Could we start with a brief assessment of the Cyprus banking sector?
The Cyprus banking sector is still in recovery. To understand the Cyprus banking system and sector, you have to understand what happened to it. In March 2013, after a year of political toing and froing around the country’s issues, the banking sector suffered what could only be described as a massive cardiac arrest. One institution was allowed to go bust: Cyprus Popular Bank. All deposits over one hundred thousand were lost. Everything that was uninsured in terms of deposits was lost. The Bank of Cyprus was then combined with Laiki Bank and its Greek operations were sold off to Piraeus. Capital controls were put in place, and 47.5 percent of all deposits above one hundred thousand were bailed into the equity of the bank. The previous equity holders and bondholders were wiped out. The country was told to get on with its life. The issue there really was the removal of confidence. The banking sector had the one thing that causes a banking system to work removed—confidence. Capital controls were essential to creating the conditions both domestically and internationally in which confidence could be rebuilt. You have a broken banking system going into a recovery period. The banks were in resolution. The bank through a change of management and a few different boards. We had two branch networks that were incompatible with the technology that had to be deployed, we had too many staff, etc. You had a very dislocated banking system. You had a customer base that fundamentally had an issue with the banking system because they as individuals had paid the price. That is where we started. Two years later, we have no capital controls in place, we have growing deposits, we have a stability of mood, albeit lingering anger from various groups as you might expect in an economy that has suffered so much, and we also have the beginnings of economic recovery,. We have the start of the return of horizontal confidence in Cyprus. We have a growing local deposit base. We are seeing stabilization and slight improvement in the nonperforming statistics. We of course are talking about the future as a country that is in recovery. The banking system is recapitalized, is stable, still has the issue of nonperforming loans. That is really important—we are going to solve that next. All of the other aspects of the economy in the banking sector are sitting positive. There is reducing reliance on ELA, the emergency liquidity assistance funding that was in place.
At its height in April 2013, ELA was 11.4 billion. We have that down now to 5.6 billion. We all talk in big numbers now, but Cyprus is an economy that is only 15 billion GDP. We have been deleveraging our balance sheet by 1 billion each quarter. Six percent of GDP every quarter. You can only do that for so long, but that is the nature of the problem. It is a small island, it is an open economy, and it has recovered very quickly, but it has recovered because we acted on it very specifically. I think the prospects for the industry are good, but there are still significant dangers we need to keep combating in a very deliberate, aggressive, straightforward way. Banking is about restoring confidence. Banking is about creating horizontal confidence. It is about allowing people to borrow from their own future earnings stream to acquire things now, consuming houses and cars now and pay for it later. It only works if depositors trust you with their money and allow you to lend it to others to borrow. We have also reversed a lot of managerial strategies tourism of the past. Company tourism. We had businesses in the Ukraine and Russia. We had businesses in Romania and Serbia. These were not sensible expansions of the bank’s base from Cyprus and we have reversed all of that. The last big one we sold was Russia. Uniastrum. We have agreed to sell Uniastrum. We have signed it and are now just completing it. We sold Ukraine—that is done, gone. We sold off pieces of our Romanian exposure. We will get it all down. We have sold off investments like hedge funds we should not have been investing in. We sold them off. We sold off surplus loan book in the UK. We got rid of our largest single nonperforming loan exposure in Serbia. Now we are back in Cyprus, fundamentally focusing on the Cypriot economy and our dominant position in it, lending and being there for the Cyprus population. Also for those who come to Cyprus for what Cyprus offers for a business destination in terms of offshore wealth preservation and that sort of thing.
n terms of an offshore center as Cyprus used to be, are you still getting a lot of that FDI [foreign direct investment]?
It is not really FDI. It is about managing the company structures through what Cyprus offers in terms of connectivity into the tax treaties around the world. Cyprus has a sensible corporation tax rate, which competes with Ireland. It has the highest rate of all the OECD nations of a university-educated workforce. It is an English-speaking nation, as well as a Greek-speaking nation, so it has an enormous amount to offer in terms of being able to manage non-Cypriot wealth. A lot of trading companies base themselves out of here and they capitalize on the corporation structures and the ability to have a business in Cyprus that works better internationally than in other international hosts. That is important, to build on that. The economy has probably been excessively focused on one or two jurisdictions, but what Cyprus offers is equivalent to what Ireland offers, equivalent to what other countries offer, including the Netherlands. But we have not really used it properly to grow the country’s reputation as a destination for investment.
