Open letter to John Hourican

hourican developers debtWhat say you John Hourican, CEO Bank of Cyprus?

Welcome to Cyprus John. I am sure you have now settled in and have at least come across some of “the artful ways”.

I have decided to write to you via the good offices of the Cyprus Mail rather than BoC website form as I am sure via the latter you would never even see it.

I have to congratulate you for at least sending “stern” letters and having “uncomfortable” meetings with debtors to your bank. A new experience for many of them I suspect. There is one question remaining unanswered, although possibly never asked. Ultimately does the Bank of Cyprus intend to call in the security they hold over “our” houses to repay or contribute to the repayment of developer debt owed to your bank?

A simple yes or no will suffice.

Many thousands of insane people, who bought a mortgaged property, look forward to hearing from you!

Thanks and best wishes for 2014.

Andrew McClay,
Peyia/Livingston

Editor’s note

In a recent interview with the Independent Mr Hourican has given himself three to five years to rescue the Bank of Cyprus and said:

“I will be honest with the descriptions of the problems we uncover. I will be honest with everyone about how we are doing. Any other approach is misleading.”

Offers to abandoned Tala development buyers

abandoned tala developmentTHE developers of a stricken, now deserted Tala project which appears to be slowly sliding down the hillside say they would never have gone ahead with construction if they had been aware that the land was ‘problematic’ to build on.

The development consists of 14 units: four apartments, two villas and eight townhouses. The latter are at a skeleton stage and face directly onto a busy road which leads to the Kamares village development in Paphos.

Following heavy rains two years ago, a large crack appeared in the road below the development, which is a busy hub for traffic to and from Kamares village. Police had to temporarily close the road, diverting traffic from the area.

Tremetoushiotis Developers Ltd – operating under the umbrella of Top Cyprus Properties – was responsible for the construction of the development and is now being sued by the Paphos district office, according to Evagoros Andreou, head of the planning permits department.

“The district office is proceeding with taking legal action against the developers,” Andreou said. “This is complicated and I can’t say any more about that.”

Andreou confirmed though, that all of the necessary permits and licences were issued for the project prior to construction.

Christos Tremetoushiotis told the Cyprus Mail that the developers were unaware that the plot of land wasn’t ‘healthy’ – although he says that locals had been aware of the problems for many years.

“We bought the land as residential plots with up to 60 per cent building allowed on each. We obtained all of the necessary permits and licences and started construction of the project in 2003/2004,” he said. “Usually, if there are some particular specifications or points to be aware of, these are listed on the last two pages of the building permit. There was nothing on ours, they were clear.”

Tremetoushiotis stated that such points may include the presence of underground water for example. The developers said they now believe this is the case with the Tala site, but they did not know prior to construction, and the permit mentioned nothing.

“When the authorities tell you that everything is OK – they have access to all of the geological maps and other information – you believe them and go ahead,” he said.

The developer admitted that Tremetoushiotis didn’t undertake an independent survey prior to construction but added that this was common practice.

“No developer would spend an extra 10-15 thousand Cyprus pounds [the currency at the time] for no reason to undertake a survey when you have already been issued with all of the permits,” he said.

Construction got underway and half of the entire project was completed – including one block of four apartments and one detached villa – and those properties were delivered to the clients.

Heavy winter rains soon revealed a problem. The construction of the upper road – an access dead-end road to the project – had been carried out ‘incorrectly’ by the authorities, the developer said. He said insufficient measures were taken by them to ensure that the huge amount of rain water which sometimes cascades down the mountain side would be taken away safely instead of being able to get into the site.

“Usually properties built on hills or inclines have a half a metre trench built which takes the water somewhere safe. We had done our own rainwater drainage; it was carefully studied and calculated for our properties, but it cannot cope with torrents from the hillside,” Tremetoushiotis said.

He noted that when the heavy rain started a deep crack appeared at the end of the road, and all the rain water poured in. “We stopped construction to see what we could do about it.”

The developer stressed that if they had known that the hillside was ‘dangerous’ they wouldn’t have purchased the land.

