THE CENTRAL Bank of Cyprus (CBC) defended itself yesterday against criticism that it authorised gratuitous emergency liquidity to Cypriot banks, thereby saddling the lenders with unnecessary additional liabilities.
In a statement yesterday, the CBC said the provision of the funds through the European Central Bank’s Emergency Liquidity Assistance (ELA) “has played and continues to play a stabilising role, allowing the smooth functioning of the banking system and preventing the disorderly default of the state.”
It said Laiki and BoC were drawing liquidity from ELA until March 21 this year, with no objection from the board of the European Central Bank (ECB).
On March 21, the ECB’s board of directors warned it would stop providing ELA to both Cypriot banks “because there were no clear and no binding policy decisions by the Cypriot side to apply for the support programme”.
“Based on ECB regulations as regards the Emergency Liquidity Assistance, the two Cypriot banks remained solvent until March 25, 2013,” the regulator said.
The two banks ceased being considered solvent for purposes of providing ELA once the first decision of the Eurogroup (March 15) was rejected by the House of Representatives, it added.
ELA is a temporary measure provided to banks provided they meet two conditions: that they are solvent and creditworthy against adequate collateral.
When in May 2012 the state underwrote €1.8bn to float stricken Laiki, the lender was already neck-deep in ELA to the tune of €3.8bn due to a steady outflow of deposits since the summer of 2011.
But in July of 2012, Cyprus’ sovereign debt was rated junk, meaning it could not be held as collateral for underwriting the bank, and at that point Laiki was technically insolvent.
The CBC and the ECB insist that post-May 2012, Laiki was illiquid but not insolvent.
From May 2012 until the decision to wind down Laiki was taken, the bank’s ELA had mushroomed to around €9bn. The entire amount, having been guaranteed by the Cyprus government, has since been lumped onto the balance sheet of struggling BoC.