I guess you are quite used to efficiency in business. Being a foreigner coming to take over a bank almost in its collapse in Cyprus…
The Cypriot nation was spoiled by its economic success in joining the euro. As part of that, coupled with a political system that had large elements of embedded communism practice—a real melting pot of influences—over the years Cyprus has lost some of its competitive edge. If you review some of the productivity measures and various things over the years, you can see that happen as you look back on the statistics. Hindsight is a wonderful thing. The Troika reforms that are getting put in place are restoring some of that competitive edge. But we must not waste the crisis. We must continue to reform and make this economy nimble. Cyprus competes not just for money in Cyprus; it competes for investment on the world stage. When there is gap between your deposits and your loans and your banking system of 14 billion—almost 100 percent of GDP—you need to figure out how you are going to credit-fund the economy as it grows. You need to become an attractive investment destination for foreign money. That is something I am shouting about a lot these days. As we pass new legislation in Cyprus about the transfer of loans or foreclosures, we must not miss the point that this is about creating an environment where international investors will be putting their money to advantage and create wealth in Cyprus, not so they can come and take things from Cyprus. Cyprus needs FDI. It needs other people’s money to reestablish itself into a growth mode while it then creates an industry and the capacity to grow prosperity. Later that can be made even better by the Leviathan basin discoveries and the hydrocarbon agenda. Today, we need to make this a very attractive destination for international investors so they can create employment and wealth in Cyprus for Cypriots. I think they are not efficient at the moment.
What should be done?
When you sit in the privilege of the banking seat in any country and you run a systemic bank, you are as interested in the macro picture as a government. Actually, we care about the Cyprus economy. We bank the economy. Seventy percent of corporations in Cyprus bank with us. Half of the country’s balance sheet is on ours. The stochastic performance of the country manifests itself in a levered way through our bank. I care fundamentally. I am an economist by training, then an accountant, then a banker. I care a lot about the economy. When I look at the economy, I see a series of vertical industries that need to be written up in a plan with greater ambition and a lot of effort put behind them. If you take the tourist sector, Cyprus does not have enough people coming to it. The tourist season is too short. We should widen the tourist season. Government policy is currently directed at subsidizing the closure of an industry in the winter months rather than the opening of an industry in the winter. The basics of economics tell you that multiplier effects on private capital are much better than multiplier effects on government capital, particularly if government capital is being deployed to subsidize the closure of an industry. Take tourism, medical, convalescence, universities, and education: the downstream industries that will be created by the extraction of hydrocarbons that will change the cost of electricity. We must work on each of these at the same time.
You can disaggregate the economy into its verticals. Which ones are we going to back? How are we going to articulate the strategy for the next five to ten years? What does that mean in terms of legislation? In terms of reducing red tape? In terms of tax incentives? In terms of educational employment plans? You write it all up, you get the whole country behind it and you say you have a plan for Cyprus 2020, 2025. Let’s not just plan to grow GDP by 5 or 10 percent. Let’s double it. The GDP per head in Cyprus for an economy of this shape and size is too low. If you look at tourism again as an example, there is a permanent population in Cyprus of eight hundred thousand people, ignoring the peace dividend that could occur by the combination of the two pieces of the island. If you look at Crete, it has 1.5 million more tourists than Cyprus. If you look at Majorca, which is a little unfair because it is closer to continental landmass, it has eleven million tourists for a permanent population the same size as Cyprus. Cyprus has not grown its tourism at all in the span of the last decade. That is not correct. We should be looking at the plan and asking how we can get private enterprise to back us to create better infrastructure for a longer tourist season. They are very simple things. They are about conviction and action and deliberate desegregation of the economy to create a clear vision so people can get behind it. One of the things I say in Cyprus is that everyone knows what to do, but collectively there is an eerie silence. We need to stop this. We need to get behind a big plan and be really ambitious for the nation. I think it is utterly deliverable. I believe the rest of the world is unsustainably over-borrowed. There are very few countries across the world that can grow their way out of their troubles. Cyprus can absolutely grow its way out. It just needs to get a plan and get behind it. I think the government has done an excellent job in delivering Cyprus from a really dangerous place to somewhere people believe can once again be a prosperous economy.
