Fact Splash

26 October 2014

Stress test, first reading: About them recaps…

Screen Shot 2014-10-26 at 13.37.27

There is some confusion on Hellenic, which has announced a 105m shortfall, not 176. Central Bank agrees.

The difference comes about as follows: Start with 277 shortfall on adverse scenario. Then  101 million covered by cocs already converted. After that, another 23 m cocos to be converted (apparently the date is 26 Oct. 2014) on Q3 results. That brings us to 154 million shortfall. Subtract from that another 46 m from the existing 130 m on cocos (equal to 1% of risk-weidghed assets), which may be counted. That takes us to 108m shortfall, from which another 3m to be covered by the sell off of Russian ops. So, there you go: 176=105.


20 October 2014

Between August 2012 and the bail-in in March 2013, we insisted that Laiki’s ELA was a bad idea because the bank was insolvent and because, in any case, the bank could never repay the obligations. One of the questions raised (here) was wether the delay in dealing with the bank -and the subsequent astronomical growth of ELA- was related to an effort to buy time for Eurozone MFIs with deposits in Laiki, to pull out. Although intent can’t be proven, this was one of the effects; the Central Bnk governor admitted as much, calling them «best informed investors» (link above). The bottom line, however, was that the Central Bank had decided, in the words of tis Governor, to «keep the bank on a respirator until elections took place». The results are now clear.

By the way, the cops in charge of the investigation were too thick to understand that ELA was not «confidential information».

EzMFIs and ELA

19 October 2014

House Prices have been declining since 2008, when the bubble started to burst. The decline has been protracted and, compared to 2008, deep. However, we feel that the methodology used understates the decline: Land Registry Department reviews prices based on «recorded sales»; when a large, luxury, beach hotel was sold, the sale price fed into the entire area’s real estate prices, including homes. The only alternative, used by the Central Bank, is based on a survey of Real Estate Agents, who have strong  incentives to overstate prices. With a small and slow secondary market in the country, actual administrative data is slow and not dependable. The correction may well be much deeper than the data says.



17 October 2014

One more point on retail: The steady comparative decline continues. As government is still trying to «boost consumption» (that is, retail), despite the decline following the end of the bubble, a rethink of policy is urgent. If indeed this was a bubble (as the previous three charts show) then boosting retail is a misguided policy.



14 October 2014

Excluding Housing Loans, the other two main categories of Household credits reported by the Central Bank of Cyprus, are «Consumer» and «Other». After some commentary -and lots of questions on credit growth- it was noted that consumer loans had been declining since the end of 2009. However, a corresponding increase in «Other» loans raised eyebrows, although the entire question flew under the radar.

We raised the question on (overall) consumer loans in the previous chart; although the Central Bank is quite protective of its definitions (!) and changes to them, this is a pretty clear sign that the change was on the definition, not the real underlying trends.



13 October 2014

Growth in both turnover and employment in trade coincide chronologically with the credit boom. Indeed, as we noted earlier, consumer loans have a higher NPL rate (54%) and higher overall NPL value (4,4  billion) than housing loans, where most of the attention is falling. The numbers spike even further if one includes another category, «Other Loans», which include many consumer loans after a redefinition (more on that later). One dares refer to a bubble in retail, which in turn would imply that measures to boost «consumption» (meaning retail) are doomed- or perhaps should be given up altogether (if this is indeed a correction).

In any case, the decline is only following a rapid expansion- so rapid one wonders how viable it was to begin with.




24 September 2014

More fiscal strength (for now). Apart from the fiscal deficit, which is performing better than the DSA predicted, primary balances are diverging significantly (and doing better) than the original expectations. This reflects the fact that, apart from lower debt servicing costs, the government is drawing in higher revenues while spending less than projected by MoU. We showed this earlier (below), but the over performance is still impressive.

The main question right now is whether the trend can to December, the highest spending month of the year for the government.

Primary Balance


23 September 2014

Underperforming: With tourist arrivals looking good compared to the atrociously bad last few years, there is a sense of relief among officials and some of the industry leaders. However, longer term trends show how much Cyprus is in need for reform in a heavily regulated (and mismanaged) industry that is the lifeblood of the economy.

On the upside, per capita spending has been improving, showing that some of the recent upper-end hotels that are coming online are paying offl as long as these tourists (mainly Russian) are not too badly hurt by the Crimean crisis, the per-capita-spending figures might not reverse themselves, especially is distressed asset sales translate to better management and better deals with agents.





17 September 2014

As the «budget season» approaches, Cyprus is showing better-than-expected fiscal results for 2014. While revenues are over- performing MoU estimates, spending continues to be lower than projected even after the 11% cuts in this years’ budget compared to last year. This is creating an important buffer as the cumulative effect is both a budget balance that is better than the DSA projected, and a primary balance that remains above target.




14 September 2014

Primary spending has been performing better than MoU/Program targets throughout the program period (so far). Together with increased revenues, this has helped hold primary balances within program targets/predictions, creating an important fiscal buffer from DSA assumptions. This buffer could be used to cover Co-op recap needs after stress tests and amounts to approximately 1 bil. euro.




09 September 2014

Maritime transport continues to place an anchor on the recession. For the first half of 2014, it registers a continued increase in turnover, this time up 12% form last year. The new shipping tax laws are boosting the ship-management business based in «Little Hamburg» (read, Limassol), and further growth is in the cards. Shipping continues to make up almost 6% of Cyprus’ GDP, a percentage boosted by the recession as all other categories are declining.

Interestingly, road transport is rebounding strongly after a flat 2013, sign that the recession is bottoming out.




07 September 2014

Despite troubled tour operators, Russian arrivals (to June) are still increasing, although the recovery of other markets is lowering overall share of Russians as a percentage of total tourist arrivals. Interestingly, Ukrainian arrivals are also increasing rapidly.

In any case, with almost 30% this year so far, Russian tourism is still following the trend of the last four to five years, becoming one of the major sources of tourism for Cyprus: Does this spell trouble ahead?




05 September 2014

Still illiquid: Banks in the domestic market are still struggling to deleverage. Although deposits are declining, as was to be expected, what causes some concern is that loan recalls are not taking place at the same pace. Loans from Cyprus domestic banks to foreign entities and individuals are declining much faster than loans to Cypriot resident non-MFIs and households, which are at -6% y-o-y.




19 August 2014

While the attention has lately fallen on housing loans, consumer loans are showing an equally troubling trend, regarding NPLs. The large differentials in NPL levels probably show that households are strategically opting which loans to service, and which to let fall in arrears. Housing loans for primary residences show NPL levels at 39%,compared to 58% for consumer loans. Current accounts are also falling behind.

Note that the absolute amounts of NPLs in consumer loans are in fact larger than housing loans.


Individuals credits


07 August 2014

One of the issues that are raising eyebrows in Troika analyses, is that, while Household NPLs are continuing to rise, household data are still rather «comfortable». With Loans-to-deposits at approximately 96,5%, households still have more deposits than loan obligations. Therefore, the argument goes, it makes little sense that household NPLs are increasing. If they were pushed to use up assets (including deposits) to cover obligations, then NPLs would have declined to manageable levels.

We are noting that households are still using up deposits, especially since the beginning of the year. We are noting that the decline in deposits is parallel to the decrease in loans, which may be a strong indication that households are deleveraging rather than just using up deposits to hold up pre-crisis consumption levels, as was always assumed.

One other issue, is that «Cypriot Households»  as a category still has one particularly important issue to be clarified: The definition used by Central Bank is that of «Cyprus Residents». As such, it includes foreigners (think: HNWIs from Russia). While this may be boosting deposit levels, it probably has a very small impact on loans.

