By Poly Pantelides
THE PREVIOUS government ignored suggested action plans to contain Cyprus’ deteriorating finances and support the overextended banks, the head of the finance ministry’s investment and finance directorate told an inquiry yesterday.
Andreas Trokkos was testifying at an ongoing committee of inquiry into the country’s near-bankruptcy leading to a harsh €10 billion bailout that has resulted in a massive restructuring of the country’s banking system and has forced losses on uninsured depositors in the island’s major banks.
A year before the bailout Trokkos and other finance ministry directors recommended the immediate implementation of an action plan to tackle the economy’s problems.
This included restructuring state finances, improving competitiveness and addressing Cyprus’ image abroad in relation to the risks raised by the banking sector’s size and exposure in Greek debt.
Instead, the government secured late 2011 a €2.5 billion loan from Russia but failed to use it to correct the Cypriot economy’s downward trajectory, Trokkos said.
Laiki and the Bank of Cyprus incurred huge losses in a Greek debt write down decided in 2011.
Trokkos’ directorate warned of possible negative consequences from the Greek haircut in August 2011 and had exchanged views with banks, but despite informal efforts to get outside help for Cypriot banks’ losses, his department’s opinion was not asked for before a crucial eurozone leaders’ meeting in late October 2011.
The prevailing view was that risking Greece’s exit from the eurozone would have been even worse for the Cyprus banking system, Trokkos said. He added he agreed Greece would have been forced out of the eurozone if the write-down had not taken place.
But Trokkos added he believed the state could not support the banks and had prepared a memo suggesting Cypriot banks needed special handling.
Some 10 percentage points in the “inordinate and unjustifiable” jump in state debt – from 48.9 per cent in 2008 to 85.8 per cent in 2012 – were accounted for by the €1.8 billion state bailout of Laiki bank in July 2012, he added.
Laiki needed to be supported because of its structural importance in the financial sector, Trokkos said.
By the time Cyprus was ready to agree on a bailout in March 2012 there was no other choice because the banks were insolvent, he added.
He added he only realised that a raid on banks’ deposits could take place, a day before a eurozone finance ministers’ meeting in mid-March.