In terms of the bank, you said it sold off all these assets in all these other countries. What is the next step?
It is a very straightforward plan—make it simple. When we have deployed capital and liquidity overseas to places where we have no competitive advantage, it should be a step to repatriate that capital liquidity back to a place where you have a competitive advantage. In Cyprus, we have a competitive advantage. We have been shrinking the bank to strength; that is the phrase we use, very deliberately, because we need to make sure our core market and our core customers have confidence that the bank is focused on what it can do and is good at. That journey continues. We still have to repay a further 5billion or so of ELA and restore our liability stack. We have to change our loan-to-deposit ratio back toward that gold standard of 100 percent. We still have to continue to build our funding stack. We have to issue wholesale debt. We have to make sure that confidence is restored here. That is the first thing. That journey is still on. We have to lend into an economy that has started to recover. We have to deliberately do that. We will do that. We also have to make sure we get our stock price back to a place that says it is worth the equity in the bank. That journey is still ongoing.
We will not discuss the next corporate finance options and how we might grow until we have restored the bank to that. As part of that, we are looking at where we are listed. The board has not made a decision on exactly where, but my advice to the board is that we should be looking at a FTSE 250 London listing. This bank has 3.5 billion of equity in it. The exchange here has almost no liquidity. The exchange in Athens has neither liquidity nor purpose. We need to de-Greek the stock, and we need to find a more index-driven exchange where a bank of this size can be more valuable to a series of investors. We have changed the governance of the bank. We have a fabulous board. We have changed the strategy of the bank to be really clear. We have been making progress in all the metrics. We need to make a little more progress in the nonperforming loan side of the bank. Then it should be obvious to any investor that this stock is well worth investing in. As that realization occurs, that will be a good moment for us to have put in place everything necessary to move the listing to a more index-driven place. It is not about raising more money. It is about having a better venue to host it. Of course, we will need to think about a secondary here in Cyprus, but we need to be sure that is the right thing to do for our shareholders. The Cyprus stock exchange is nascent. It does not have any liquidity. We need to figure how to make it more relevant. Maybe it should be hosting instruments rather than companies. Maybe it should not be focused on what it is focused on.
There was the possibility of a privatization of the stock exchange as well.
That makes total sense. The government should not own a stock exchange. The government should not own anything commercial, in my opinion.
When we spoke to Michalis Persianis, he said that the Bank of Cyprus now is almost a Wall Street–governed and managed bank.
It is more than that—it carries the same governance requirements in the way we run it as a premium London listing. We are absolutely of the governance structure that would fit in either a Wall Street or a London environment. That is the standard of transparency and management we have to have if we are going to restore confidence in the banking system. This is not an accident. Everything I have looked at has been about raising standards. Ensuring to U.S. Patriot Act standards by how we look at our customers and engage with them and how we clear into U.S. dollars. We have New York and London Stock Exchange–level governance in terms of how we run our board and its committees. We have the highest standards of disaster recovery, technology, everything. That is how you should run a bank. These things individually might not mean much, but collectively they restore the fabric and strength of the institution over time. We still have to finish the journey we are on before we talk about what is next. This bank by the end of the year will be in a much better position in terms of how it is funded, how its risk is organized. It will be prepared to take on the next chapter. I will not be here to do it because I have completed chapter one. But I think the bank is dramatically better and will be able to support a recovery in the Cypriot economy.
That is one of the most important things a bank can do—to ensure the reputation of the country as exhibited by the brand carrier. That is what we are trying to do.
What about you personally? Where next for you?
