An intense price war waged by Cyprus’ commercial banks in their bid to attract deposits is likely to hurt the property market, with bankers blaming the Central Bank for imposing tight liquidity conditions in order to control the spectacular increase in loans in the real estate and properties sectors.

Marfin Laiki Bank is widely blamed for starting the “price war” to attract deposits by offering exceptionally high rates on 3-, 6-, 12- and 24-month fixed periods, which are above the Lombard lending rate.

MPB is offering 20 basis points above LIBOR on 24-month deposits, which is seen as an aggressive move to attract deposits and confirms the tight situation in the Cyprus pound money market.

Laiki’s move was immediately matched by Hellenic Bank, which has sent a message to its peers that while it will not start a price war, it is ready to match any such attempt by the others.

Bank of Cyprus is widely seen following with its own move soon by offering exceptionally high rates, which is likely to be matched by Alpha Bank and the rest.

As one banker told the Financial Mirror, the tight condition in the Cyprus pound money market is a result of the efforts of the Central Bank to drain excess liquidity from the market, as part of its efforts to orchestrate a slowdown in loans directed to the property market.

The banks are also at fault, he said, as they rushed to give “too many property loans without the comparative increase in deposits, so now, in order to support those loans, they need to attract deposits, otherwise their ratios will not allow them to carry the loans in their books.”

The Central Bank’s decision not to accept an effort by banks to classify their euro surplus funds as local currency only three months ahead of the shift to the common currency has added to the banks’ woes, which otherwise, would simply count their euros in the minimum deposit/loan ratios of the Central Bank.

“The Central Bank wants to cool the property market loans and after reducing the deposit requirement for loans, and banning banks from lending to foreigners on margin, now they are squeezing the banks by tightening the liquidity situation,” the senior banker told the Financial Mirror.

MiFid

The same sources however, added that once the euro becomes official currency, then the leverage of the Central Bank will decrease.

“Instead of wasting everybody’s time on these, they (Central Bank) should clarify other pressing issues, such as how you define euro loans from January between locals and non-residents, what will the impact of MiFid be and so many more pressing issues that have been left unattended.”

With only a week to go before the MiFid rules go into effect across most EU countries, including Cyprus from November 1, another senior banker told the Financial Mirror that there are many problems associated with the launch of structured products that need to be MiFid compatible.

“There are too many loopholes, gaps and different ways of interpretation as to how the new structured products should be in compliance with MiFid rules,” said the banker, blaming the authorities for not informing or issuing specific guidelines.

Structured products are those which combine a bank deposit or a guaranteed return with the performance of a specific sector (equities, bonds, commodities) and are increasingly proving popular as a way to attract long-term funds.

Inflation impact

By cooling demand for property loans the Central Bank wants to reduce the sharp appreciation in property prices and at the same time reduce the inflationary impact on the rest of the economy.

With demand high for properties, developers and suppliers have been hiking prices and passing these on to the consumers who, in the belief that property price rises are justified because of the appreciation in property prices have, accepted such increases.

But this is having a negative impact on the headline inflation rate, which now risks getting out of control as most retail establishments have increased prices ahead of the launch of the euro as the official currency from January 2008. That is why the government has been trying to cool specific sectors of the economy in order to reduce the inflationary consequences.

The recent reduction of the VAT on up to 100 products, most of them directly or indirectly related to the construction industry, is seen as a vain attempt to control and reduce the headline inflation rate, which risks spiralling out of control in early 2008 when the impact of the dramatic reduction in taxes on vehicles will be removed.

“If this move to control inflation does not work, then the government may decide to further reduce taxation on cars,” an informed source told the Financial Mirror.