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Greek debt acquisition could not be stopped

Costas Poullis

A former senior Central Bank (CBC) official said on Tuesday the regulator could not have stopped the island’s banks from investing in large numbers of Greek government bonds whose write-down in 2011 caused devastating results.

Costas Poullis who retired in May 2012 as a senior manager in the CBC’s supervision and regulation division, said the regulator could not forbid banks from acquiring so much Greek debt.

The previous administration blamed former Central Bank governor Athanasios Orphanides for allowing the banks to invest in the bonds, whose write-down in 2011 resulted in huge losses for the lenders who sought assistance from the cash-strapped state, which was forced to seek an international bailout in June 2012.

Poullis was testifying at an inquiry into how the country’s banking sector and economy came one step away from collapse in the run-up to a €10 billion EU/IMF bailout in March.

The Greek bonds, which were written down in 2011 devastating the island’s major banks theoretically carried no risk, Poullis said.

This in effect meant that banks did not need to offset any risk of purchase of government bonds with additional capital, he said.

Government-issued bonds are also exempted from regulatory investment and lending limits, he said.

At the time of the 2011 eurozone decisions to write-down Greek sovereign debt, the island’s biggest banks, the Bank of Cyprus (BoC) and Laiki, had acquired a disproportionate amount of Greek debt relative to the country’s GDP and their own size.

Warning the banks of the risks, Poullis authored a March 2010 Central Bank letter advising all exposed banks to take action to limit exposure.

Andreas Eliades, BoC CEO at the time, verbally told Orphanides the practice would stop, Poullis said, contradicting Eliades’ previous statement he had not dealt with the issue directly.

But the Central Bank could do little more, he said.

“A bank needs to build a risk management framework, and the supervisory authority has the power to investigate the measures and if it is not satisfied, ask for a correction…,” Poullis said.

Asked to comment on reports on bad bank governance policies inherent in the system, Poullis said that although the banks in general followed the Central Bank’s instructions, there was no culture of checks and balances.

“I agree that in Cyprus there is no governance. Not in government, not in semi-governmental organisations, not in co-operative bodies, not anywhere. There is a culture that is not compatible with governance,” Poullis said.

He also said that at the time of his departure, BoC had presented to him as “almost final” the sale of their two insurance companies, which would have ensured they met regulatory capital requirements. Instead, the bank asked for a €500 million state bailout in June.

Earlier Tuesday, former Central Bank senior official Spyros Stavrinakis, who had a brief stint as deputy governor before the appointment was rescinded on grounds it was unconstitutional, suggested the banks failed to self-impose checks on their governance.

When the internal bank mechanisms fail to work, “the final line of defence is the regulator,” he said. But he said the Central Bank structure “should have set a good example” by decentralising power.

The Central Bank governor is the only senior official with executive powers at the regulator.

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