Panic On The Streets Of Nicosia

Every day brings more bad news. Or that, at least, is the way it seems. Over the past week, the focus has shifted to Cyprus. Divided it may be between the Islamic north, which is under Turkish control, and the Orthodox Christian south, which has strong historic links to Greece. But the country that calls itself Cyprus, as anyone who has been there will know, is a lovely place in which to bed down.

If you pick the time of year well, you can go straight from beautiful warm sunshine on the beaches of Limassol to snow in the Trudos mountains. There is a great buzz in the beachside resorts and, at the height of the tourist season, hedonism and good times hold sway in coastal tourist destinations like Ayia Napa.
The people are friendly and welcoming. The culture is a fascinating cross between Southern European and Middle Eastern. It might never strike you during a two-week stay there, but you are barely a stone’s throw from Lebanon. To the north is Turkey. Syria, Iraq and Israel are near neighbours. The ancient civilization of Egypt is not very far away. But in the Greek part of Cyprus, at least, they seem to have achieved a very European style of equilibrium. The locals might not fully approve of the wilder indulgences of Irish and British youth, who flock there during the summer, but they are mature and open-minded enough to shrug their shoulders and smile. As long as no one gets hurt, that’s all that really matters.
As long as no one gets hurt: it is an important caveat that seems to have been forgotten by the policy makers in the European Union. Cyprus has gone through some extraordinary changes since the fall of the Berlin Wall and the implosion of the old Soviet Union. Over a period of years, Russian and Ukrainian money, shifted abroad to avoid the ravages of corruption on their home turf, found a refuge in Cypriot banks.
The financial services sector grew to accommodate the inflow. Hot money followed. Affluent Russians moved to Nicosia in numbers to mind their roubles. Shell companies were formed. Investment managers did good business. The banking system became disproportionately inflated. The Cyprus-based funds put vast sums of money into Greek banks. When the banking collapse happened in Greece, contagion was inevitable. It was only a matter of time before Cyprus would need a bailout. The hour of reckoning arrived last week.
The parallels with Ireland are obvious. No one can reasonably claim that the ordinary people of Cyprus are responsible for any of this. There may have been a ‘trickle down’ effect in terms of lower rates of unemployment and the availability of cheap loans from banks that raised the standard of living, but Cypriots neither invited the Russian money in nor benefitted greatly from it. Now that the whole shit-house has gone up in flames, however, they are being expected to pick up the tab.
And to add insult to injury, in what is a first in the ongoing European financial crisis, people who have money on deposit in Cyprus banks are also being forced to cough up a chunk of what is actually their cash. The decision was taken because, in an election year, politicians from Germany in particular were deeply afraid that they would be turfed out if the German electorate became aware that their cash was being used to secure the deposits of Russian money men in Cyprus banks. But, as the story emerged, it seemed that what was sauce for the Russian goose was sauce also for the Cypriot gander. A levy would be imposed on all deposits.
The response to this announcement was dramatic. The initial EU and IMF deal was rejected by Parliament in Cyprus. As a result banks remained closed. Citizens were unable to get cash. It was as close to total meltdown as any country linked to the European family has come.
As I write, cash dispensing machines are back in action, but account holders are temporarily limited to a maximum withdrawal of €100 a day. There is. meanwhile, still huge uncertainty concerning the likely final outcome. But one thing is clear. The ordinary citizens of Cyprus will be badly hurt no matter what happens. For the most part, they are innocents, caught in the crossfire. Their economy has been brought to its knees by the financial services sector. As in Ireland, the banks are to blame and behind them the regulators across Europe, who failed to impose a sustainable regime. And yet, to a very large extent, it is the people who will have to shoulder the burden.
Back at home, we’re at a different stage in the same game. The issue of mortgage arrears has now been pushed centre stage. Legislation is being prepared which will enable banks to get nasty with people whose mortgage payments are in arrears.
A lot of Hot Press readers, between their mid-20s and mid-30s, fall within the age bracket most likely to be caught in a negative equity trap on houses or apartments they bought. The Government has been making all sorts of soothing noises about repossession being the last resort, but I doubt that anyone is convinced.
The Central Bank has instructed the lending institutions to offer borrowers in distress sustainable restructured loan arrangements. But the language is woolly and there is nothing in the legislation which requires banks to do the right thing. It is a typically Irish solution, shrouded in fuzz. Above all, the public servants who have drafted the legislation seem to be obsessed with the need not to do anything which might give the banks the opportunity to sue the State. And so there are platitudes aplenty, but nothing that effectively binds banks to any specific course of action.
There are numerous potential options – what the Minister for Finance Michael Noonan described as a “suite of solutions” – which would enable people to stay in the houses they have bought. These include accepting interest-only repayments for an agreed period; ‘split mortgages’ where a part of the mortgage is warehoused for a time but full repayments of capital and interest are made on the rest; so called ‘debt for equity’ deals, whereby the bank gets a share of the house and recoups the money only if and when the house is sold or bequeathed; or, ‘mortgage to rent’ arrangements, which deliver the title of the property fully to the bank but allow the current mortgage holders to stay where they are, paying rent.
These are not pleasant options, and – to one degree or another – those being targeted have a right to feel victimized. But no binding State forum has been proposed for agreeing what a ‘sustainable solution’ might be in any given instance. The banks are being freed to pursue those who are in arrears, without any prescription as to the parameters within which they finally have to operate.
The likely effect is that, where mortgage payments are in arrears, the big lenders will go after houses in which there is residual value first. There will be a flurry of repossessions of homes which they will be able to put on the market and on which they will turn a profit. Others will be allowed to fester, because there is no percentage in it. It is a recipe for compounding one form of injustice with another. The end result will be more and greater inequality of treatment.
The responsibility of policy makers is to face fully up to the ethical issues. It is to find equitable, even-handed solutions to problems that affect the public so that no one is unfairly disadvantaged. We have a spectacular habit of getting these things wrong because we are more concerned with appearance than with substance. And above all because we seem incapable of being imaginative in what we do, of thinking outside the box.
Only a fool would say that there are easy solutions in an upside down world, where priorities have become totally skewed. But it should be possible to take a systematic approach which is fair to all concerned, relieves the burden on those most in need and still retains the value in the mortgages to the greatest extent possible for the lenders. Legislating to the effect that everyone has an equal right to warehouse a proportion of any mortgage has been suggested as one option – and it is an attractive one because it might have the added potential benefit of delivering a badly needed stimulus to the economy.
What we can say for sure is this: we have to be able to come up with a better solution than merely giving banks the power to crush those mortgage holders who can’t pay on a biased, we’ll-take-the-most-lucrative-ones first basis.