All this been said, all indications show that strategic defaults are very high, with households refusing to pay even when they are in position to do so (although this is more prevalent among non-MFIs than households).

HHJuly 2014





05 August 2014

We had commented earlier (8 July below) that the fast and happy USD inflows would probably reverse soon enough and indeed they did. At the time, many a banker were celebrating that overall deposits were beginning to increase; we noted that the overall increase was due to USD inflows and that these were short-term deposits. Now it’s time for the opposite comment: No cause for panic as overall Cy bank deposits are recording a decline; the decline is due to USD exit, which is natural, expected, and strongly (if erratically) cyclical.

We do note a tendency for stabilisation of overall deposits, however, if one excludes USD ST deposits. Cy households are still bleeding, as opposed to non-MFIs, where we see some recovery. Eurozone deposits are also stabilising.

deposits usdrow


14 July 2014

On manufactures, which looks like it will be the biggest long-term victim of the crisis, MoF is noting declining capacity utilisation. A long string of data, as well as unpublished sources, are showing that the long decline of the sector has been significantly accelerated by the crisis. On the long run, we don’t  see very much light at the end of the tunnel for the sector. On the other hand, businesses are already transforming their infrastructure to alternative uses (such as fx trading «warehouses», startup centres etc), switching out of the defunct system. We are looking at manufactures as a source for potential assets, but there is little room for growth unless official policy boosts the sector’s prospects.

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08 July 2014

Since we are the issue: USD deposits recovering. Even more erratic than total foreign deposits, and the question remains how fast it will turn into outflows.




07 July 2014

Coming back, for now: Deposits from outside of Cyprus (mainly non-Eurozone) are recovering rather dramatically in the last set of Central Bank data. Indeed, outstanding amounts are at their highest point for the last year. We are noting, however, that foreign deposits fluctuate a lot -reflecting short term deposits, driven by USD siphoned through Cyprus for payments in the wider region of the Eastern Mediterranean. This trend tends to become more acute as stability in the region declines.

This said, increased inflows do mark an increase in confidence, as depositors are no longer concerned with the possibility of a sudden bail-in or other «accidents». We would not be surprised (or alarmed) if the next three months show a sudden outflow of foreign deposits. We are keeping a particularly interested eye on USD.




23 June 2014

A word on SIFIs. It appears that in the last periods measured by OECD, competition has effectively declined in Cyrus -as in most of the EU- as the largest banks gained in relative size. This has been aggravated on paper by BoC’s absorption of Laiki. The more interesting part of this, however, would be how the smaller players are reacting to the field -now wide open as BoC is troubled, Hellenic is waiting for its recap and co-ops are going through dramatic revamping. A host of formerly secondary banks are upping their game dramatically.


OECD The Stateof bsecin Europe SchoenmakerD, T. Peek 2004-2




20 June 2014

Doing better? Despite the tight NPL definition used by the Central Bank, which categorises as NPL all restructured loans and does not allow de-categorisation until 6 mos after the highest instalment, some NPL categories  have been showing improvement at the beginning of the year. We are noting Education/Traininng with some interest, and Health with even more interest. Note also that hotels are noting a decline in NPLs.

Some of the decline may reflect loans written off, especially through asset sales. However, do note that NPL levels in these categories are nightmarishly high.





19 June 2014

Behind the bond’s bend: After absorbing Laiki bank, Bank of Cyprus also inherited the Laiki recap bond, worth 1,8b (and 1,91 at maturity). The bond is held at an IFRS discount and it is estimated by IMF/KPMG/PIMCO that it will boost Bank of Cyprus capital by 2,7%. Back-of-the-wedding-invitation estimates put that number near the 540m mark.

There is plenty of noise (and hints) that FinMin’s new bond (and subsequent ones) will be mostly used to pay off (partially) the recap bond at 100%, thus boosting BoC capital ahead of the stress tests. This is an important buffer that may conceivably help in making BoC more attractive as the bank also goes to the market in search for a capital increase. Needless to point out, whichever part of the recap bond is rolled over (may do so unilaterally to 2017) will need to be financed later on.

IMF is calling this capital boost to BoC:  «Unwinding of FV loss on CYP govnt. bonds in CPB». (CPB is Laiki’s other name).

Screen Shot 2014-06-18 at 00.22.03



9 June 2014

Since we’ ve been discussing debt issues, here’s the debt maturity profile as is today. Note that the recap bond can be rolled over unilaterally. But still…

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5 June 2014

As the Euro looks like it will move into depreciation-mode after the ECB rate cut, one thought about a second-degree effect could be on the terms-of-trade. Cyprus has been increasingly exporting (goods) outside the eurozone, especially since 2011. The depreciation will put a nice push on these exports.

We are still concerned that, because Cyprus (small-open-siland economy) depends almost entirely on imports for its inputs, the depreciation will increase, rather that decrease relative prices as it puts pressure on production costs. That aside, exports to non-Ez countries (here a rough proxy including non-EU plus the UK, a makor trade partner) could get a boost.




4 June 2014

Total assets have declined significantly since 2007/8 in Cy banking system, in the order of 15%. OECD data show that this sort of asset reduction is more or less «normal», although, interestingly, the largest declines in total assets were in MoU countries.


OECD The Stateof bsecin Europe SchoenmakerD, T. Peek 2004



2 June 2014

Net deposits inflows reported in Cy banking system in the official data for March may be misleading. Every single category was in decline, except «non eurozone other financial intermediaries». We’ve seen across-the-board declines, with a single category inflow leading to overall increase in deposits before; it was usually because of a small number of large transactions (e.g. sale of Russian aircraft owned by cy-registereed firms).

This time, and although USD inflows are rather flat, the large oscillations in the category of «there MFIs» from outside the eurozone indicate that the category is usually comprised of short-term deposits (mainly working capital). We therefore can’t talk about «a deposits inflow» as this appears to be a temporary inflow into the system.

Other other hand, we are noting that foreign depositors are not shying away from using Cy banks for their operations.



10 May 2014

Import data are some cause for concern as «productive» imports have declined significantly. Consumption has held relatively well; this is also reflected in domestic households’ declining deposits and in retail turnover data: The former declining fast and the latter holding strong compared to GDP in other categories. The main concern is the extent to which the economy can pick up the slack in the upturn. As supply is declining and the credit crunch continuing, it’s looking like the economy will not be able to pick up steam as the crisis theoretically «comes to an end». The recession could look a lot like an L-shaped problem.

Note that, being a small, open, island economy, Cyprus overwhelmingly imports inputs (capital goods, raw materials, intermediate goods etc), so the import data is of particular importance. (This is why we felt that exiting the euro and depreciating could be disastrous, by the way).



06 May 2014

Non-eurozone deposits are continuing to trickle out of the Cy banking system, even though the exodus has stopped. The trend mostly affect BoC, which is shedding more deposits than other banks. Co-ops went through a mini-run as rumours of an impending bail-in scared depositors two weeks ago, but that deposits flight has run its course. While BoC is the main loser of deposits, Hellenic and the Greek banks are the great winners; they seem to be drawing strong liquidity.

nonez deps


05 May 2014

We’ve been worried for a while now about the breakdown of imports. The virtually complete decline of manufactures is reflected in the dramatic decline of capital-goods-for-use-in-manufactures, as reported in official data.

However, the total levels of capital goods imports are just as dramatic. Interestingly -and worryingly- imports of nondurable goods are doing relatively well, showing the lowest decline of all categories. Durable and semi-durable are declining, which is normal given the crisis.

