part of the decision making that led to it being treated differently than for-profit banks in Cyprus. The cooperative sector is collectively the second biggest banking institution in Cyprus.

Unlike Fannie and Freddie, however, the ESM injection of capital comes with great conditionality. The Cooperative sector will have to merge from 93 separate entities to 18. Control and monitoring will be in the hands of the Cooperative Central Bank, whose role in monitoring the cooperative system is greatly enhanced. With the 1.5 billion euros the government will buy a 99-percent stake in the sector, effectively pausing (some say destroying) its cooperative nature. The board is controlled by the government (although they are members of the cooperative sector) and any decision to repurchase the shares from the government will incur a penalizing interest in order to defer to EU competition clauses.

The new CEO of the Central Co-operative Bank, Marios Clerides was the former group general manager at the Hellenic Bank of Cyprus. He is immensely respected in Cyprus, and some consider him to be one of the reasons that the Hellenic Bank of Cyprus (where he was previously employed) mainly avoided the mistakes in purchasing Greek Government bonds that Laiki and Bank of Cyprus did.

The Cyprus cooperative movement expanded throughout Cyprus in 1926 when the British government saw it as a way to self-organise the farmers away from moneylenders that had anti-British (pro-Enosis) aspiration. It was essentially focused on agricultural related loans. Yet the sector had an implicit guarantee from the government: most co-operative established before 1931 did so in order to be able to draw credit from the government sponsored Agricultural bank. 

This close relationship between the cooperative sector in Cyprus and the government did not go away with independence, but was in fact strengthened. It was transformed into a vehicle to help provide mortgages to the population as the agricultural sector was diminishing; as a result the size of the cooperative credit sector was growing even as the share of income provided by agriculture diminished. The cooperative credit sector became the unofficial vehicle of the government to promote house ownership, as well as a way for local and central government to borrow; in effect the Cypriot answer to the need for a Fannie or a Freddie.

The cooperative credit sector of Cyprus has several challenges on top of its breakneck-speed consolidation. Non-performing loans are rising fast due to a combination of a natural consequence of lending to those that would not have received loans from private banks, and very poor (some would say even corrupt) practices by some of the 93 cooperative credit unions. It has been reported out of the staggering 26.25 billion euros in non-performing loans in Cyprus, the cooperative sector has 5.96 billion euros, which is 44.49 percent of the total lending of the sector, far higher that the 39.11 percent of the commercial banking sector. One would assume that these 5.96 billion euros are owed less to big business (were liquidation / recovery might be easier), and more to low income households, making recovery socially and politically sensitive.

On the positives, Clerides and the board have the knowledge in how to manage risk as well the sensitivity of the cooperative sector’s non-for-profit nature to steer it to a new age.

*Alexander Apostolides is an economic historian at the European University Cyprus. For his analysis of economics and politics in Cyprus and Malta visit: www.econcyma.blogspot.com

*Charis Michalis is a research assosiate at the European University Cyprus