The title of this article could just as easily apply to the depressing fact that a year after the Eurogroup events of March 2013 no legal entity or natural person has been brought to justice to answer for the myriad criminal offences that lead this country to near economic collapse a year ago. It is frustrating and disappointing that the administration has fallen short of its promise to bring the culprits of this disaster to answer for their negligence and crimes.

But I will not dwell more on this subject, maybe some other time. As this has become again a time of crisis and unlike the months after March 2013 we do not feel the urgency to react as we have been numbed by our success. For it is true that within 12 months the Cyprus economy has responded better than the most optimists predicted (me being one of them). We have managed to walk away from the brink and have regained our confidence to hope that the worse is over and 2014 will be the last year of contraction. And while this is true, what is equally true is that there are still problems in the Cyprus economy, problems that if we do not address might destabilise the fragile recovery we have been experiencing. And the biggest of all is just three letters, NPLs. Non performing loans are a problem for almost all banking institutions but while Hellenic has its shiny white knight ready to step in, and the CoOps still have another EUR 500mm from which to draw from if need be, poor Bank of Cyprus finds itself (again) without much help and is heading in dangerous waters while some of its Board Members are more worried how to undermine their CEO rather than how to save their ship.

Unfortunately for BoC, its current loan portfolio has hidden losses that have not been provisioned for so in other words, once these losses are realised the reduction in Tier 1 ratio will be significant enough for the bank to need more capital. To put it as simply as possible, there is a hole in the bank’s books and someone has to pay for it.

This should not be surprising and it has nothing to do with how well the economy has responded in the last twelve months. Rather this is the cumulative result of many years of bad lending practices coupled by the fact that most lending was done on an asset basis (i.e. with a focus on having adequate collateral to support the loan rather looking at the repayment capability of the borrower) and in Cyprus’ case the overall asset basis has lost close to 50% of its underlying value in the last six years. This simple fact goes a long way to explain why efforts at restructuring loans will only have limited success because a restructuring, like any therapy, only works when the underlying has enough viable elements to be able to come back to life given the time. Unfortunately, as Mr. Hamilton is finding out, this is not the case with many of the NPLs.

Which brings us to a fundamental question: who is to pay for this hole? There are 5 (unwilling) contenders for this role: the borrowers themselves, the European Central Bank, the BoC depositors, the BoC shareholders and last (but alas not least) the taxpayers.

Let’s bring the spotlight to each one in turn. First, the borrowers. They are the natural target as they are after all the ones who borrowed the money (usually with a little encouragement from their over-eager bankers but this is a story for another article). We can deal with them here easily enough because I think everyone agrees that no matter who else will also pay every effort should be made to maximise the amount to be retrieved from the borrowers. That being said though I believe all but the most idealistic realise that this amount will not be enough to cover the hole and hence someone else must contribute the rest.

From our perspective, the best one to do that would be the European Central Bank. Would this be possible? Well, about 9 months ago in an earlier article of mine I had argued that we were in a game of chicken with the ECB and at that moment the ECB had blinked. Unfortunately, our leadership (both secular and religious) once more let us down having failed to realise the golden opportunity which presented at the time to create this bad bank with funding provided by converting the ELA into long term bonds. To be fair, it was not a straightforward task and the ECB never clearly signalled that it was willing to bring the ELA to the bad bank but on the other hand, we never really tried to make this into a reality.

Today this is much harder to achieve, ironically, because of our success. For our better than expected performance has created a buffer of around EUR 1.5bn in the programme which is available to be used. In other words, there is already a plan B in place which explains why international investors have not stopped buying the Cyprus government debt keeping its yields at record lows. All this plan B needs to be put in motion is a decision by the Eurogroup to allow this money to be used to re-capitalise the Bank of Cyprus. However, were this to become a reality this would be bad news for the existing shareholders (former depositors) who will be diluted and once more will see the value of their investment significantly decrease. In such a scenario, given that any money given by the troika programme is ultimately paid by the taxpayer both the taxpayer and the current BoC shareholders would share the cost. The only upshot in this case is that it is extremely unlikely that any (new) harm will be done to the BoC depositors both because there will be no need for a bail-in but also because it is my conviction that a bail-in is first and foremost, a political decision not a financial one and at this moment in time the Eurogroup cannot afford a second bail-in.

Is there another way? I believe there is. The idea of a bad bank makes sense in many levels and we must become more aggressive in pursuing it. And even though it has taken our politicians almost nine months they finally get it which makes it more likely for the idea to become a reality. The crux of the matter as most recently the BoC CEO explained is the financing of the bank. Nine months ago, when we could credibly argue that the whole country was on the verge of economic collapse we could have maybe gotten the ECB to foot the bill. Now that we are healthier we are also weaker in our negotiations with the ECB; as I said before, our success has become our weakness. So if the ECB will not finance the bad bank the next best thing is, unfortunately, the taxpayer. The government can guarantee long term bonds issued by the bad bank which effectively would mean that the losses the bad bank would make in the ensuing years as the NPLs are slowly unwound would be absorbed by the taxpayer.

Beyond that the creation of the bad bank has a number of benefits, mainly for the good bank left behind. Assuming that the Bank of Cyprus would transfer the NPLs to the bad bank at their face value less all provisions made so far this would mean that the Bank of Cyprus will stop the bleeding and cauterise the wound so that it can immediately begin to heal. The new Bank of Cyprus will be healthy while the 18% held by the old Laiki will become instantly very attractive to a number of investors which in turn will spark a number of other positive developments. Having said that one should not think that this will solve all issues that the bank is facing. Because aside from the NPLs the Bank has a serious challenge in integrating the former Laiki bank, to reduce its cost base (yes, it has too many employees!), and become much better in servicing its clients who are waiting for weeks on end for the bank to respond to simple requests.

In all, looking back where we were in March 2013 and where we are now I think Cypriots should feel proud of what was accomplished in twelve months. Similarly, a lot of credit should be given to the Minister of Finance and his colleagues for they have managed to gain the respect of our international lenders but also, to implement a tough programme with great success. At the same time, there are other areas where we fell short. Namely, a complete failure to have those responsible answer for their actions and so far no real structural changes in the public sector. More pressing though at this time is to address the issue of the NPLs in the Bank of Cyprus and to come up with a solution fast. To fail that test would render a lot of what we have accomplished mute and would truly be a disservice to the collective effort and sacrifice of countless Cypriots who took a hit, fell down, dusted themselves off, looked up and kept going!