Cyprus Mail
Business Cyprus

Sarris: we fought to the point of tears

Michalis Sarris testifies at the inquiry

 

By Poly Pantelides

THE FORMER government’s delay in agreeing to an international bailout and the rejection of an original bailout proposal for Cyprus in March, sealed the fate of the now defunct Laiki, an inquiry heard on Thursday.

Laiki’s systemic importance as the island’s second biggest bank, its massive liquidity problems and “problematic Greek portfolio” endangered the banking sector as a whole, Michalis Sarris told the inquiry into the economy’s near collapse.

Sarris served the current government as finance minister during the March banking crisis. Previously he had headed Laiki.  He took over as non-executive chairman for the bank in January 2012, until he was ousted in August that year by the recently-appointed Central Bank governor after the state took over control of the bank.  He resigned as finance minister in April in the wake of fallout from the bail-in in March and because the inquiry would be looking into his time as Laiki chairman.

“We fought to the point of tears,” Sarris said of the Eurogoup meetings that ended in the unprecedented  bail-in for depositors. He said there were no friends to be found during the Eurogroup meetings.

In the end, Cyprus had to agree to shut down Laiki and restructure its biggest bank, the Bank of Cyprus, forcing major losses for the depositors of those banks.

Laiki lost €3.5 billion from a writedown on Greek sovereign debt. It also posted a €4.1 billion loss in 2011, partly because the new board had realised had realised the risks and damage from the bank’s Greek exposure were “much worse than the official bank data”.

But despite knocking on doors and visiting Greece’s then prime-minister, Lucas Papademos, as well as Greece’s Central Bank governor, Sarris failed to convince them to take on Laiki’s Greek branches on a package of some €50 billion the eurozone had agreed would go towards alleviating the impact of Greek banks’ losses during a Greek sovereign debt write-down.

“We argued that as a bank we had a strong presence in Greece and in Greek lending and we should also be part of a similar treatment.” Eurozone and IMF brass also said they would not help Cyprus’ banks directly unless the government took austerity measures to control its deteriorating finances, Sarris said. But as long as Laiki had a presence in Greece, there could be little interest from investors, Sarris said. Eventually, the state was forced to bail out the bank in May last year to the tune of €1.8 billion, acquiring 84 per cent of the bank.

In the run-up to Laiki’s state bailout, Sarris was one of the people assessing the real damage the bank had incurred from a massive expansion in Greece. Former Laiki bank strongman Andreas Vgenopoulos was forced to leave in November 2011, and other executives and board members followed suit. A new leadership started assessing the situation at hand, with the help of forensic experts. Laiki’s balance sheets for example showed in 2010 some €200 million in non-performing loans related to the Greek portfolio, but “recognising that the Greek portfolio was very problematic,” the new management set the 2011 figure at €1.6 billion, Sarris said.

There was a lack of “the necessary objectivity and courage” evident in the figures previously released by the bank, which the newly appointed Laiki board tried to correct, Sarris said.

There were also questions raised over some €600 million that Laiki lent to Vgenopoulos’ Greek investment company, Marfin Investment Group and questions about “the great risks and strange ways” in which lending took place in Greece, Sarris said. He was warned by the inquiry’s head, Giorgos Pikis, not to elaborate since the committee has decided not to touch matters relating to criminal investigations.

“A healthy bank needs a strong board that can ask difficult questions,” he said. When executives dominate the board or when there is no clear distinction between board and executives you have a “recipe for disaster,” he said. Internal checks within a bank fall apart and the Central Bank’s supervision becomes more important, Sarris said. But he added steps the Central Bank would take to control bank lending were deemed as interference with the then-booming property market and “infuriated businesspeople”.

Nonetheless, the prevailing belief was that the bank’s serious problems “could be handled,” Sarris said. This, despite a May 2012 statement by then President Demetris Christofias during an official visit to Vienna which spooked investors who heard from Cyprus’ head of state, the island was trying to help a non-viable major local bank.

But that faith relied on the belief a memorandum would be signed “soon” in 2012, Sarris said.

Despite the delay, during which Laiki amassed over€9 billion in emergency liquidity assistance – over half of the country’s GDP –  an original eurozone agreement in March was better if unpalatable, of spreading out a bail-in or haircut across all deposits – insured or not – in all local banks, Sarris said.

The former World Bank director, a man with a reputation for being sensible and cautious, had to dive right into negotiating a bailout amid foreign press reports “assumed to have been leaked by the IMF or the eurozone” of a potential bail-in.

 

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