“It costs a lot of money to put in the infrastructure needed to build here. We have used a solid foundation and not piling as we believed the land was safe.”

According to Tremetoushiotis, the project cost over two million Cyprus pounds. All residents and owners were forced to leave after authorities deemed them unfit for habitation.

“It would be very costly to put right now,” he said, but was unwilling to comment on whether the development would have to be demolished.

But it seems that all is not lost for home owners at the development, as Tremetoushiotis says they will be offered another Paphos property of equal value.

“We have approached four of the five owners to offer them an informal proposal, which we will do legally in the near future. We will cancel the contract of sale and swap these properties with one of our other completed properties in Paphos of the same value as the client paid. These properties have title deeds,” he said.

He conceded that this was not an ideal solution as the properties won’t be in Tala but in other areas of Paphos.

“But at least they will have a property and be compensated this way. We are not in a position to give cash back,” he said.

Tremetoushiotis said it is important for the company to continue to have a good relationship with their clients and the authorities.

“We are trying to be fair to our customers and do what’s best for the company. Our reputation is important to us and we do not want this situation in Tala to damage that,” he said.

President of the Paphos branch of the Cyprus Civil Engineers and Architects association, Chrysostomos Italos carried out a study of the area and is due to visit the site again in the coming days. He said that the main reasons for movement at the site were due to excess surface water and poor quality soil.

“Although there is considerable subsidence at the site – some properties are visibly leaning to one side – at present the area is safe,” he said.

But the Paphos district office isn’t taking any chances and workers are currently undertaking works to ensure the situation doesn’t worsen. Andreou said: “We are taking some measures ourselves to ensure the site is stabilised.”

Illegal use of state-owned land

1

HUGE expanses of state land are being illegally exploited for years, with the Lands Office unable to take effective action because of lack of resources.

As a result cases involving land worth millions of euros have not moved forward for years.

A number of complaints lodged with authorities have needed up to a decade to be investigated so that they can be conveyed to the attorney general for legal action.

This has only encouraged instances where some people have even gone as far as to build homes on state land.

Auditor general Chrystakka Georghadji has sounded the alarm in her 2012 report, and urged authorities to take legal action immediately to protect state property.

“Even though district offices have informed the district land offices about illegal interventions on state land which were determined after on the spot visits by officials from the land office or complaints submitted by individuals, the Lands Office delays for periods up to 10 years to carry out an investigation so that this can stop,” the auditor general says in her report.

And she added: “As a result, the problem has become more acute, whereas cases where there is a cabinet decision, the Lands Office is slow in determining whether there is compliance with these decisions or to take action to stop the intervention.”

The auditor general warned that tolerating illegal interventions on state land can be interpreted as a weakness in effectively dealing with the problem, therefore serving as an encouragement rather than a deterrent. One case cited was in the village of Agridia where someone had illegally built on state land bordering on his property. Though the trespass was established in July 2004 and the individual given six months to demolish the illegal building, the Lands Office has still not carried out an on the spot check to see whether he has complied.

Another case involves a large expanse of state land on the Larnaca coast worth several million euros where an individual has built a private home and runs a camping site.

According to the auditor general, although the individual’s contract expired in 1987 and has not been renewed, he continues to use the land. Cabinet has twice rejected his request to renew the lease – in 1993 and 1999 and decided that he should pay dues to the state for the camping site from 1986 until he terminates the illegal intervention.

Cabinet has also given instructions for legal action to be taken against him by both the Lands Office and the District Officer of Larnaca for illegal use of state land and building a house without permission, respectively. Three years later, in September 2002, the case was sent from the Lands Office to the attorney general to sue in court so as to collect the sums due and terminate on encroachment state land.

The individual appealed against the cabinet decision to the Supreme Court which in 1994 rejected his appeal. A request for the home be registered in his and the names of his children was also rejected. The appeal that followed in the Supreme Court was rejected in 2008.

Twenty six years later, both the uncollected dues and the intervention remain.