However, inputs and capital goods, including spare parts as well, are falling to a point where one expects the crisis to drag on into a protracted L-shaped recession.




1 May 2014

Unemployment continues to rise, with Limassol hardest hit y-o-y in Q1. Low levels in Paphos probably reflect the fact that construction adjusted early, before the reference period (Q1-2012) as well as the fact that in tourism, construction and farming, undeclared work is widespread. Nicosia increase reflects the decline in retail, MFIs and (to a lesser degree) the harder absorption of newcomers because of the government employment freeze. Overall, the number of  registered unemployed increased by 19% but this number should be assumed to understate the real increase on the ground.



23 April 2014

The export shift: As exports continue to increase -if modestly- troubled Greece is increasingly becoming less important than it was a few years ago, declining from about a quarter of exports, to 17%. At the same time, the UK is taking an increasing share of Cy exports, hitting double-digits in 2013.

Interesting shift is also away from EU MS, and to extra-EU trade (chart coming soon).




14 April 2014

On the «bank sitzkrieg»: As BoC market shares are declining, several banks are revving the engines for an all-out war for market shares. To be sure, BoC looks very much to be «systemic still», which is why Hellenic and Co-ops agreed not to attack for BoC depositors. However, as cap-controls are due to be eased, and as post-bailin BoC CDs are due to be released, several other MFIs are picking the slack and red dying themselves for a war for market shares.

Alpha Bank, Eurobank and Perieus are subsidiaries of heavily troubled, bailed-out banks in Greece; RCB getting ready and FBME is probably lubing the guns, as well. One concern, related to previous points made, is that this might lead to a deposits rate hike, which in turn will probably put pressure on lending rates, especially as interest margins are thinning.

This would be fun, if it weren’t scary.




10 April 2014

The other side of deflation. Across the board, real interest rates are climbing as inflation figures move into negative territory. A deposits war, which puts pressure on deposit rates, is in turn putting pressure on lending rates. The data below is indicative, as all categories of loans show similar «shapes». As rates continue to climb, there’s an additional reason to fear that the credit crunch will continue- and with it, an L-shaped recession will continue.

Unless, that is, something drastic happens with BoC.




08 April 2014

Even though Retail held stronger than expected -and stronger than most categories of GDP- its performance continues to look bleak We’ve noted the pressure caused by the twin problem of tight credit and continued destocking, which is hitting retail even harder than other importers (e.g. inputs). Although overall numbers seem pretty good, the non-food, non fuel numbers are increasingly tight.

We are not expecting a rebound in 2014.

The main brunt of the pressure seems to come on small, isolated stores that were catering to declining niches of the market increasingly served from abroad (e.g. electronics, online shopping). Even though the malls and large shopping centres are under pressure, their market shares seem to be increasing.




4 April 2014

Part time work continues to pick up as a percentage of total employment. This is rather expected and straightforward given the crisis. One issue worth noting, however, is that part-time employment seems to be the flip-side of jobs moving underground as the recession continues. Employment data per sector (coming soon) seem to justify all the other indications that undeclared work is also on the rise.

part time2013



1 April 2014

Continued concern over the effects of declining investment. All proxies we have are indicating a declining potential for the economy in the next quarters: Imports of capital goods, intermediate goods, spare parts and other inputs are translating to decreased investments, while the continued credit crunch is making it unlikely that businesses will be able to invest fast enough on the upswing. As long as the main problem in the economy is not excess capacity, this is a scary prospect; policymakers are increasingly noticing that growth will be particularly difficult without foreign investment, direct or otherwise.

The data in the chart seem to include construction (as per the source) which overstates the decline of productive potential as the bubble burst and as the construction industry does have excess capacity. Together with the other proxies we have, however, the picture is the same.




21 March 2014

A notable decline: Total government employee numbers are declining. Some would say not fast enough, as the decline is by about 3 thousand since 2011. However, Q4 numbers show that last year’s trend is continuing as the civil service is becoming leaner. Now let’s hope it will become meaner, as well.

We are using q-o-q numbers because there is very high seasonality in the numbers of employees in central gov.

gov empl


18 March 2014

Deflating: Every category reported officially is in disinflation or outright deflation. Note that Alcohol and tobacco, after tax increases that pushed HICP rates near the 8% to 9% levels, are now declining fast. The same is true with Hotels and Restaurants; while tourism is holding on well for the time being, they seem be feeling the pinch as inflation rates are declining.

Health and Education, two categories that recorded stable inflation rates around 4% in previous quarters are both now in deflation.

With almost -8%, «water, power, gas and housing» is now deflating heavily, largely driven by government action to remove surcharges on electricity bills. Overall deflation is still testing the bottom and it seems that, while it’s almost there, there is still some deflation yet before prices reach their minimum.


12 March 2014

More of the expected development. As Construction remains the category with the largest decline in Cyprus’ GDP figures for 2013 (-30,2%), labor costs tumble together with economic activity.

Although the figures show adjustment taking place and are not far from expectations, the decline is probably even larger as a good deal of employment (as much as 35% by most recent, pre-crisis inspections) is undeclared.

construction lcost

09 March 2014

Transport -a major industry for an island economy- is always interesting to look at. Inland (domestic) transport has declined by 4,8%, which is still rather timid. Air transport has declined by more, reflecting the fewer arrivals as well as reduced trade (yes, some of it is by air).

Most interesting is shipping/maritime transport, which has increased considerably. The 8.8% increase is lower than the original trend we saw in the year (+15%) but still quite impressive. As shipping rates increased internationally, the maritime business held fast. As Limassol concentrates on ship management (rather than flag-of-opportunity) since accession to the EU, the increase reflects international trends and remains immune to domestic factors. (Even discounting for the bail-in suffered in the deposits of some of these companies).

Overall, the maritime business (about 5% before the crisis, and more than that now) is an important reason for the smaller than expected recession of 2013.

tran 2013

07 March 2014

An indicative list compiled by stockwatch.com.cy based on Stock Exchange announcements. The left column shows profit/loss and the column on the right shows turnover. The latter are pretty solid and are holding fast, given the circumstances. The problem rests with the former- Losses have been piling up for years and the industry is in distress overall.

This is the dark side of tourism: Financing costs (often of other projects) have been burdening some of the most important hotels. This is why companies that own the hotels are recording losses (again) despite relatively solid performance of the hotels themselves. Asset sales, debt-equity swaps and other similar solutions are now beginning to happen; we expect more investors coming in in the next few months.

Screen Shot 2014-03-05 at 15.53.49

03 March 2013

One of the factors noted for the smaller-than-expected decline of the GDP has been the strong performance of services. In the category of Scientific and technical services, the largest decline has concentrated in architects and civil engineers, as expected. However, the impressive performance of legal and accounting services, with -1,5% y-o-y, is really the impressive number to take note of.

Not only did these services adjust early (before Q1 2013, in anticipation of a extreme developments) but the result also reflects the fact that, while the size of accounts may have suffered, the number of accounts didn’t decline as much as was expected.

Interestingly, advertising and market research remained solid, as well.


25 February 2014

More travel abroad. Cypriot residents are travelling more than last year, which in itself points towards better consumer confidence (most of the travel is for leisure). More interestingly, we note the breakdown per destination. Israel is skyrocketing, with a 267% increase, although from a relatively small base. More interestingly, Russia is growing significantly, both because of the increasing number of Russians living in Cyprus and because of increased business with Russia. The increase of almost 10% to Greece may be driven by the fact that for many Cypriots Greece is cheaper, traditional alternative to UK for leisure. Egypt and Lebanon are showing a pretty much natural decrease, given the instabilities in these countries.


