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. Last Updated: 07/27/2016

Stock Bubble Bursts in Cyprus

NICOSIA, Cyprus -- In a small converted shop on the ground floor of the Cyprus Stock Exchange building a group of men stood transfixed at screens flashing red.

A piece of paper glued to the wall advised that smoking is prohibited.

It didn't deter a group of elderly men hunched glumly on worn seats of black plastic, staring at a television suspended from a ceiling while taking quick deep puffs of cigarettes clutched in nicotine-stained fingers.

In typical Mediterranean temperament, hands were thrown up in despair and waved angrily each time the screen blinked.

"I'm telling you, if there were proper fraud laws here everyone would be locked up," an investor shouted angrily.

The gloomy faces in the Cyprus Stock Exchange this month were a stark contrast to the mood there last year when the bourse took a 688 percent vault upward.

By last Wednesday, the index had dropped 48 percent since the beginning of the year.

Brokers and analysts differ on precisely how much of the decline was a correction, a bear play by fat cats at the expense of small investors or the central bank pulling the plug on commercial bank loans for investors.

"Looking back to November 1999, there was a very significant overvaluation. Over a period of time it needed to correct anyhow," said Nicos Severis, managing director of Severis and Athienitis Financial Services.

Many now think the worst is over.

"The divorce Cyprus shares got from reality then was a temporary one. The same could be said now, but in reverse. Some prices are now at ridiculously low levels," said Pambos Papageorgiou, head of research at Cyprus College.

Sniffing money, hundreds of Cypriots took out bank loans and hard-earned savings to invest on the bourse in 1999. Most of the rally was triggered by word of mouth by people who had already made money on the market.

"It's raining money down there and you've put up your umbrella," was a phrase frequently used to disparage those who opted to stay out.

At the beginning of 1999, only 7 percent of households owned shares. That figure jumped to more than 30 percent by the end of the year.

Government warnings that the rally was excessive were ignored in the scramble to invest, and by those who angrily rejected suggestions at the time that the bourse was a bubble.

"It is true many people were publicly pumping the market up. They were extremely negative to anyone talking the market down," said one economist based in the capital Nicosia, speaking on condition of anonymity.

Analysts say that most of the new investors emerged when the market was close to its peak in November, when it reached an all time high of 881.46 points.

Starting 1999 with a market capitalization of 1.2 billion Cyprus pounds ($1.96 million), it ended the year with a capitalization of almost 10 billion Cyprus pounds. It is now down to 8.5 billion Cyprus pounds.

"What we are experiencing is a severe correction to the excesses of 1999, augmented by the fact that Cypriot investors are mainly inexperienced and we are seeing excesses in terms of feelings," Papageorgiou said.

Those excesses have been evident on several occasions this year. When the market started downward, trading sessions were disrupted by bomb threats.

In a country where business security is usually unnecessary, many brokerages have recruited guards; an unexploded bomb was found outside one brokerage earlier this year and earlier this month the car of a brokerage employee was destroyed by a bomb.

Investor groups have organized several protests.

Many are angered by investment firms, which they say failed to plough their private placement gains back onto the market during its rise.

Traders say no one forced them to part with their money.

"Nobody has done that. But asking people to invest their money, knowing that investor does not know what he is doing, is downright irresponsible. And it has happened," Severis said.

Central bank restrictions on credit expansion have also been cited for the downturn; central bank officials say that argument is flimsy since a stock market cannot be built on borrowed funds.

It has, however, exerted additional pressure on banks and brokerages extending credit to call in loans, prompting forced selling of stocks.

Research debunks the view that the majority of investors are heavily in debt. "It's a myth. From our research only 20 percent of private investors entered the market with leverage," said Papageorgiou.

Punters in the converted shop frequently vent their ire at the brokers sitting upstairs in between snapping instructions at them on their portable phones.

"Those people have destroyed the poor. Brokers are playing games at their expense. They caught people ignorant," said one investor.

"I remember when they were still getting a 500 Cyprus pounds [$804] salary a month and were scrounging for business," another one said.

Severis thinks investors should kick the habit of turning accusing fingers to others whenever the stock market goes into reverse.

"It is simple. Instead of saying, 'I'm an idiot for investing,' they come along and say, 'I should have been better protected.'"