Back in black
2014 has been a good year so far for incurable euro zone optimists. Even though the euro zone crisis is fresh in the memory, and deflation remains a risk, Greece’s five-year bond yields are below 5 percent. Greek banks have easily attracted foreign capital, helped by global funds flowing back into Europe after the U.S. Federal Reserve started its “tapering” policy. Still, foreign investment into Bank of Cyprus would represent a new bullish peak.
It has been barely more than a year since the Cypriot banking system capsized, ushering in a haircut of uninsured depositors, capital controls, and an emergency deal to merge Laiki, the country’s worst-off bank, into rival BoC – whose depositors still cannot access about 1.5 billion euros of their cash.
There are some reasons for the rosy view. Cypriot GDP fell much less than the 9 percent predicted by the euro zone authorities for 2013. National deposit inflows turned positive in April, for the first time since December, 2012. John Hourican, BoC’s chief executive, is getting to grips with bad debts by shoving 12 billion euros into a restructuring division. The bank made a profit in the first quarter, and the last significant internal capital controls were lifted on May 30.
But there is even more cause to worry. External controls remain in place, and non-performing loans are an awful 49 percent, only 39 percent of which are covered by provisions. Two-fifths of BoC liabilities still come from central bank funding, due to emergency liquidity assistance inherited from Laiki. And while a 10.6 percent core Tier 1 capital ratio may look robust, the longer-than-expected Cypriot recession, and the forthcoming European stress tests, could leave some holes to plug.
Bizarrely, foreign investors might well do the plugging. They have already gobbled up 100 million euros of sovereign bonds in a private placement in April. Overseas investors have, since the start of the year, shown increasing interest in BoC, according to a person familiar with the situation. That gives the bank a decent chance of sorting out forthcoming problems on its own. Whether such a move is reassuring about investors’ state of mind is another matter.