17 February 2014

What we see in import data is a real cause for concern (charts below), as it shows small declines in consumer goods, but deep drops in inputs (spare parts, intermediate goods, capital goods etc). We have not really touched exports, however: These are looking stronger in 2013 compared to the previous year, having grown both with respect to third countries and with respect to other EU destinations. The data below is in current prices; the deflated prices of 2013 are telling us that the picture is somewhat better in constant/real prices.

Despite the increase, the decline in the trade deficit is still attributed mainly to the decline in imports.

Although (still) too early for sectoral data, 2013 trends show that the increase in exports is probably due to processed foods («industrial goods of agricultural origin») and to manufactures.


13 February 2014

A bit more detail on the disinflation. All categories of services are in deflation or disinflation, except for star services, which are increasing quite drastically under MoU conditions. Impressive decline on rents, partially due to legislative intervention that forced reductions. We are also noting Health and Education, two of the main drivers of inflation in previous periods/years. Overall Services are deflating by 1.7%, versus the overall CPI decline of 2.9%, y-o-y for January (chart below).

CPI deflation in services is most likely buoyed by «state services».


12 February 2014

More adjustment, continuing. With even deeper y-o-y CPI declines, the economy is still moving fast towards «internal devaluation». Note that «core CPI», which excludes fuel and edibles (the latter not on the chart) is even deeper in negative territory. Also note that domestic goods are showing deeper deflation than imports. The «traditional drivers» of inflation -health, education, rents, fuel- are all in disinflation except the latter.


08 February 2014

Another sign of declining investment beyond the 33% or so we see in construction. While imports of inputs (including fuel, spare parts, cap goods and intermediate inputs) show a much steeper decline than consumption, non-saloon vehicles are also declining in scary numbers. Specialised vehicles (paving trucks, heavy trucks, cranes etc) have defined by 64% y-o-y versus 2012. Light commercial vehicles (not in the chart below) have also declined by 66.5%.

This is yet another piece of evidence that maximum growth is under pressure for 2014.


05 February 2014

One other big question, as unemployment crawls towards 20%, is how many of the jobs that have been lost represent job destruction and how many of them have simply moved underground. Given severe inadequacies in Ministry of Labor, legal shortcomings and risen part-time and contractual work, we have been expecting that the grey economy must have risen in 2013, and will continue to do so in 2014.

According to pre-crisis data (2011) from Min. Labor, inspections (mornings only) showed that undeclared work was endemic, around the 30% point in construction, tourism and agriculture. Data below from Eurofound.


03 February 2014

Them dollars: As expected, the foreign deposit inflow from last recorded month was reversed. This is because the foreign inflow was in USD, which makes about 20% of total deposits. USD deposits have always shown large oscillations, with deposits and outflows of as much as 1 billion moving into and out of the Cy banking system. For the most part, this is funds of regional businesses who use Cyprus as a transit centre for payments. Hence our unwillingness to join December’s celebrations over the inflow. The December outflow was natural, although we frankly expected this not to happen until last month.

On the other hand, overall deposits are stabilising, partly because domestic deposits are coming out of the pillow cases and partly because after outflows of 23 billion (32%), the outflow hd to stop at some point. This is the good news.

Deposits tot and USD

01 February 2014

In the light of ongoing discussions on the proposed local authority reform, it would be interesting to contemplate the comparison. Cyprus has 39 municipalities, plus smaller local authorities. The proposed reform revolves around the merger of local authorities into larger units.

From the Danish Ministry of Interior
From the Danish Ministry of Interior

28 January 2014

Still some way to go: Government employees are declining overall, as per MoU obligations. There’s still some way to go to the reduction by 4.500 by 2016. Numbers are still cyclical with temporary/seasonal employees rolling in and out of service. the reduction at this point is mainly due to the «no replacement rule» for retiring civil servants, who are encouraged by increased taxes and the looming threat of taxing their five-figure lump sum payments upon retirement.


23 January 2014

The credit crunch was both dramatic and mild: This is one of the main explanations for how mild the recession has been in Cyprus despite the disappearance of two SIFIs and the double (banking and fiscal) crisis. Although we do see an overall reduction in credits by 12%, the credit crunch inside Cyprus has been very mild. Banks have been calling in loans abroad, rather than at home, so the overall credit restraint has not affected the domestic economy as much as expected.

We are expecting domestic credit crunch to pick up as large NPLs (of «the 30» NPL holders who total 6b euro) start being called in) but this will skew the picture for households and for most businesses who continue to shed deposits, but remain still overall as far as total lending goes.

As banks burned this «fat» in their deleveraging, and as businesses and households have been burning up deposits, the economy could hold a growth rate at «only» -5.5% in 2013. The question is, how long can this go on, as the fat is running out.

Credit growth

21 January 2014

As expected building permits in 2013 to October (the most recent data recently released) show an overall decline y-o-y. Interestingly, the large category including health, spectacles, entertainment centres, education etc show a marked increase. We don’t believe that this reflects a casino license (data ends in October) or any of the planned new stadiums. University expansions are also very unlikely to be the trick, although some permits were extended in 2013 (we are expecting that they won’t be used any time soon). There are some obvious «candidates» that explain this, but we can’t be certain at this point as to what to attribute the growth to.

Note that the data below reflect value, not surface area or size of projects. As noted earlier, we are noticing fewer projects of larger size and value.

Also note that the category in question has a low basis, which overstates somewhat the increase, which is notable nonetheless.

building permits

19 January 2014

Another sign of the pressures in Cy business. The increasing leverage proxy seems driven from declining deposits as the credit crunch and dried-up liquidity is forcing businesses to burn the fact they’ve gathered in the good times. As BoC is pulling in some of the bigger loans from troubled businesses, total credits outstanding to cy business will also start to showing a decline. This is driven by a small number of large loan takers, however (30 businesses hold 6 billion in NPLs). Overall, indications show that businesses are still running down on their «old» deposits.


16 January 2014

Good-ish news on the banking system. Overall lending abroad is growing marginally, driven by loans to other eurozone borrowers excluding Cyprus), and  in third countries outside the Eurozone. Despite this slight upward tilt in lending abroad, total outstanding loans are flattening out. Inside Cyprus, deleveraging is still ongoing as banks are calling in loans from domestic borrowers.

This is goodish news because it reflects banks zeroing in on large NPLs: In BoC these amount to some 6 billion euro. As they are exchanged with locked-in deposits held by investors who take equity in large NPL holders, overall lending declines in Cyprus. At the same time, more lending abroad   may translate to increased profits in later quarters. Hopefully.

Note that earlier (October) it looked like the opposite was happening- deleveraging was taking place mostly abroad, allowing Cyprus to by-pass the credit crunch as most of it took place in loans extended to non-cypriots. Now large NPL holders are skewing the picture as their loans are called in, while banks are lending in ez and third countries again.


15 January 2014

One of the most important reasons to worry about 2014. As noted in earlier splashes, inputs and capital goods (mostly imported) are declining. We know that the economy is dissaving and that stocks have declined for the first time in Q3, whereas Q4 is the usual «destocking time». With input imports declining, and with capital goods coming in slower, productive capacity is probably declining, pulling maximum potential GDP inwards (thinking in terms of production possibility frontier).

Intermediate inputs and capital goods have declined by 30.9% overall, year-to-November.

Another concern is that, with the credit crunch still continuing, with bank guarantees, credit notes and the like not accepted as readily from exporters, and with businesses being increasingly illiquid and increasingly leveraged, the question is whether they can restock as much as they need, and wether input and capital imports can cover the slack in 2014.

