Cyprus-Forum.com

by **CBBB** » Fri Jan 09, 2009 8:57 am

A TALE OF TWO ISLANDS – ICELAND and CYPRUS

What is it about islands with the possible exception of Singapore that makes them so poorly governed? Is it simply that all the brighter people leave to fish in bigger ponds leaving the less able to rule; or is it that on a small island everyone knows everyone else and the very rich stand out as big fish in a small pond and become oligarchs influencing government or is it both?

ICELAND – WHEN THE COD STOCKS FALL – FISH FOR BANK DEPOSITS INSTEAD

The Iceland story gets funnier by the day, except for those, including many charities, who have lost money. It has a population of 315,000, less than half Metropolitan Leeds, a GDP of $6.5 billion, representing per capita income of $20,600 US. Its collapsing banks hold $76 billion of deposits which the Government has guaranteed. That means every man, woman and child is guaranteeing $241,000 of deposits equivalent to 12 years total income. Who is kidding who? Last week I suggested Denmark would be forced to rescue them but given the scale of the debacle not sure they can afford to do it. The Danes may well now be regretting their folly in not joining the Euro and Iceland their folly in staying out of Europe. Last week I pointed out that neither Ireland nor Greece could honour their bank guarantees if called. As for Iceland, don't make me laugh.

CYPRUS – WHEN TOURISM FALLS – FISH FOR ROUBLES

When Cyprus became the most expensive tourist destination in the Mediterranean it was generally assumed that the government would address the issue by a 30% devaluation. But the church, the monasteries and the oligarchs into whose few hands wealth is concentrated didn't want to see their pounds devalued. So it didn't happen. Tourism accounting for 77.6% GDP – contrary to popular myth Agriculture is only 3.2% - would have to be allowed to uncompetively struggle. The rich would do well out of changing their overvalued currency in Euros but at the price of rendering the island terminally uncompetitive.

To replace it they devised a new wheeze of building houses and selling them off to foreigners but as you can only sell land once it is hardly a basis for a sustainable economy. What do you do when all the land is sold? To fund this massive building programme the banks sought international funds mostly roubles. I do not wish to be drawn here into the controversy of whether the former President's law firm laundered the Milosevic fortune or whether Cyprus was the only country about to join the Euro where you could launder money, let it suffice to say that Cyprus banks, from whatever source were able to raise foreign funds on the scale of Iceland.

Cyprus shares with Lesotho and Romania the distinction of having the most overpriced housing in the world relative to economic fundamentals (IMF Formula)

Cyprus with a GDP of $18 billion has bank deposits of $76 billions – coincidentally the same as Iceland. Almost 30% of these funds are short term foreign funds which could walk to safer havens elsewhere. If the funds walk then like their Iceland and Irish counterparts all the local banks are bust and will have to start calling in property loans, including all the non performing loans that have been a feature of Cyprus banking since the Turkish invasion.

If the Government agrees to guarantee all deposits, they will simply be laughed at as there is no way every man woman and child could each guarantee over $100,000 US. Unlike Iceland where funds raised were used partly to acquire overseas assets and only partly to fuel a property price bubble, the Cyprus banks lent locally fueling a property bonanza. Cyprus now shares with Lesotho and Romania, the dubious distinction of having the most overvalued property prices in the world - overvalued by 75% relative to economic fundamentals (IMF formula). The 75% could be misleading for if the local unrecorded cash economy adds a hidden 30% to GDP prices are only overvalued by 50%. But even if the fall is only 50%, the Cyprus banks are finished in their present format.

For the majority of home owners, a 50% fall would mean that their property is still worth what they paid for it plus inflation. For many buying in the last 5 years the situation is not so good: for the most part their properties will not be worth what they paid for them.

Not surprisingly there are now relatively more empty and half completed properties in Cyprus than in downtown Miami which has already seen a 60% fall in prices, but then Miami on the same formula used to be 60% overpriced relative to economic fundamentals. All over the world house prices are falling back to fundamental levels. The boom so foolishly created by bonus chasing bankers with too much money to lend is over.

Cyprus Banks have poorer credit ratings than those that have already failed

The Cyprus government claims all its banks are robust with sound credit ratings – coincidentally exactly what Ireland and Iceland said before their banks collapsed. As a matter of record all the banks internationally that have collapsed had higher credit ratings than any Cyprus bank. Mind you the credit rating agencies are themselves damaged goods following the world banking debacle.

Given the excesses of the property boom bubble, can any bank anywhere survive a housing price collapse? In Australia where the IMF says property is only 24% overvalued, all the banks have been guaranteed by the government. With banks everywhere holding only between 3% and 8% tier one capital, it's a no brainer to see they will not be able to cope with the current scale of worldwide property falls. The idea that Cyprus uniquely will be immune to global waves is laughable.

It is often said that foreigners leave their brains behind when they buy properties overseas in places with no guarantee of title and this may be true. But there simply aren't enough foreign fools around to save the Cyprus situation. At risk of being premature yet again, expect Cyprus to be the next but one Iceland with collapsing banks and an imploding economy. Would like to be wrong, often am, hope I am but somehow doubt it.

I received this yesterday, but no source was given so I have been trying to obtain one. No luck so far.

by **Piratis** » Fri Jan 09, 2009 10:28 am

Would like to be wrong, often am, hope I am but somehow doubt it.

Just the opinion of some idiot at best. At worst it could be some (e.g. Turkey) who hate the prosperity of Cyprus and they are trying to spread rumors.

by **waldorf** » Fri Jan 09, 2009 10:56 am

Msg probably received from another wind-up merchant, striving to achieve your own level of sophistication, CBBB.

But, despite the possibility that Piatis may have a point, and seeing what has happened to Iceland, it remains a frightening scenario. IMHO.