President Nicos Anastasiades has launched scathing criticism over the terms of an international bailout which forced massive losses on bank deposits, saying the support lenders displayed to Greece was absent in the case of Cyprus.
Cyprus, one of the smallest economies in the eurozone, was forced to wind down one bank, and seize savings in a second to qualify for a €10 billion aid package from the International Monetary Fund and the EU in March.
In a letter to lenders, collectively known as the troika, Anastasiades expressed concern onerous conditions for aid were a stranglehold over an economy facing deep recession, with legacy debt from the wound-down bank adding to the vulnerability of the banking system.
To prevent financial collapse and be eligible for aid, Cyprus is closing down Laiki Bank and converting sizeable deposits in Bank of Cyprus into equity to help recapitalise that bank.
The process, known as a ‘bail-in’, was a first in the history of the eurozone debt crisis. Thousands of depositors lost their savings, and subsequent capital controls were imposed to prevent a drain on remaining deposits. Those controls are largely still in place.
“It is my humble submission that the bail-in was implemented without careful preparation,” Anastasiades says in the letter, reported by financial website Stockwatch and other local media outlets.
The president said there was no clear understanding of how a bail-in would be implemented, legal issues were being raised and there were major delays in completing the process.
No distinction was made between long-term deposits earning high returns and money flowing through current accounts, such as company working capital.
“An alternative, longer term, downsizing of the banking system away from publicity and without bank-runs was a credible alternative that would not have produced such a deep recession and loss of confidence in the banking system,” the letter said.
Finance Minister Haris Georgiades, who Anastasiades said, had already alerted lenders to potential pitfalls without receiving a response, declined comment on the matter.
As part of the aid package, Laiki and BoC were forced to sell their Greek branches, while deposits the banks had in that country were exempt from the bail-in, to avoid contagion to Greece.
“As understandable as ring-fencing may be, this was absent at the time of deciding the Greek PSI (Private Sector Involvement) in relation to Greek government bonds which cost Cyprus 25 per cent of its GDP,” Anastasiades wrote.
He was referring to a Greek sovereign debt restructuring which imposed heavy losses on Cypriot banks in early 2012.
“The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus’ turn to seek help,” Anastasiades said.
BoC, is assuming some of Laiki’s assets, was also forced to assume Laiki’s emergency liquidity assistance (ELA) liability, a funding lifeline provided from the European Central Bank.
BoC has a total ELA liability of around €2 billion. By taking an additional €9 billion from Laiki, which was accumulated over the course of the last year under very questionable circumstances, BoC has substantially increased the vulnerability of its own funding structure, with its cumulative ELA liability reaching a very high €11 billion, Anastasiades said.
“The imposition of Laiki’s ELA liability on BoC is the main contributor to the liquidity strain Bank of Cyprus faces.”
“I stress the systemic importance of BoC, not only in terms of the banking system but also for the entire economy. The success of the programme approved by the Eurogroup and the troika depends upon the emergence of a strong and viable BoC,”the president said.
He urged lenders to find a long-term solution to BoC’s liquidity issue in a bid to regain confidence and allow the economy to function without restrictions.
“Artificial measures such as capital restrictions may seem to prevent a bank run in the short term but will only aggravate the depositors the longer they persist. Rather than creating confidence in the banking system they are eroding it by the day. Maintaining capital restrictions for a long period will inevitably have devastating effects on the local economy, will also affect the country’s international business and will have an adverse impact on GDP.”