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Cyprus Problem: Truth About Devastated Cypriot Economy Exposed

Well, well, well – having lived in Cyprus for many years and having had exposure to the less than ideal realities of a nation that attempts to pride itself on its welcoming and honest reputation, it’s truly refreshing to see that the real truth about the Republic of Cyprus is finally beginning to emerge for all to see.

Cyprus’s most popular export ever has been its positive propaganda; but unfortunately the island’s own people and government began to believe the hype and ‘accept’ that the nation was immune to the likes of global economic, political and even legal realities.  So much so that Cyprus believed its property bubble could never burst, its tourism industry would never shrivel, and its business environment could continue to prosper unhindered by the forces of reality.

But, with the news that all the world’s leading credit agencies have once again cut Cyprus’s credit rating as a result of its exposure to Greek debt and its unwillingness and inability to adapt to cut its high deficit, it’s time to peel back the layers and examine the controversy!  Until now no one has dared discuss the truth about Cyprus, because the power and weight of the propaganda machine outshouted any voice of criticism…but things are beginning to change.

What’s Wrong with Cyprus?

As stated above, all the leading credit agencies have slashed Cyprus’s credit rating.  Standard and Poors dropped it to BBB on the 27th of October, citing among other things the island nation’s exposure to Greek sovereign debt as cause for concern.

Cypriot banks have an estimated exposure to Greek sovereign debt of 4.2 billion euro according to the FinancialMirror.com – half of which will most likely be written off.  S & P stated that they believe some domestic banks in Cyprus will require ‘recapitalization’ following such a move.

But the problem for Cyprus can’t just be blamed on the nation’s banks’ exposure to Greek debt…there are far greater problems that need addressing much closer to home!

The nation’s deficit is expanding and edging Cyprus towards a requirement for EU funded financial assistance (i.e., a bailout).

It’s already secured a bailout in the form of a ‘loan agreement’ with Russia, to the tune of 2.5 billion euro – but that’s only expected to help Cyprus limp on into 2012 before it requires greater and more decisive action.  What’s more, by getting even further into bed with Russia, Cyprus is potentially setting itself up for an even greater fall at an indefinite point in the future when Russia decides to call in its favour.

Talk about jumping out of the frying pan and into the fire!  I mean, don’t you have to be desperate to sell out to the Russians who aren’t exactly famed for their benevolent treatment of those who remain in their debt…things could therefore get extremely ugly for Cyprus in the near-term.

In terms of what else is wrong with Cyprus – well, there’s the tourism industry that’s very tired and lacking from any form of significant or meaningful investment.  It’s also a sector of the economy that has suffered a great deal because Cyprus has become known as a rip off destination.

In these unprecedentedly difficult economic times, hard-up holidaymakers want to ensure their sunshine currency goes a lot further.  They have therefore been put off by Cyprus where it’s well documented that you will be overcharged at every turn.

But perhaps of even greater significance in terms of Cyprus’s lack of economic fortunes is the failure of its property industry…

The Great Cyprus Property Scandal – Worse Than Anything We’ve Seen in Spain

Swathes of column inches in publications worldwide were dedicated to exposing the Spanish property scandal, which dogged unsuspecting buyers and catastrophically undermined this entire segment of one nation’s economy.  However, the truth about the property market in Cyprus is worse – far, far worse.

In Spain the scandal resulted from unlicensed and illegal construction work, and the corruption crawled up the governmental chain like poisoned ivy, clinging ever more securely to the government structure.  In Cyprus however, the problem goes even deeper and is far more disturbing and far-reaching…not to mention economically disastrous.

An absolutely brilliant article in CyprusPropertyNews.com by Wolf Richter completely exposes the nature of the beast.  It’s well worth reading in full – but to summarise its key points…basically the Cypriot property market has been built on so many layers of corruption, it makes Spain’s wrong doings appear veritably amateur and harmless by comparison.

According to Richter’s analysis this is how the corruption cesspit has manifested itself and allegedly affected an estimated 130,000 purchasers: –