Illegal use of state-owned land

Significant risks for Cyprus remain

1

IMF-buildingTHE EXISTENCE of significant risks, leaves no room for implementation slippages, the International Monetary Fund (IMF) points out in the second review of Cyprus’ performance under the financial adjustment programme imposed to the country by its international lenders.

According to the review, a more protracted recession, with knock on effects on the fiscal and financial sectors, could lead to additional financing needs and put debt sustainability at risk. Reform fatigue and prolonged internal tensions could impede key reforms and prevent a needed increase in confidence.

The IMF notes that the impact of the banking crisis on the economy remains uncertain and that confidence in the banking system remains weak and may take time to recover, delaying a return of deposit growth and associated credit growth. The deleveraging process could be more protracted, leading to a more prolonged recession and to a slower recovery, which could negatively affect bank asset quality and profitability resulting in additional capital needs.

“Delays in the removal of payment restrictions would negatively affect activity, while a premature removal may jeopardize financial sector stability”, it is said.

The Fund also mentions that prolonged tensions between the executive power and the central bank, and within the top management of the bank, may lead to delays in policy implementation in the critical financial sector area. Moreover, it is said, rising unemployment and deteriorating social conditions could call into question the fiscal consolidation path, and vested interests may impede structural reforms and privatization efforts.

According to IMF there are also litigation risks, as a number of legal claims for compensation related to resolution losses in Laiki and BoC have been filed at the Supreme Court and in district courts, and prospective legal claims related to the recapitalization of Hellenic bank.

Pointing out that there are factors mitigating these risks, the Fund says that BoC and Hellenic Bank are now fully capitalized above minimum requirements and under prudent assumptions, providing some margin for additional deterioration of asset quality.

At the same time, the program buffer remains sizeable and could cover comfortably additional fiscal needs even under a severe growth shock, or, alternatively, more than a doubling of state aid needs for the coop sector, if needed.

At the same time IMG projects that the program will be fully financed through the next year and there are good prospects that there will be adequate financing thereafter. Debt service to the Fund as a percentage of exports or GDP is expected to remain manageable.

The review also mentions that the authorities have established a good early track record of policy implementation, and the challenge is to maintain the momentum going forward.

It also notes the significant progress been made with restructuring and recapitalizing the financial Sector, adding that the next key step is to finalize the recapitalization and restructuring of coops.

It also points out that decisive action to deal with non-performing assets is essential to restore credit to the economy.

The IMF suggests that payment restrictions need to continue to be relaxed in line with the authorities’ roadmap, while safeguarding financial stability and that the authorities need to continue to strengthen supervision, regulation, and the Anti – Money Laundering framework.

Giving credit to Cyprus’ authorities for pursuing prudent fiscal policies, targeting lower deficit levels than originally envisaged, the IMF says that fiscal efforts need to be complemented with steps to advance structural reforms and jump-start the privatization process.

On March 25, 2013 Cyprus and the Troika (European Commission, European Central Bank, International Monetary Fund) agreed on a €10 billion financial assistance which featured an unprecedented haircut on uninsured deposits in a bid to recapitalize the Bank of Cyprus, the island’s largest lender. The bail-in also provided that Cyprus Popular Bank, the island’s second largest bank would be wound down with its good part absorbed by the Bank of Cyprus.

Further reading

IMF Country Report No.13/374 – Second Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criteria (December 2013)

The state of our economy

Cyprus economyWE are in the midst of the toughest economic times since the invasion. It is only natural therefore, that many of us should succumb to the state of ‘insecurity’ that permeates society.

Some people turn recluse and inert, refusing to try out anything new or to make a new start – particularly when their businesses are in financial hot water. Others are ‘cautiously optimistic’, believing that the crisis is temporary and that it shall pass, continuing to behave as they did before and thinking that, at some point, the ‘economy has to get better’, an attitude which prevents rethinking past habits. To us, both these outlooks are ineffectual. We must not allow ourselves to turn inert amid the current fluid situation in Cyprus; on the other hand, we must also not become too optimistic, thinking that all the problems will vanish as if by magic.

