By Costas Apostolides
THE EMPHASIS on the Memorandum of Understanding with the troika is not the most damaging feature of the policy imposed on Cyprus, because that dubious honour goes to the so called “bail in”, translated by the locals as outright theft, by which non-guaranteed deposits in Laiki and Bank of Cyprus have suffered a forced cut in their deposits to recapitalise the new Bank of Cyprus thereby enabling it to stay afloat, and to bury Laiki Bank.
This condition for support from the Eurogroup should not have been accepted because it breaks the major rule in banking, which is to avoid doing anything that creates a negative psychological assessment of the bank sector.
If people fear for their savings in banks they panic and massively try to withdraw their funds, to save their holdings. What was done by the Eurogroup was stupid and, as former finance minister Michalis Sarris stated before the commission of inquiry, against every banking principle. This is because the reaction of the public cannot be assessed, and the extent of cash withdrawals cannot be predicted.
Given the present situation and Cyprus’ commitment to the memorandum, it is essential that gradual step by step relaxations in the present regulations be undertaken so that the bank sector returns to normal banking conditions without a mass outflow of cash from the banking system. It is therefore of the greatest importance that the mistakes of the previous government and governor of the Central Bank are not repeated by the new government, parliament and the Central Bank. It was the failure of the former president, Demetris Christofias, and former governor Athanasios Orphanides to consult and work together that got us into this mess.
Unfortunately it seems that the present government, parliament and the governor of the Central Bank are on a conflicting course and that presents great risks for the economy. The government has applied great pressure on Governor Panicos Demetriades to speed up the process of normalisation, especially with respect to the forced merger between BOC and Laiki, which is full of booby traps such as landing the former with the €10 billion or so Extraordinary Liquidity Advances of Laiki and other losses.
The ruling Democratic Rally party is constantly criticising the governor while protecting the former governor. Meanwhile parliament is investigating Demetriades for providing inadequate information on personal accounts to the House, and President Anastasiades has sacked deputy governor of the Central Bank Spyros Stavrinakis on the grounds that this is not an emergency and does not come under the rule of necessity which allows constitutional changes. The present investigations by the House and the commission set up to investigate how this mess occurred, could develop into a witch hunt reminiscent of the McCarthy era in the USA directed at the governor himself. That is probably why the governor has instructed the Central Bank to challenge that decision to sack Stavrinakis , something which has caused bitterness in the ranks of the ruling party, but in essence it is an act of self-defence by the governor that poses risks for the government as well. In the event of failure to convince the Supreme Court of the grounds for sacking Stavrinakis, which is possible since the less important positions of deputy attorney general, deputy auditor general, deputy accountant general, and minister of education) were all made in less critical times, would reduce the prestige of the president.
To be fair the governor is also not cooperating with the government. Hiding behind the principle of Central Bank independence he appears to be behaving in a dictatorial manner, and from what I have heard the government and Central Bank do not have joint committees working on the problems. As a result the president himself has endeavoured to coordinate at joint meetings under the president with the governor and minister of finance. Cooperation and coordination are essential if progress is to be made, but that must come from both sides.
The president has tried to get his views across and wants normalisation of the banking sector as soon as possible, and over the past two weeks it appears that progress has been made in finding a way to work together. It must be remembered, however, that the job of the governor is extremely difficult, and not only because he is squeezed between the European Central Bank and the government. Essentially, if mistakes are made and deposits are released too quickly without exchange controls, the whole system could be jeopardised. Slowly and steadily is the way things should be done, and with luck we could land softly with less damage than we think. Already the accountants advising foreign companies have expressed an evaluation that most foreign companies will stay in Cyprus, though what is left of their deposits is likely to move away to other locations in the Netherlands, UK and other tax havens.
The official statistics of the Central Bank show that in May 2012 deposits in banks based in Cyprus peaked at €72 bln, but by March 2013 after the Eurogroup bail-in decision, almost €9 bln had left the system. Most of this was from Bank of Cyprus and Laiki, but also the “others group”, mainly the foreign banks. Modest increases in deposits took place in the Co-ops, Eurobank and Bank of Piraeus, as well as some smaller banks.
Overall deposits are now less than loans, with most of the problem being in the now demised Laiki, though some problems also exist with the “others” group.
The conclusion is that the situation is very serious, and unless the government and the Central Bank work together, the situation cannot be managed and further pain lies ahead for everyone. It is time for all sides to reduce the rhetoric, control their egos and work constructively together.
Costas Apostolides is chairman of EMS Economic Management Ltd ([email protected])