  1. Buyers have bought property in Cyprus using the assistance of allegedly corrupt lawyers who have been in the pockets of the developers selling the properties
  2. The developers and banks have worked together to continue to extend the Cypriot property market – basing no single lending decision on any consideration of sustainability or reality
  3. The local business culture in Cyprus is one where extended family bonds exist and will always dominate, and where any outsider is fair prey – i.e., where it’s a case of ‘us’ (Cypriots) against ‘them’ (anyone else)
  4. Whilst prices of properties have been falling sharply in Cyprus for the past six consecutive quarters, banks are forcing estate agents and valuers to talk up the market so that the loans they have extended for construction and development continue to look realistic
  5. This is done in a bid to hide the true extent of the banks’ bad loan debt, to hide the true nature of the near bankrupt property economy in Cyprus, and to once again advance the positive propaganda internationally
  6. In terms of the bad loans that the banks have been responsible for signing off for developers, these have been secured on parcels of land that unsuspecting foreign buyers believe they have bought un-mortgaged…
  7. Which leads us neatly back to point 1.  When a buyer purchases property in Cyprus they ask a lawyer to do searches on the land and property to ensure clear title.  The allegedly corrupt lawyers who are in the pay of the developers do no such searches, instead assuring buyers they are purchasing clear title to their new home…
  8. The loan the developer has with the bank to buy the land on which the foreign buyer believes his home will be built is secured with the title deeds – which the buyer believes he will receive, but which in reality remain the legal property of the bank
  9. The developer pockets all the buyer’s money, continues to service the mortgage (or not, as the case may be) and the buyer never gets their title deeds and pays a fortune for something they can never own and never did truly own in the first place
  10. The banks either receive mortgage repayments from the developer – or increasingly they don’t.  They can then foreclose on the land and take the land and property out from underneath the unsuspecting foreign buyer.  However, this process takes an estimated 10 – 12 years, so the entire situation is a ticking time bomb that, together with the true extent of the bad debts the banks have extended to the developers in Cyprus, will only become evident given a little more time.

According to Wolf Richter’s calculations, this property scandal will prove far more costly to Cyprus, (on all levels), than having to swallow Greek’s sovereign debt write off.

Whilst an estimated half of the 4.2 billion euro debt exposure is expected to be written off by Cyprus and result in some of its banks requiring recapitalisation, the cost of the property scandal is likely to be between 3 and 6 billion euro – that’s potentially enough to snuff out the entire banking sector!

The owners of circa 130,000 properties are without their title deeds – assuming an average property value of 150,000 euro per property, that’s 20 billion euro worth of disputed property – some of which may have more than one mortgage and more than one owner too – thanks to some developers allegedly remortgaging and also reselling unconstructed property units to more than one unsuspecting buyer.

Naturally enough the banks are absolutely categorically denying the issue even exists – because they created it.

They are also refusing to readjust the true value of the bad loans they have extended to now bankrupt or struggling developers.  Expatriate property buyers have no more money, and no more money is being invested in Cyprus because the global economy cannot currently sustain a second homes market anywhere!

As the property buyers fight for their title deeds, more and more are discovering that the banks own the land on which their home is built and that the date of foreclosure will become a reality.  According to Wolf Richter: “Estimates of the missing money range from EUR 3 to EUR 6 billion—enough to take down all Cypriot banks.”

What is Being Done About the New Cyprus Problem?

Whilst the IMF has demanded a “strong and immediate policy response” from the Cypriot government to address its precarious economic position, beyond the huff and puff of positive propaganda there is actually little substance in terms of what is being done to save Cyprus.

The government wanted to push up VAT to plug a bit of the deficit shaped hole, but after the coalition began to crumble and great public antipathy towards such a plan became vociferously evident, the plan fell by the wayside.

Top rate tax has been hiked by 5% however – and there’s been a culling of over 1,000 empty civil service posts (which of course doesn’t actually save any money, it just saves some money that hasn’t been spent from being spent…)

Elsewhere public sector workers are having entry-level salaries slashed, (although surely it would make more sense to slash the salaries of those on higher grades as the savings would be proportionately larger, and theoretically affect those more able to afford the cut in relative terms – no?)

And finally, the Special Defence Contribution charge on dividends has increased from 15% to 17% and all but dormant or non-asset holding companies will have to pay an annual fixed duty of 350 euro to the Registrar of Companies going forward…measures hardly likely to stem the outflow of bad debt Cyprus is silently drowning in.

The Future’s Anything But Bright

Nations like the US and the UK have exceptional and ingrained issues to overcome before they can ever return to true strength – and it’s anyone’s guess how many generations will be wasted before such countries can recover from their dearth of hope.

But a country like Cyprus has issues that go way beyond the requirement of practical restructuring measures and cuts…

Basically the entire nation needs to change what is clearly an endemic culture of corruption that’s absolutely accepted and expected.  It’s considered acceptable behaviour by every level of society – it’s not seen as something harmful.

Therefore, until every last fragment of the economy unravels and Cypriots are left staring into an abyss that only they can be blamed for creating, the island will continue to hurtle forwards at breakneck speed – in absolute denial – towards implosion…all the while blowing hot air up their propaganda trumpet and fooling a fortunately dwindling supply of unsuspecting foreign investors and buyers into believing that everything’s rosy on Aphrodite’s island.

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