The portfolios of Cypriot banks comprise more loans than deposits (and capital). Even after the banks have been ‘recapitalised’, their balance sheets are deep in the red. Whereas a healthy banking system seeks to lend out depositors’ ‘stagnant’ savings (in order to collect a loan interest greater than the savings interest), the banking system in Cyprus is running a deficit which is currently being covered through liquidity guarantees from the European Central Bank and the ELA (Emergency Liquidity Assistance) mechanism, seeking to deleverage from the real economy.

The banks are desperately trying to collect on as many delinquent (or problematic) loans as possible, thus draining liquidity from the economy and from businesses, which have seen their profits evaporate (and turn into losses), thereby exacerbating those very conditions that make a business non-viable.

Take a business that continues to function at a basic level, mainly thanks to ‘good’ partners. Its revenues go toward paying salaries, the electricity bill, VAT, rent, servicing its loans (as well as paying legal fees for any bank lawsuits – which ultimately backfires on the banks themselves) and, of course, paying its suppliers. But as the business finds it increasingly hard to collect – unless if it’s in retail – it lags behind on its payments, and as a result resorts to settlements to repay what it owes at a later date; meanwhile any new obligations are not serviced. As businesses can no longer borrow from the banks – not because the banks are ‘evil’ but rather because the loans they have given out exceed their deposits and equity- they seek to borrow from everyone else, that is, the suppliers, their staff etc. This is the vicious cycle that we are in today!

Our businesses today have morphed into ‘machines’ that churn out unpaid and artificial debt. Not because they are poorly run, but because of the simultaneous contraction of the private sector, the sharp decline in their turnover, the banks tightening the screws on debt collection, and last but not least the loss of income of the businesses’ clients.

We must therefore adapt, trusting in ourselves and being open to the view that, whereas the crisis has created problems that need addressing, at the same it presents opportunities. This is an opportunity to change mentality, both with regard to the banking system and to the country as a whole. Let’s engage in some self-criticism, recognize our mistakes, and try to overcome the impasses, shedding old habits; and this goes for businesses and banks alike. It’s time for us to change.

Merry Christmas!

Endnote: Through JEREMIE (Joint European Resources for Micro to Medium Enterprises), a co-financed instrument – supposedly aimed at ‘propping up’ micro and small enterprises – the Bank of Cyprus is even now asking businessmen (and even their relatives) to put up collateral in the form of homes (and other real estate) for loans, as if no other means exist to collateralise a loan. In short, we are pursuing the same model which led our banking system to the state that it is in today!

NPLs of 22 developers highlighted by Troika

THE EUROPEAN Commission’s second review of the Economic adjustment programme for Cyprus is generally favourable to the progress being made by Cyprus.

In summary, the ECs report concludes that:

  • The Cyprus programme is on track.
  • The economic situation remains difficult, although so far the recession has been less pronounced than expected.
  • The authorities have made important strides with the recapitalisation and restructuring of the financial sector.
  • Fiscal performance has remained strong.
  • Structural reforms are advancing, although delays and partial compliance were observed in a number of cases.

However, the report highlights that the Bank of Cyprus needs to take steps to continue to strengthen its balance sheet, reduce ELA (emergency liquidity assistance), and manage non-performing loans more effectively.

Although the Troika’s report does not mention specific names, it calls on the Bank of Cyprus to create two separate units – one for ‘normal’ NPLs and a ‘Special Projects Division’ for the top 22 corporates and real estate developers and that with a focussed approach attempts will be made to make the top 22 NPLs start performing again – or that action may be taken to seize collateral.

Bank of Cyprus

According to media reports John Hourican, the Bank of Cyprus CEO, has already sent stern messages to the bank’s large debtors, some of whom have already had ‘uncomfortable’ meetings with Mr Hourican.

Mr Hourican has also announced plans to establish a department within the Bank’s recoveries and restructuring section under the direction of Euan Hamilton that will deal with problem loans. The department will be headed up by a person with experience of negotiating the purchase and sale of property.

The department will comprise six units, one of which will focus on customers who owe the bank more than €100 million.

Further reading

European Economy Occasional Paper 169 – The Economic Adjustment Programme for Cyprus Second Review – Autumn 2013 (December 2013)