Note that consumption imports have declined by significantly less than «productive» imports. Also note that most of the inputs and capital goods are imported


12 January 2014

Decline in prices in the year to November shows that, with the exception of fuel, which is exogenous, there is a disinflationary trend across the board. Fuel inflation will probably remain high, driven by new taxes, but the data jibes with what we are seeing from other figures. December and annual data for 2013 show that the trend seen to November isn’t changing.

So internal devaluation is seen in yet another set of data. Good news, in most respects, especially regarding competitiveness.

Interestingly, as disinflation is taking hold, another thought is that euroexit’s main goal (devaluation and competitiveness) is already happening.

CPI largecats

09 January 2014

Does Eurostat’s metric dispel tax myths? Interesting numbers, although the definitions are a bit fuzzy. In any case, real tax burden is higher than often assumed, with a host of labor taxes, «defense» tax, local taxes etc increasing total burden.

implicit tax rate

07  January 2014

Job losses, in absolute numbers, concentrate in trade, construction and manufactures. It’s highly unlikely that they’ll ever return in the latter two categories, given the displacements we are seeing in the economy. In trade, we might expect some job creation, but that will be over the next few years, and in new categories (re-exports, shipping-related, bulk-and-wholesale) rather than the retail bubble that was fueled by consumer credit growth. As such, many questions arise about the unskilled labor employed in retail.

Overall, it looks like unemployment might be approaching its climax slowly. Some more job loss should be expected in trade and in MFIs still. Services (scientific and professional) started adjusting long before the crisis, so there shouldn’t be a marked increase later on.

The big question is how many of these job losses are actually lost, rather than moved into the grayer parts of the economy. The latest inspections of Labor Ministry found up to 25% of employees were not registered in inspectors’ «working hours» (till 14.30), while the few inspections that took place in the afternoons puts the number at 33%. These are 2011 figures, concentrating in agriculture, construction and tourism. With no real campaign taking place against illegal and/or unregistered work, these numbers should be expected to be much higher today.


06 January 2014

We’ve talked a bit about destocking before. Available data shows that shocks have declined in Q3. Historical data show that net destocking has never taken place before Q4 before, and Q4 is always a time for destocking, both for retailers (Christmas, presumably) and for other stocks (inputs). The fact that there are more stocks consumed than brought into the economy starting in Q3 should translate to dramatic stock reductions for 2013.

The big question relates to the restocking that has to follow. Although the cap controls allow spending on imports, credit notes, bank guarantees and other instruments are increasingly not accepted and foreign exporters demand cash advances or payments on order. Given that businesses are both leveraged (loans-to-deposits at 423%) and illiquid, the credit crunch should be taking a pinch on them as of Q1 this year.

This is one issue that needs to be tracked closely.


o4 January 2014

More adjustment: Labor Cost Index is showing fast adjustments, in the midst of increasing unemployment. Labor working hours are remaining lately constant, with full-time workers working an average of only 28 or so minutes more per week than a year ago. CPI is moving on similar trends, with the year closing in negative territory for the first time since 1964.

Interestingly, there seems to be a small increase in part-time work compared to full-time work, with employers preferring part-time workers and employees taking whatever they’ll find. Overall, however, LCI figures are showing that the economy is fast adjusting to the new conditions, boosting competitiveness.

«Internal devaluation» proxies are showing almost in every metric.


23 December 2013

Retail turnover continues to appear normal given economic conditions. All categories except edibles are in deep negative category.

Retail gas pumped at stations is still very low considering that there are no real substitutes for the car in Cyprus (weather and roads are bad for bicycles and public transport is inexistent).

Edible goods are rising still, probably reflecting the decline in leisure and restaurants. One aspect of this, is that the switch to at-home meals and way from other leisure activities, also leads to increased consumption of domestically produced goods. The increase in both prices and turnover for cy-produced agricultural goods probably reflects substitution effects as well as Giffen effects on Cy-produced edibles and drinks.

Overall decline is tempered mainly by the increased turnover in edibles.


15 December 2013

A good indication of where the economy is moving, Internal Revenue Department receipts (direct taxes) are not showing any changes in the trends identified in earlier splashes. New taxes (newly imposed or with increased rates) are still bouyant as opposed to old taxes (pre-existing the crisis and with no rate hikes). In this sense, «austerity» is helping achieve fiscal targets, together with brave spending cuts by the government.

Receipts from self-employed are still collapsing, perhaps reflecting the increase in voluntary dissolutions of businesses which most likely reflects micro or very small SMEs. Corporation tax and capital gains are still very low (-14% and -57% respectively), which is an indication of how well over-leveraged and cash-strapped businesses are doing.

Screen Shot 2013-12-11 at 2.36.47 AM

12 December 2013

Although the absolute numbers may appear small, voluntary dissolution of businesses is picking up. We are likely to see faster dissolutions in November-December as restocking bottoms out: Because foreign exporters are refusing letters of credit/bank guarantees from the largest Cy bank, the credit crunch exacerbates difficulties in imports. This affects virtually every sector in the economy. Apart from final goods in retail (which is the most obvious), Cyprus imports most of its inputs. Therefore, as stocks dwindle many firms find it impossible to stay in business.

We were expecting dissolutions to speed up in September, but there is no data. Q3 net restocking was negative, which is unprecedented in the last several years. We identify 15% of all dissolutions of the year to end of October, in October. The data for the last two months will be crucial.

Note that destocking has been visible for about 18 months.

voluntary dissltns

11 December 2013

More on inflows.This further corroborates the chart of 09December, just below. Not surprisingly, non eurozone non MFIs show the same kind of erratic net inflows and outflows as USD deposits. In fact, with non-eurozone non-MFIs, the USD conclusions are even stronger: This is short-term deposits tending to move into and then out of the cy banking system. And, to the extend that these are in foreign currency, they can’ t translate to «liquidity» in a more banking-ish sense of the word.

Interesting fact- unlike USD deposits, which or the first time were positive (net) since March in October, non-MFIs from outside the eurozone have in fact shown some return to «usual» behavior.

Conclusions from 09 December below still stand.


09 December 2013

Despite some celebratory coverage on the increase of foreign deposits in the cy banking system, the data is in line with the pre-March trends on foreign currency deposits. Most of it is in USD, which is erratic and short-term. These are not «liquidity» in the sense that, apart from being short-term deposits, they also face a very high required reserve ratio (70%): They can’t be transformed into credit by the banks.

We should expect these deposits to turn into outflows soon -probably January if not December as foreign non-MFIs (from outside the Eurozone) tend to use Cy banks as a transit point to complete obligations/contracts in the general region. Before March, these flows were roughly cyclical.

However, there is a certain upside -the initial fear of further bail-ins that drove even ST depositors away from Cyprus, seems to be loosening its grip. Interbank rates (opaque and unavailable for Cy) would give a better picture on bank confidence, but this is certainly a sign.


28 November 2013

Although historically much more volatile than the rest of the Eurozone, Cy HICP inflation is now declining faster than the other Euro countries. As we were expecting, HICP inflation is now in negative territory, while every category appears to be registering negative inflation or fast declines in inflation rates. Another sign of adjustment, verifying expectations based on August and October data.

HICP comparative

26 November 2013

Some explaining to do: At the time of the bail-in in BoC, many of us insisted that a bail-in at 47.5% of uninsured deposits cannot guarantee solvency for Bank of Cyprus because, 1) it’s too small to begin with, and 2) because of the expected deterioration in asset quality.

Despite insistent questions, we were assured that, at 47.5%, the bank would have a Core Tier I ratio of 12%, which would be «more than enough» to ensure that BoC would remain over the 9% threshold over the program period (to 2016).