I have some incoming calls, but nothing that is in a serious stage of discussion. I think it is important for me to finish this, to declare that I am out and then we will find out what is next for me. I do not mind if I have some time off. All jobs have the degree of difficulty, and if they don’t, you need to find the degree of difficulty. Keeping a company competitive and alive is about changing it always. The banking industry itself is going through a massive change. The industry is at a digital crossroads. It is protected by regulation. We moan and complain about all the regulation all around us, but that itself is a competitive barrier for others to enter. As those more digitally savvy and capable competitors come along, the banks will have to metamorphose to compete against those digitals. That is a big challenge. We have a whole lot of work going in the whole IT space. We have to think about being competitive. We have to make sure we can compete against the new guys, not just the old guys, which is why we need labor-law reform, a whole load of more nimble stuff around the banking industry in Cyprus if it is to have an international competitive edge.
We have also heard there is no credit-rating agency here to find out who owes what to which banks. There is no unified system for that.
The Central Bank has been gathering a lot of the information. Arguably, we already have that information inside. Seventy-eight percent of adults in Cyprus bank with us. We know their data. They have an active account with us. We have effectively a FICO engine inside our bank already, which we are probably not using fully or properly. We have the data from two banks now.
This was actually a blessing in disguise, to have inherited…
I would not say that. We inherited some very angry customers. They were not self-selecting into our bank. The consolidation happened at the time in their lives when they were most offended by what had occurred. There is probably an element of a blessing, but it is a small one. The majority was a very angry bunch of people who put their money in the bank having earned it over their lifetime and a lot of them lost it or their provident fund was clipped. These were psychologically scarring experiences for those people. It will take a long time for them to get back to trusting the institution and the state. The only bail-in in the whole of Europe occurred in Cyprus. Even after Cyprus’s bail-in, a bank such as Banco Espírito Santo in Portugal, which had the Angolan crisis—it was not bailed in, it was bailed out. There is a feeling in the country that Cyprus has been experimented upon by the EU and the institutions they are now known as. It was a small enough Petri dish, so that if it went wrong, it would not contaminate the rest of Europe. But if it went right, it could be pointed out as a poster child for future legislation.
People feel aggrieved about that. I understand why. A small country like Cyprus joins the EU for the protection the federation should offer it, and the outcome at the first sign of trouble is disproportionate to what they might have expected from the friendship circle they joined. That is something that will irritate people for some time. I am a realist. To me, you find the issues and you fix them. You do not sit there and complain about what happened. That does not solve anything. That just makes people annoyed with you for not getting on with it. It is a little bit about Greece. If you look at what happened in Greece, it was beginning to get its troubles sorted when the people lost patience and basically went to the extremes of politics, and now we have a much worse situation than we had before. Greece will be recovering for a long time because its competitiveness is destroyed. I cannot see, in my off-the-record remark—Greece cannot be a long-term member of the euro because it has no competitive advantage. On the record, we hope Greece does very well. Cyprus is so not Greece. Another thing Cyprus needs to do is ensure the third-level institutions only lecture in English. They should not lecture in Greek. You can find your small, open economic island with an advantage of speaking English to the wrong space to compete in if you do your third-level education in Greek. That is not to disrespect Greece; that is just the way the world is.
The Cypriots feel connected to Greece.
But in the real world, where people live and eat and compete, you have to recognize where your advantages are. Cyprus’s advantage is its colonial heritage. Ireland is the same. We have a highly educated, English-speaking workforce that is capable of competing with a number of other smaller, open-market jurisdictions, and you should use that advantage. You should not celebrate the thing that disadvantages you. The association between Cyprus and Greece over fifty years has disadvantaged Cyprus. A union is a great idea culturally and linguistically, but you do not want to be economically combined with the mess that is Greece.
That was one of the main reasons the banks were overexposed to Greek debt. Why were they invested in any other markets?
Again, it is hindsight. There was a good yield of Greek government bonds. There was an expectation they would not default. There was an expectation that they would always be valuable and it turned out to be catastrophically wrong. The association between Greece and Cyprus—I understand it. I understand the rationale for us having a large branch network in Greece. Linguistically and culturally, it was a good combination. In reality, the law in Greece was dreadful and the economic prospects were not positive. Cyprus associated itself excessively with its cultural and linguistic motherland. I understand that, but let’s learn from it—let’s stay culturally and linguistically associated but let’s economically divorce.
