Cyprus Mail

Laiki was kept afloat to protect foreign investors

Panicos Demetriades

By Elias Hazou

CENTRAL Bank governor Panicos Demetriades has said that Laiki Bank, once the island’s second largest lender, was deliberately kept afloat by the European Central Bank in order to ‘protect’ foreign investors.

In comments to the German media this week, Demetriades said that throughout 2012 the ECB continued authorising emergency liquidity funds to Laiki despite the bank being insolvent.

Demetriades told daily Tagesspiegel that in this way Laiki was prevented from going bust until March of this year, when the ECB finally threatened to pull the plug on emergency liquidity – finally leading to the ‘bail-in’ of uninsured savers and the break-up of the bank.

By extending a lifeline to the already-broke Laiki, the governor claims the ECB gave large savers (over €100,000) in the eurozone time to “protect their investments” and withdraw money from the stricken lender before it folded.

In the same article, Tagesspiegel then cited Cyprus Central Bank data showing that, during 2012, foreign banks withdrew some €10bn from Cyprus.

The emergency liquidity provided to Laiki delayed the bank’s collapse, helping “the better-informed quarters protect their investment”, Demetriades told the paper.

Laiki was put on life support long enough for these foreign investors to pull out ahead of the raid on deposits in March 2013, the governor alleged.

Demetriades seemed to be suggesting this was done purposefully in order to limit bank troubles to Cyprus.

“The burden [of the bail-in] was to be shared among Russian investors, Cypriot pension funds and businesses, with losses totalling at €6bn,” the Tagesspiegel item noted.

Drawing on this, Frankfurter Allgemeine Zeitung cited German MP Frank Schäffler as accusing the ECB of being an “accessory” to delaying the collapse of Laiki.

If the same rules which apply for a company manager were applied to ECB chief Mario Draghi, Draghi should now be behind bars, the paper said.

Asked to comment, the ECB dismissed the allegations as “nonsense”, pointing the finger instead at Cypriot financial authorities.

The ECB board needs a two-thirds majority to decide on terminating emergency liquidity to lenders, it said.

The ECB went on to say the Cyprus Central Bank (CBC) is the local regulator and therefore the body responsible for monitoring a bank’s solvency.

But in an accompanying commentary piece also published on June 24, Philip Plickert of the Frankfurter observes that the CBC governor is at least equally complicit.

Calling Demetriades’ admission about Laiki “scandalous”, Plickert writes that the governor should have been one of the “better-informed quarters” yet he continued to provide liquidity to Laiki, a “zombie bank”.

Emergency Liquidity Assistance (ELA) is liquidity provided to a eurozone commercial bank in a financial crisis by its national central bank. It is meant to be used to overcome a temporary liquidity crisis, where a bank has assets but cannot access them quickly enough to meet liabilities, such as cash withdrawals.

In order to be eligible for ELA, a bank must meet two conditions: to have adequate collateral, and to be solvent.

The ECB’s argument appears to be that, post-May 2012, Laiki was illiquid but not insolvent.

When in May 2012 the state underwrote €1.8bn to float Laiki, the bank was already neck-deep in ELA to the tune of €3.8bn due to a steady outflow of deposits since the summer of 2011.

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.

By the time eurozone finance ministers decided to wind down Laiki, the bank’s ELA had ballooned to over €9bn. The entire amount, having been guaranteed by the Cyprus government, has since been lumped onto the balance sheet of struggling Bank of Cyprus.

Back in March, Demetriades told newsmen that Laiki was kept afloat for nine months, despite its enormous liquidity problems, because the bank had to stay alive until the presidential elections.

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