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PIMCO gives fascinating insight into the working of Cypriot Banks.

Date: 24/04/13

The investment house PIMCO was given the job of assessing the amount of cash need for the Cypriot Banking system which resulted in most shocking report.

Although in all essence already out of date, this 100 page report gives an intriguing inside of the inner workings of the three main Cypriot banks. In short, the system was based simply on ever increasing asset value (such as land) and mostly ignored the borrowers’ ability to pay.

This small extract from page 12 gives a flavor for type of scandalous mismanagement the banks were facing:

Prevalence of Loan Modifications in Lieu of Problem Loan Servicing.

Loan modifications are common in Cyprus and exist across a broad array of loan types: home loans, consumer, corporate and small and medium enterprises (SME). Modifications often extend loans beyond the contractual maturity, may be based on relationships and may not reflect the borrower’s current ability to repay. In other cases, modifications rely on third-party personal guarantees or simply result in extensions despite strong evidence suggesting the borrower’s inability to service the debt. In general, Participating Institutions have been accommodative toward borrowers who face significant liquidity issues (little or negative cash flow generation and minimal cash on balance sheet). Loan repayments are often rescheduled and classified as such due to “economic conditions” while there is strong evidence of the inability of the borrower to service the debt. In many cases, overdraft .”

One thing for sure that bank lending from here on in will be based on economic fundamentals rather than on nepotism and incompetence. But for that we will have to start from scratch. For those at a bit of a loose end or with an interest in economics the entire PIMCO report is here

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