Tables published on the website of the Central Bank (but since mysteriously removed) noted a Core Tier I ratio of 13%, under a smaller bail-in, at 37.5% of uninsured deposits. In fact, for some of us the insistence that a haircut of 47.5% is not enough, was met with -to put it mildly- bemusement and heavy accusations.

The third table is from the bank’s results to 30.06.2013, noting that at the end of H1. Core Tier I is at 10.5%. The question now is whether we’ve had a deterioration of 2 p.p. over the 3 months between the bail-in and the H1 results, or the estimate for 12% was wrong to begin with.

Hopefully, the bank will, despite our concerns, remain above the 9% threshold till the end of the program period, but we do note that the expected deterioration in asset quality (esp. increasing NPLS and Provisions) are still ongoing, as senior staff in the bank openly admit.


BoC bsheet22

Screen Shot 2013-11-26 at 10.31.42 PM

25 November 2013

Has austerity worked? While indirect taxes (and especially VAT receipts) are down, despite increased rates, direct tax increases seem to be working. Fiscal figures are holding fast, despite the downturn, largely because of increased receipts on direct taxes in which rates were increased this year.

The reduction of fiscal spending is also important, both in 2013 and in 2014. For 2014, the budget foresees a very brave 10% cut in spending.

Worth pondering if austerity is working, at least from the point of view of the government.

IRD receiptsto Sept

18 November 2013

How Hellenic benefited from the forced alienation of assets in Greece. In the aftermath of the Bail-in decision for Cyprus in March, Cypriot banks were forced to cut the contagion cord with Greece by selling off their operations in that market. Hellenic Bank, beleaguered for the last 3 to 4 years by a string of unwise decisions made in the Greek market, was eventually «forced» to also sell its assets in Greece, alongside Laiki and Bank of Cyprus.

The dirty secret has been that Hellenic asked to be included in the deal. The data shows how the bank benefited from the transaction. Hellenic’s  NPLs in Greece maxed out at 52% just before the «forced» sell-off. Provisions (shown below) declined dramatically after the sell-off. This probably saved the bank; but the management should show some restraint in telling everyone that «others» forced Hellenic to sell its ops in Greece.

On another note, the new definition is certainly a correction and it creates a much better picture of reality than before.

Screen Shot 2013-11-18 at 9.18.28 PM

15 November 2013

While unemployment growth is slowing down, the biggest problem appears among newcomers. Although the administrative data grossly understates the absolute number (newcomers have no incentives to register), the numbers still underline the problem in job creation and show a terrifying upward trend.

The small decline in October may be a good sign if the decline continues, but it is most likely because newcomers don’t show up every month to re-register as they receive no benefits. Brain drain might also be at work here.


14 November 2013

Another point about unemployment- despite the virtual decline in the number of registered unemployed, the data is not seasonally adjusted. So the absolute increase is scary. Press celebrations on the m-o-m decline are rather misguided. Terrifying increase y-o-y, as is obvious from the data below.


12 November 2013

Registered Unemployed. Although the absolute numbers underreport unemployment itself, the figures show some interesting trends. Unemployment among MFI/insurance companies are more or less expected, especially after March. Trade continues to shed jobs, with a 26% increase in the number of registered unemployed in the last year.

Services, widely reported to show surprising robustness, is also showing an increase by almost 50%, which should raise eyebrows. Tourism (hotels, restaurants) registers an increase in unemployment by 10%, reflecting on on hand the numbers of people who are working off the books, and on the other, the increased revenues (despite lower numbers of arrivals) for this year.


11 November 2013

Construction is continuing to unwind after the bubble. New building permits are down by almost 26% y-o-y. Slightly bigger projects are being promoted, with the value of the licenses declining by less than the absolute number. This is especially true in the «traditional» bubble parts of the country- Famagusta, Larnaca and Paphos, where new cheap, fast-turnaround projects are being abandoned.

building permits

08 November 2013

Banks continue to deleverage slower than they are shedding deposits. Following the overall increase in credits outstanding noted in an earlier update, together with continuing deposit loss are translating to increased loans-to-deposits ratios. The illiquidity of the banks raises lots of questions, not only on how interest rates could possibly decline, but also on how the credit crunch can possibly be reversed at all.

loans to deps

04 November 2013

Another proxy for business activity. While food and beverages are still recording increased turnover, non-food, non-fuel consumption is still in a slump – but steadily so. New light cargo vehicles, widely used for deliveries for retail trade, are in decline versus last year, but the September figure show negligible decline y-o-y.

Waiting for October, November figures with interest.

cargo vehs

03 November 2013

An older problem. ROA and ROE both collapsed among Cy banks long before anyone noticed- in 2011. Markets barely saw the figures at the time.

roa and roe

01 November 2013

Total loans are holding up and deleveraging is looking slow. One piece of data that explains what we are seeing, is loans to Eurozone (excluding Cyprus) MFIs, where Cy banks are extending loans lately. Probably because of the slow demand at home.

EZMFIs loans

31 October 2013

Pressure on businesses is mounting, as expected. Both bankruptcy protection filings and voluntary dissolutions are still riding the crisis. 2013 numbers are till 30 September and we don’t have any breakdowns per quarter in order to determine the degree to which there is seasonality in failures and dissolutions.

However, after 2011 and 2012, businesses are still failing at increased numbers. There are no job creation data or anything resembling nonfarm payroll, but job creation seems to be correspondingly low, if employment data is any indication.


29 October 2013

While most of our discussions on deposit flight exclude interbank deposits (CB data don’t include much of the interbank market), the question overall has been who is picking up their money since the March bail-in. Ret-of-World non-MFIs have recorded a dramatic decline of 54.4% in their deposits, since the peak in December. And this, despite the corral imposed on capital movements in Cyprus.

On the (slightly) bright side, most of these businesses aren’t picking up their business from lawyers and accountants, who record a decline in turnover (about 9% -11% by our reckoning) but the actual number of clients doesn’t seem to be declining.

So business is frozen from these clients, as they are beginning to use other banking systems for their transactions.

row deposits

23 October 2013

Construction output has declined by about 30%. Most proxy figures are also declining by the same amount (architect and civil engineering turnover, producer prices etc). Latest data on hourly labor cost show a relatively smaller decline. Absolute employment in construction has declined by about 30% and hourly labor costs are dropping as well.

On a bird’s eye view glance, it seems that employment declines are bottoming out as productivity is climbing and labor costs are declining as well. Given that new building licenses are fewer in number but of higher value on average, we could expect that unemployment in construction will not climb too much further.

hrLcost Construction

21 October 2013

Exports continue to do decently well, mainly because of spikes in April and July. The April spike was attributed to the sale of two aircraft owned by a Russian company but registered in Cyprus, to a buyer in the UK, so it was completely misleading. We can’t identify what the July spike can be attributed to, yet.

Overall, exports are holding on compared to previous years, partly because of re-exports as maritime/shipping turnover is also holding on very decently. However, exports will not be able to reverse overall trends in the economy.

exports August

17 October 2013

Another piece of data that verifies what had been said about Cy banks- and also speaks volumes about the Central Bank’s decision continue extending ELA assistance to Laiki bank. The Governor noted in the Investigative Committee that Laiki was solvent by virtue of its imminent bailout, which amounts to admitting that the bank was anything but.

The data is systemwide, but draws a clear picture of what was going on -and it also raises questions about asset quality. All in all, a complete revamping of the banking map in Cyprus, with the obvious SIFIs (Laiki and BoC) looking unsalvageable at the end of the year, is verified.