They are doing it right now.
We must do it. Cyprus is fundamentally capable of surviving and prospering on its own. It does not mean you have disrespected the history of Greece. It means you have grown up. It is an adult move for Cyprus to suggest it is entirely different from Greece.
They have a different mentality here. I used to work in Greece. You see that too.
Yes, but I deal in the inconvenience of the truth.
I see the process of commonwealth influence here.
I believe that countries should have their own self-determination and that they should be able to stand tall in the associations they are in. Cyprus needs to recover that composure. I do think the minister of finance and the president and the government generally have done a superb job of recovering Cyprus’s reputation in the international community. It has been hampered by a parliament that has not engaged in the national interest but in petty parochial politics repeatedly. Let’s hope they do not do that as we continue to create the conditions for recovery. There is a significant risk of it as we head into an election year in 2016. It is really important that we change the debate. Let’s talk about the future of the country. Let’s look at the country through the eyes of our children and see if we are creating a more prosperous country or a less prosperous country. We, the nation, have spent our unborn grandkids’ money by borrowing too much and consuming it in the infrastructure of the countries we have created. We have not created an annuity earnings stream capable of repaying that debt. We have made them poor. We have an obligation to figure out a way of reversing that. We should not be creating conditions where the coming generations are poorer than we are. That is not progress. That is the reverse.
When we talk to normal people, they are used to fancy lives. The lower-middleclass used to live a high-end life compared to other European countries. They do not understand they have to lower their lifestyle.
This is debt. They do understand it, they just do not want to. I understand that. It is like the differences in benefit systems around Europe. If you are used to receiving more money for not working than you would receive if you went out and worked, the natural tendency is not to work. If you are able to borrow a lot of money and buy things and life seems good, and everything seems only to go up in value, you grow used to it. Look at what happened in Ireland. Now, people have to realize the reality of their circumstances. The country is poorer today than it was a few years ago. Probably poorer today than it has been for some time. It is just that nobody noticed. Debt has to be repaid. The moral issue for Cyprus is that the depositors paid the price of overleveraging, not the borrowers. It should be an absolute societal ill for borrowers not to repay their debts, which is why the nonperforming loan thing has to become unacceptable.
We have laws that have just been put in place that will help us create the conditions for that to start to come down. Economic prosperity will reflate earnings. Everyone in Cyprus, on average, lost something like 12percent of their earnings, which meant their leverage statistics went up, not down, during the crisis. Unemployment spiked into the mid-teens, and that is not a good place for the country to be. It is reparable with focus. It is a small island. We brought a billion Euros of equity into the bank. That is 6percent of GDP. That is the largest investment in Cyprus since 1960 and the founding of the state. But we need lots more of that. We will not create lots more of that unless we absolutely embrace the world and our parliament stops worrying about Turks coming to buy stuff. This is one of the silly discussions that goes on in Cyprus. It is politics messing with the country’s reputation and its prospects. We need to stop it. No funds are circling Cyprus with the desire to take the assets of the people. This is nonsense. Investors are looking for returns. They are held to the standards of the people who run them to find returns. Cyprus is competing for that investment with the rest of the world. I have not met a single investor who has strategically decided to buy anything in or around us to advantage themselves on a nationalistic basis. It is utter xenophobic nonsense. It is about politics. Our politicians need to recognize that their job is to create a better society, not just to get reelected. The serious media and the serious media in society need to insist on the right debate. This is one of the things I have been shouting about. It is really important. We will lose the debate if by the end of the year we have not changed the discussion in the media in Cyprus, and among the serious people in Cyprus. The peace dividend that may emerge from the combination of the north and south will be a fabulous boon to the economy and great way to reenergize maritime tourism, the building trade, all kinds of things. But it will not happen unless we are serious about concluding the discussions. One of the great things about Cypriots is that they talk a lot like Irish people, like me. We need to do, not just talk. It is one of the reasons, when we were doing the bank restructuring here, that we talked about things after we had done them. We did not talk about them before. Then you are talking. Then when you say you are going to do something, you have the track record of actually doing it. That was an important psychological thing for the team. Give them airspace. There are a lot of really talented people on this island, but there is a real hierarchy. It has taken me two years to get people to call me John. I do not want to be called Mr. Hourican. That is my father’s name. It creates distance and it does not create the team, the formality of the way Cyprus communicates upwards. That is not good. That is bad in the modern world, which is much less hierarchical, much less respectful of age for the sake of age; it is more respectful of capability.
