Greek PSI deal wrings Cyprus banks dry

Being a banker at a Greek bank in Cyprus was certainly not the best job in the world a year ago. Consumers and businesses alike looked askance at anything Greek as the country tumbled into recession and entered into an ongoing cycle every three months or so of anxiously waiting to find out whether it would receive the next bailout loan or not. Of course, things have not changed that much today.

In as small an economy as Cyprus?s, one small whisper can grow overnight into a loud buzz, at times distorting the truth. The pressure felt by Greek banks on the eastern Mediterranean island because of developments in Greece is best reflected in deposits, as in November 2011 the market share of Greek banks in Cyprus fell to 10.19 percent compared to 12.33 percent a year earlier.

In this negative climate, what acted as a safety chute was the fact that the Cypriot subsidiaries of National Bank of Greece, Alpha Bank, Eurobank EFG, Emporiki and Piraeus are basically Cypriot banks with Greek owners. In fact they have little to no exposure to the Greek risk as they don?t hold Greek government bonds and have not issued loans to Greek households and businesses. They also don?t hold Cypriot bonds.

According to banking officials, Cypriots do not discriminate between Greek and Cypriot banks, while the policies followed by the Greek banks themselves have allowed them to maintain their influence in the Cypriot market. Together, the five banks had a market share in loans in November of 2011 of 15.8 percent compared to 16 percent the previous year.

Drawing liquidity from Greece, Emporiki went on the offensive and managed to boost its loan portfolio significantly to 1.79 billion euros in November 2011 from 619.497 million at the end of 2010.

Bankers admit that 2011 may have started out on the wrong foot, but the year proceeded without too many nasty surprises, while their Tier 1 capital is well above 9 percent (13.5 percent for National, 14 percent for Alpha and 11.5 percent for Piraeus), giving them a significant comparative advantage while the local competition is being called up to increase their share capital.

Efforts to stabilize the banks have met with a new obstacle in recent weeks as the Cypriot market suffers the consequences from uncertainty over negotiations for a Greek debt swap. The first talks for private sector involvement (PSI) in a Greek debt write-down were bad enough, but the PSI+ talks taking place now for an even bigger write-down has sent the balances of all three major Cypriot banks into the red and resulted in a freeze on all loan issuances.

Bank of Cyprus, Marfin Popular and Hellenic Bank control almost 50 percent of the loans market, but they have not been at all forthcoming in the past few weeks, imposing a new freeze on all new issuances. Meanwhile, cooperative banks, the other pillar of the Cypriot banking system, channeled their liquidity into Cypriot T-bills in order to support the government at a time when no one would lend to Cyprus (the loan from Russia came through later).

The result of these tactics is a credit freeze on the market that has caused a chain of effects from rocking businesses, delayed payments to suppliers, reductions in private sector salaries, a freeze in the residential housing market and the skyrocketing of unemployment to 7.6 percent, an unprecedented level for Cyprus.

The last downgrade of the country by Standard