The data is for domestic banks, excluding co-ops.


16 October 2013

Lax supervision? Even as NPLs were rising, provision coverage continued to decline. IMF data goes up to December 2012 -NPL rates are now estimated around 30% and provisions-to-NPLs seems to be declining still.

More worrying is the realization that many of us are making, that NPLs are under-reported because of the numerous rollovers, especially for the biggest loans, which entail: 1) Hiding NPLs, 2) No additional provisions and 3) Increase in loans outstanding as the rollover is financed with new financing. More on this here (A simple warning on loan restructuring).

But one obvious conclusion from the data below, is the lax supervision, as well.


15 October 2013

Declining, but not as bad as was assumed. The data is still old (H1) but the decline of final private consumption is still below 6%, according to the latest data. The big question is how far it will drop in H2. But from the looks of it, it may still   be below the -13% to -19% assumed in the MoU (depending on which document you read).  The credit crunch is still not biting in Q2, but the pressure is on.

We should expect downward revisions of this data later in the year, however.

H1 privatecons

11 October 2013

BoC December 2012 results are finally out, ten months late. The figures are indeed scary as the bank was insolvent. The overall results highlight how big a problem is asset quality for the bank. This makes scary reading; in the meantime, 1 member of the board refused to sign the results and a second one resigned.

At least, we now have a picture of what was happening. Provisions increased by 485% from 2011.

BoC Dec12

09 October 2013

Another interesting proxy for economic activity is electricity consumption. Although Cyprus lacks many large, energy-intensive industries (except, notably, cement and hotels), electricity consumption nonetheless is a good indication of how the economy is faring. Sectoral analysis is not easy due to the lack of data, but households saving on energy is probably a big component of the decline in total electricity consumption.

Last year, H1 consumption was down 4.6% y-o-y. For 2013, the decline is 14.1%.


06 October 2013

Moody’s foresees GDP contraction of 12% this year and another 6.9% for 2014. A bit too gloomy -but still very likely. Moody’s assumes wealth effect and NPL increase through a 25% write down of government debt, which is mostly held by locals.

Consensus Economics carries a similar picture, according to an MoF (FinMin) report (blue line for 2013; red line is 2014f):

Screen Shot 2013-10-02 at 1.15.35 AM

04 October 2013

More adjustment- we didn’t have solid data until now, but mean receipts for employees (private sector) are now recording a decline for the first time. Unemployment, while painful at 17.3%, is also a sign that businesses have started adjusting. At the same time, we have strong indications that productivity is increasing, especially as employment levels are declining by more than GDP.

Real wages, while declining, might be boosted by the fact that prices are declining- especially on the back of domestic price levels, which seem to be moving into negative territory (noted in an earlier update). For August, overall CPI was 0.1%, while most of the domestic price levels remained negative (or dropping fast).

All in all, mean salaries are both good news (adjustment) and bad news (lower revenues for households and lower consumption).

Salaries shown below are nominal.


02 October 2013

More on expected GDP declines. Given Cyprus’ extreme reliance on imported inputs, the results so far are rather scary. Intermediate goods, Capital Goods and Fuels/Lubricants are all declining massively. We noted before the nearly 10% decline of retail turnover in fuel -a very large amount given that private transport is essentially without alternatives.

Imports of inputs are still declining, which in itself  should be ringing alarm bells about a review of the -5% figure for GDP growth in H1. One of the biggest questions has been restocking. In Consumer goods we don’t see anything of the sort materializing, but more worrying is the restocking in lubricants, intermediate goods etc which is also not happening. The credit crunch is obviously not helping much.

Overall imports are lingering at around -20% almost, which in itself is a leading indicator for more depression coming along. Still expecting that the official -8.7% will be surpassed, despite pretty good figures so far.


30 September 2013

Banks are still deleveraging, but not as fast as they are losing deposits. We’ve commented on the deposit drain slowdown before- it’s partly because there’s simply no cash left for households and businesses to draw from. Interestingly, loans-to-deposits still stand well above 130%. Open Europe is commenting that this translates to long-term dependence on ECB and we agree.

There’s a point to be made about moves (still not materialized) to repair confidence in banks.


27 September 2013

Credit crunch: Bank deleveraging is still underway, as outstanding credits to households and businesses are still being unwound. Total loans outstanding have declined by 6.89% overall in the last 12 mos.

In the domestic economy, outstanding credits to cypriot households have declined by 6.79%. Lending to business has fallen by 3.43% in the last 12 mos. University of Cyprus finds that «more than half of the households» are finding it difficult to make ends meet, while both households and businesses are using up deposits to cover their current financing needs.

We should be expecting this picture to continue as banks are still calling in loans and as both demand for new credit is subdued, and supply of more credit is not forthcoming as banks are extremely illiquid.

cridit crunch Cy

26 September 2013

Labor market adjusting, but slowly. Not a very impressive change, but nonetheless two things appear to be happening. First, part time work is increasing as percentage of total employment, especially when compared on a y-o-y basis (Q2 over Q2, which is the latest). Data is not seasonally adjusted. Second, more of the unemployed are looking for full time work, but can’t find any.

Note the social construct (which should perhaps be discussed a bit more than it is in Cyprus until now) that causes Cypriot female members of the labor force to seek part time work more often than men -thus supplementing incomes and remaining in touch with the labor force without leaving the home.

With more unemployment, people are looking for full employment as household assets and revenues are declining. Overall, some adjustment, but nothing very impressive.

PT work

25 September

More on leverage. Businesses now show a loans-to-deposits ratio of 418%, up from 200% at the beginning of 2011. Although a very rough proxy for  business leverage, it nonetheless shows a clear trend. According to other Central Bank data, loans to Cy businesses are declining slower than deposits, which underlines their liquidity problems and the need for more credits. Note that other assets, and operational revenues are also down, across the board.

The big question is still to which degree they will be able to restock after having destocked for a year and a half. Given the fact that credit is not forthcoming from suppliers abroad, this will be a determining factor for GDP growth, business failure and unemployment levels in the next few weeks.


23 September 2013

Household leverage – household loans-to-deposits are now approaching 100%. After increasing savings in the face of worsening expectations about the crisis, Cypriot households have started making net withdrawals since the beginning of the year- before the banking crisis unwound. Despite their efforts to deleverage, they are becoming increasingly leveraged. Apart from this particular ratio, asset prices are declining, salaries are falling and unemployment is rising.

Households are now unable to hold off consumption and to maintain their balances and it’s becoming clear that they are withdrawing for two reasons- a) to preserve assets in the face of fears of new bail-ins and b) to actually finance running expenses.

Apart from showing how much pressure households are under, the figures also spell a warning about NPLs and the prospects of private consumption.

One other «maybe» is also that the slowdown in bank withdrawals is caused partly by the fact that there is no more money to be withdrawn- deposits are either «locked» (CDs and other time deposits under cap controls) or «committed» (against obligations).


19 September 2013

A lot of ink (and tears) have been shed over the infamous «PIMCO adverse» scenario, which was updated (read corrected) by the later KPMG estimates. Although we’d had lots of leaks, this is the first time, from the IMF report, that we have something quasi-official on what the estimates are and the assumptions on which they were based.

Screen Shot 2013-09-18 at 9.26.41 PM

18 September 2013

Re-exports holding. Re-exports are worth watching as they are a bit of a proxy for shipping. This year so far, total re-exports (turnover) is holding on 9% versus last year for the first half of the year (latest data). The monthly data looks very erratic  with large spikes and dips. This is normal if one looks at lt trends.

