Banking in Cyprus: Greek transmission

Your correspondent spoke at a corporate finance conference in Nicosia today, where much of the talk was about Tuesday’s downgrade of Cyprus by Standard & Poor’s. The ratings agency cited Cypriot banks’ exposure to souring Greek debt as an important factor in its decision. The country’s large banking sector—assets are worth nearly 700% of GDP—came in for criticism by corporate executives at the event, but not necessarily for the prominence the banks received in S&P’s statement.

Stubbornly high interest rates on bank loans are irking corporate borrowers; they pay similar rates today as in early 2008, despite the steep fall in benchmark euro area interest rates over this period. Bankers argue that this is because their funding costs are much higher than elsewhere in the euro area, as they compete for deposits with liquidity-hungry Greek banks and a sprawling co-operative sector that offers high rates for political, rather than economic, reasons. What’s more, one banker said, many of the loan applications he sees are related to restructuring instead of growth, and taking on “other banks’ problems” doesn’t appeal. With heavy exposure to Greece’s teetering economy, Cypriot banks have plenty of scope for problem-solving within their existing loan portfolios for some time to come.