Cyprus Co-operatives: incompetence or fraud?

by George Hatjoullis

A confidential (huh?) Central Bank of Cyprus report has revealed the extent of the non-performing loans in the Cyprus Co-operative movement. One Co-op has reported 88% NPLs. High NPLs amongst many of the 93 Co-ops seems common. The government has nationalised the movement and re-organised it as 18 entities. The taxpayer will inject 1.5 billion euro into the new structure. The 1.5 billion will come from the assistance provided by the troika.

Several questions come to mind. With such high NPLs why has the Co-op movement not been subject to the same resolution as Laiki Bank and Bank of Cyprus? First, the amount of bonds and uninsured deposits was probably inadequate to cover the capital need. Second, the chances are the capital need exceeds the insured deposits as well. These are ultimately a liability of the state (i.e. taxpayer) so nationalisation and an injection of capital with taxpayer funds was probably necessary in any event. Thirdly, the political fall-out from a resolution of the Co-op movement would have been very severe. Finally, the troika did not demand it because the ECB was not into this sector via the ELA in the way it was to Laiki and they did not view the Co-ops as laundering money, at least not on the scale of the banks.

The big question is how a does a small Co-op end up with 88% of NPLs? This is quite an achievement, however performance is measured. Did no one notice that interest was not being paid or that the loan-to-value ratio was breaching the threshold? I assume that the Co-ops had LTV thresholds? Was there no supervision from the authority for the supervision of Co-operatives in Cyprus? Were the managers of the Co-op incompetent? Or, was something not entirely kosher going on here? Rather than hearing of large-scale investigations we are told that staff to be made redundant will receive pay-offs more generous than the bank staff. Huh?

The treatment of Cyprus by the troika has been harsh, much more so than other crisis states. It is not the justice issue that has bothered me but rather the impracticability of the treatment. It will crush the Cyprus economy and thus fail in its objective of returning the Republic to a sustainable debt path. However, the more that emerges, the less sympathetic to the Cypriots one is inclined. The evidence of nepotism, corruption, incompetence and sheer arrogance is becoming overwhelming. It is the Augean Stable of an already pretty smelly Europe. Perhaps the troika, confronted with a herculean task, has opted for a herculean response.