Re-exports themselves are not large enough to have a meaningful effect on GDP. However, they are a decent -if rather vague- proxy for the performance and prospects of the Ports Authority, due to soon be privatized.

Overall, as shown in an earlier update, maritime services turnover is up by 15% for H1 (mostly int’l ship-management services). Shipping in general (approx. 5.5% of GDP) seems to be holding up well, judging from all of the indirect data.


17 September 2013

Tourist arrivals didn’t fare too badly, even if compared to the «mediocre» results of 2012. Interestingly, the numbers recorded by Cystat on the main countries of origin show that we should be expecting some dislocation in the markets -more people coming in from non traditional markets. Russia continues to do well, with continued growth, largely driven by the fact that there is now a critical mass of Russians in Cyprus to allow specialized services (Russian stores, Russian-speaking clubs and services, charter flights etc).

Overall arrivals are down by 4% despite some impressive declines from the markets that used to be the main drivers of tourism (especially UK). Tourism spending figures have not yet been announced, but the increase in Russians and the decline of traditional «sun-sea-and-sex» tourists are an indication that tourism receipts should be better than the -4% of arrivals, and perhaps even in positive territory.

JCC (card processing) figures for Η1 also show an increase in credit/debit card spending from foreigners (cards issued overseas).


16 September 2013

Economy already adjusting (?)

Domestically produced prices are in decline in many categories (Food and Beverages, Health and Leisure). Although tourism figures remain positive, they are probably buoyed by better-than-expected results this summer. Note that Health and Education were two of the main drivers of inflation in previous quarters and are both declining, even though Education is still positive.

Tobacco and Alcohol is also holding overall CPI in positive area as it records continued inflationary pressures. In August (not in chart), it reached 10%. This is partly driven by increased demand (approx. 8% increase in turnover) which is normal for inferior goods, as well as by tax hikes.

Telecoms remains steady after a rapid decline in March, while Transport inflation rates have declined significantly from a high of 4.8% in February and 2.5% in June.

Wage indications paint a similar picture.

This is good news that might signify a faster than expected adjustment of the economy. However, we maintain our own assumption that GDP will decline by double digits, above the 8.7% assumed by Troika.

CPI August 2013

11 September 2013

Who’s picking up and leaving?

Eurozone Households are registering the biggest comparative withdrawal rate from Cypriot banks. Eurozone businesses (nonMFIs) have picked up about half of their deposits in the last 12 months (to July).

Third country businesses (nonMFIs) are also reducing their outstanding balances, although this marks part of the BoC and Laiki bail-in.

Apart from confidence collapsing, all of this is also showing disintermediation as Cypriots are also reducing balances. Apart from the obvious implications for the financial system, Cy household and business leverage is increasing.

deposit changeJuly13

08 September 2013

Glimmer of hope? Imports, an important indicator of GDP growth are increasing again. Still too early for this to be anything more than a «glimmer» of hope, but it seems that the continued decline is stopping. We don’t have the data to determine if intermediate goods and other inputs are leading the way. However, with destocking reaching its limit, the main concern has been that restocking would be hampered by the credit crunch. It seems that this is still happening, but not as badly as was expected.

Total imports for Jan-July are still -19.3% and July was -15% y-o-y. These are significant declines. Obviously, this is not enough to reverse GDP trends, but the recession might be a bit smaller than the 12%-13% we’ve been fearing and closer to the 8.7% that Troika expects. A breakdown of these imports will be important, as will the September results, when businesses typically restock after the Summer.


05 September 2013

Unemployment still increasing, reaching 17.3%. August was particularly bad. Most worrying is the increase in U among hotels, restaurants etc. Although August figures are still not out, and July arrivals were down, we can assume that turnover will be lower for this summer. Other figures are pretty bad, but as expected. We expect newcomers to increase in Sept. as people graduate and start looking for jobs, although this number is grossly understated because newcomers have no benefits and hence don’t register.

Retail seems to be adjusting the fastest, while construction continues to linger around the 30% mark in everything: Building permits, sales recorded, employment, unemployment increase, concrete sales etc.

Overall, there are reasons to assume that U is flattening out and that the increase in unemployment is slowing down. Perhaps we won’t spike too far above the 20% mark…


04 September 2013

Exports are finding it more difficult than is generally assumed to pick up the slack in the economy. Although overall exports are up y-o-y, the «April spike» distorts the picture. This was a single transaction: A sale of two aircraft worth 67million, weighing 84.2 tons (total), to a buyer in the UK. No other information is available except that the seller has no flying license in Cyprus -probably it’s a brass plate selling off assets that get recorded in Cyprus.

Otherwise, potatoes, halloumi (local cheese) and pharma are recording impressive export growth (pharma at 46%, and constantly growing for a couple of years). PV panels dropped 95%, probably showing that the stock is exhausted and can’t be built up again.

It would be important to track re-exports, though. Soon, we shall…


03 September 2013

Services, until Q1 the most robust category in GDP, is beginning to record declines in turnover. Interestingly, market research and advertising is up by 1.3% despite overall declines in retail. This might be reflecting the positioning war among retailers, especially «specialized stores» selling food, tobacco and beverages (i.e. supermarkets). Architecture, engineering etc obviously reflect construction declines.

Anecdotal evidence (which matters if the economy is the size of Cyprus) doesn’t quite jibe with the decline in legal and accounting services’ decline as this category «feels» more robust out in the market. Then again, they may be overstating their condition so word won’t get out about the pressure they’re under.

Services turnover H113

02 September 2013

Rescued by shipping. Some scary declines in transport turnover for Q1. Mail and courier declining by 12% probably shows declining e-commerce and other activities, but more data needed. Warehousing and other auxiliary services is also probably a good proxy for wider economic activity. The good news, though, is that shipping is holding on as expected -and it’s continuing to grow. Overall decline held at -1.8% thanks to shipping.

tranport 2013H1

31 August 2013

Internal Revenue Department receipts (Cyprus) have been looking a little troubled. Note the blazing drop of revenues from direct taxes to the Self Employed. The decline can’t be attributed to delayed payments, shifting deadlines etc- it’s mainly from failing SMEs. Capital Gains tax is also worrying. These -plus consumption data- worsen expectations about GDP growth come September -and make VAT results (up by a hair’s breadth, y-o-y in July) even more puzzling.

Screen Shot 2013-08-31 at 12.02.50 AM

30. August.2013

FinMin’s spending cuts for 2014 and over the three year horizon for the Program Period. Brave cuts, if you can get them through cabinet.

budget 2014

28. August.2013

Another point on loan restructuring. Long before its resolution (merger of what was left with BoC), Laiki shows something strange: A spike (10%, or 800m) on outstanding «credits» in May 2012, right after the bank was bailed out (long before the bail-in).


35% of all corporate and SME loans have already been «modified» (read restructured). So any more of the same needs to be careful. Restructuring is supposed to preserve value, not cook the books.

Screen Shot 2013-08-28 at 8.37.24 PM


  1. You comment:
    «According to other Central Bank data, loans to Cy businesses are declining slower than deposits, which underlines their liquidity problems and the need for more credits.»

    Deposits in CY historically a short term instrument ==10y for corporates / >=20y for individuals.

    Thus the slower rate of decline of loans vs. deposits is understandable.

  2. Under normal conditions, yes. But we are looking at a correction here. Credits-to-deposits from the banks’ point of view remain well above 100% and ECB assistance, rather than a tool for fine tuning, has become the main instrument of financing for the banks. This means they will continue to deleverage and that interest rates will continue to take a lot of pressure.
    I agree on the general comment, but the current circumstances -and the rapid deleveraging- need, I think, some special attention. Thanks for the comment.


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