By Elias Hazou
THE SALE of Cypriot banks’ Greek operations to Greece’s Piraeus Bank was a political decision, the Central Bank chief said yesterday.
Both the price and the terms of the sale were hammered out and agreed at a political level between the governments of Cyprus and Greece during the two Eurogroups of March, Panicos Demetriades told the House Ethics Committee.
The Central Bank of Cyprus (CBC) was merely enforcing that political decision, he added.
The operations of all three Cypriot banks – Bank of Cyprus (BoC), Laiki and Hellenic – went to Greece’s Piraeus Bank, which paid around €500m. The sale was a precondition for Cyprus’ €10b bailout, designed to help the island deleverage its vast banking sector, a key demand from the eurozone and the IMF.
It was intended to lower the leverage ratio of Cyprus’ banking system (assets/GDP) to around 6.8 from about 8.
The sale also helped shield Cyprus from potential negative developments in Greece and vice versa.
The deal had been finalised after the Eurogroup decision in March to resolve Laiki and recapitalise BoC by taking part of the uninsured – over €100,000 – deposits in a process that came to be known as a bail-in or haircut.
Deposits in the Greek branches were left untouched.
Negotiations between the CBC and Piraeus regarding the deal were held between March 23 and 26.
But, Demetriades said, the talks dealt not with the sales price or terms – which had already been agreed – but rather peripheral issues and to the drafting of the sale contract.
One issue that came up during these talks, Demetriades said, was which party would incur taxes from the transaction. It was decided that any taxes would burden the buyer.
Piraeus’ lawyers had also sought to include a get-out clause from the sales contract, a demand refused by the Cypriot side.
At any rate, Demetriades said, both these issues were referred to and ultimately resolved by the finance ministers of the two governments – Michalis Sarris and Greece’s Yiannis Stournaras.
The CBC boss sought to rationalise why Cypriot banks’ Greek branches were spared a bail-in of depositors – a move which also served to fire-wall Greece’s fragile banking sector.
Given that a decision to bail in uninsured depositors had already been made, the central banker said, it would have been impossible for the branches in Greece to re-open for business.
“As we would not have been able to impose capital restrictions there [Greek operations], this would have caused mass withdrawals of deposits and led to the collapse of the banks and the activation of the Deposit Protection Fund,” he noted.
A bank failure would mean the state must guarantee all insured deposits. But given that total insured deposits in the Greek branches amounted to €9bn, there was no way the state could come up with that cash.
Demetriades sought to downplay criticism here that the deal was lopsided in Greece’s favour.
Earlier this month, Piraeus reported a net profit of €3.62bn compared with €46 million in the same period a year earlier. The figure included €3.41bn goodwill write-back from the Cypriot takeover and a deferred tax asset of €540m.
Excluding the one-off gain, Piraeus said it lost €336 million before taxes.
But the central banker said these were accounting, or unrealised profits, and predicted that Piraeus’ numbers would gradually be offset by an increase in the bank’s non-performing loans.
Shortly after the deal, Piraeus said its ratio of non-performing loans would rise to 26 per cent from 21 per cent after the branch takeover.
The deal made Piraeus Greece’s second-largest bank with combined assets of €95bn, overtaking Alpha Bank.