The new bloods come educated with a new attitude.
And President Anastasiades deserves enormous credit for that. He has appointed a young, dynamic cabinet, which is doing a good job. But the mentality is changing slowly. It needs to change much more quickly. We need to remove this unnecessary reverence. We need to get back to great people in a meritocracy rising quickly. I have been lucky enough in my life to have organizations around me that have given me very big jobs at younger ages. If you are good enough, you are old enough. This is the culture we have been trying to create in the bank, although you do fight culture because culture gets created over decades. It only gets changed over years. It is quite a difficult thing to change. Getting people to make decisions, backing them, giving them room to breathe is how we change it.
You are trained in many fields. You are a macro thinker.
I ran an investment bank. We traded the world’s megatrends. We had a trillion-pound balance sheet that we took down to 350 billion. We were trading the world’s megatrends. I don’t think anyone, even in an economy like Cyprus’s, could do their job without context. To do it properly is key. You can do the job poorly if you are not interested in the context in which you operate. Israel is running out of space to grow its industries. Come to Cyprus. Egypt is disrupted—come to Cyprus. Dubai is advertising medical cities—why not build one here? The universities here are full of high-quality people—teach them English. These are basic, simple things you can change like that. But you have to set a plan. If you only talk about all the pieces and you are never sure what it looks like, you are missing the point. If you look back to Ireland in 1958, a man called T. K. Whitaker authored the Whitaker Plan, which changed Ireland from an agrarian economy using protectionism to create its wealth to one that started to found what Ireland would become. It all happened because someone wrote a plan. If you have a plan, you can then implement it. Set an ambitious plan and achieve it. The corporation tax rates in Cyprus are the minimum of the EU’s. Would the troika have liked them to go higher? Sure, but it might have damaged the economy. It was ten before, lower in pockets. You should be able to tax companies that operate in your jurisdiction. That is not the advantage you create anymore. That advantage you create is having a ready pool of talent, educated and fluent enough in English to do the job. These are the sorts of things we need to add up. For example, we have set up an incubator in the old Nicosia town called Idea. We have set it up with CIIM [Cyprus International Institute of Management] and a number of others—Deloitte and few others have come together. We have used our space and our technology. We have basically said we have a campaign ongoing to bring start-ups into this. We will give them space for a year and will only take a tiny percentage of their company. We will try to make them a success. That is the sort of thing we need to do in Cyprus. That is mood-changing. Small, but if you do enough it will change the country. Entrepreneurship cannot be taught. You can encourage it and incubate. You can unleash it. Most will fail. We need to celebrate the attempt at success, which is a cultural thing. In Ireland, we always say that guy did not do very well. A little bit in Cyprus too.
We need to say it was amazing he tried. There are moments in countries’ lives when the debate needs to be serious, and right now in Cyprus, the debate needs to be serious. We have the north-south discussion, which I think is superb. Hopefully we can come to some sort of arrangement on those. Then we have the economy. What are we going to be? Open the airports, get more tourism, extend the season, stop subsidizing the wrong things, make the labor laws more nimble. This is taking on decades of history. They can have a twelve-month tourist season. We can read all the history about Greece, but let’s create our own country. If you do not want emigration on the island, and you want net immigration, which is what you want to create a powerful island, then you must create something to retain the talent you created. That is why we have to change the discussion. In Ireland, I am one of six—five of us emigrated. When you emigrate, there is nothing there. We need to create something that makes people not even consider emigrating.
Thank you, Mr. Hourican, for meeting with us.