Crisis shows need to right imbalances: Bernanke

THE Hellenic Bank yesterday proposed ways of boosting liquidity and injecting life into a slowing economy, after the government twice revised growth predictions downwards for 2009.

At the same time, bankers were keen to stress that Cyprus was not in the throes of an economic crisis, and that the island had largely come out unscathed from the global credit squeeze.

“The global crunch is a structural problem… Cyprus has largely been spared the consequences thanks to its regimented banking system,” said Hellenic Bank CEO Makis Keravnos.

The financial system may not be in the red yet, and no bailout plan is necessary as has been in several European countries, but there are a number of steps to be taken to get the cash flowing again, said Keravnos.

“We do not have an immediate liquidity problem,” he added, explaining that the problem lay in raising extra cash from this point on.

The issuing of long-term government bonds (three to five years), leasing, and enabling customers to transfer mortgages from one bank to another, are some of the bank’s suggestions.

Keravnos said Cypriot banks have weathered the storm sweeping across European markets due to the fact they do not engage in substantial inter-bank lending.

However, there is a downside to this. When the European Central Bank slashed its reference interest rate, Euribor (Euro Interbank Offered Rated), which is based on the average interest rates at which a panel of more than 50 European Banks borrow funds from one another, is higher.

The ECB interest rate and the euribor are usually very close, but due to the financial crisis, the latter is much higher than the former. Commercial banks are being forced to increase their interest rate margins in an effort to cope with the current scarce liquidity conditions on the financial markets.

“When [President of the European Central Bank Jean-Claude] Trichet cuts the ECB reference rate, this automatically has a negative impact on Cypriot banks, shrinking their profits, whereas the same is not true for other European banks,” said Keravnos.

The bottom line, explained Andreas Papadopoulos, head of strategic growth for Hellenic, was that Cypriot commercial banks had little room for manoeuvre – they rely mainly on local deposits. But to attract deposits, they have to offer higher interest rates on these, forcing them at the same time to up the cost of lending as profit margins have to be maintained.

Defending commercial banks against criticism that they are not cutting consumers any slack with their high interest rates, Papadopoulos said what most people failed to realise was that banks had little choice.

“At the moment, if you go to a Hellenic branch, they will offer you a 6.5 per cent rate for your deposit, and if you want to take out a housing loan, again the borrowing rate is the same, 6.5 per cent

“Normally, that makes no business sense for a bank [since there is no profit], but nevertheless we decided to keep it this way because we wanted to help consumers, and the economy at large,” said Papadopoulos.

By Elias Hazou, Cyprus Mail, January 15, 2009|||Banks have no choice on high lending rates
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