By Stefanos Evripidou
THE AUTHORITIES are working feverishly to pull the Bank of Cyprus out of administration before next Thursday’s key European Central Bank (ECB) meeting where they hope to secure a return to normal borrowing for the beleaguered bank, according to sources.
Officials from the Central Bank of Cyprus (CBC) and Finance Ministry worked into the evening last night on calculating the final extent of the ‘haircut’ on the uninsured deposits of the Bank of Cyprus (BoC), a crucial step towards declaring the Bank’s exist from administration.
According to sources, discussions on the final figure of the ‘bail-in’ will continue and possibly conclude today, paving the way for the troubled Bank to come out of administration by Tuesday, or at the very latest, Wednesday. Troika officials on the island for a first review of the bailout programme are believed to fully support the July 31 target for the BoC.
This in turn will allow the CBC to inform the ECB’s Governing Council- meeting in Frankfurt on Thursday- that the Bank is no longer under administration. Given its new status, the CBC will further request that the ECB accept the Bank of Cyprus as an eligible counterparty for monetary policy operations.
In short, the aim is to stop the BoC borrowing using the ECB’s emergency liquidity assistance (ELA) mechanism, and allow it to start borrowing directly from the ECB.
Using ELA is significantly costlier and more complex, requiring the BoC to use considerably devalued assets in exchange for ELA and at a higher than normal interest rate. Borrowing directly is much easier and cheaper, with ECB interest rates currently set at 0.5 per cent.
Earlier this month, ECB President Mario Draghi, for the first time, gave an indication of future monetary policy in the eurozone, saying rates would remain at current or lower levels for an “extended period”.
Thursday’s meeting is the Governing Council’s last before the summer recess. The ECB heads will next meet again on September 5.
Should the BoC come out of administration in time, and the ECB accept the CBC’s request, the Bank’s borrowing costs will decrease significantly.
However, first the authorities must reach agreement on the final figure of the haircut on the BoC’s uninsured deposits.
Already large savers have taken a hit of 37.5 per cent, while a further 22.5 per cent of their money over and above €100,000 has been frozen until the final size of the BoC ‘bail-in’ is calculated. The Bank’s uninsured depositors until now have only been allowed access to 10 per cent of their deposits.
Sources told the Cyprus Mail last night that the government wants the final haircut to be lower than 50 per cent, while the CBC wants it higher than the halfway mark.
The supervisory authority argues that the Bank needs a buffer of liquidity to deal with a possible bank run when capital controls are gradually relaxed.
On Thursday, BoC chairman Sophoclis Michaelides said he expected the figure to be around 50 per cent.
The authorities are also discussing issuing Certificates of Deposit (CD) to BoC’s large savers. In practice, this allows the Bank to keep depositors’ cash even after exiting resolution status by issuing CDs with interest. There is also talk of making the CDs marketable so that a depositor can sell the CD for cash but at a lower price.