By Poly Pantelides
THE PREVIOUS administration’s delays in finalising a bailout agreement worried the European Central Bank (ECB), which threatened to pull the plug on liquidity assistance to the island’s second biggest lender, a former senior Central Bank official said yesterday.
Spyros Stavrinakis, who had a brief stint as deputy governor before the appointment was rescinded on grounds it was unconstitutional, was asked to explain why the Central Bank of Cyprus (CBC) allowed the now defunct Laiki – formerly the island’s second biggest lender – to acquire over €9.0 billion in emergency liquidity assistance by March this year, when Cyprus was forced to shut it down.
He 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 ECB allows national banks to draw ELA via their Central Banks provided they are solvent and have sufficient collateral. Laiki was considered potentially solvent but that assumption rested on the island’s authorities agreeing to a bailout programme with their lenders, Stavrinakis said. “ELA decisions were taken under the assumption a [bailout] programme was in the works to recapitalise Laiki and render it solvent,” he said. But the ECB “was concerned” so set a January 23, 2013 deadline to terminate ELA assistance. When an interim November agreement failed to lead to a deal, the ECB extended the deadline to March 21 – weeks after a change of government – “again, this to exercise pressure to the new government,” Stavrinakis said.
Stavrinakis’ bank supervision department advised then-CBC governor Christodoulos Christodoulou in 2006 to give the green light to the acquisition by Marfin Financial Group Holdings S.A. of over 10 per cent of the bank’s stake. He mentioned no caveats in his executive summary. But in his fuller report he advised waiting for input by major Marfin shareholder, Dubai financial limited liability company as well as the United Arab Emirates’ Central Bank. Meanwhile, Greece’s Securities and Exchange Commission had informed the Central Bank Marfin had been fined three times in the past, for regulations’ violations.
Stavrinakis claimed that only after Marfin was permitted to move in, did the relationship between Tosca Fund and Marfin become known. Tosca Fund was within the sphere of influence of former Marfin strongman Andreas Vgenopoulos and had acquired a stake of little over 8.0 per cent in Laiki, but as this stood below the 10 per cent threshold no Central Bank approval was necessary.
Marfin and Tosca Fund collectively bought most of the shares that had been owned by HSBC, in what Laiki had called “the acquisition of a strategic share”. Under the helm of Vgenopoulos the bank went on to complete a merger in 2009 with Marfin Egnatia bank in Greece, amid jubilant statements of a new era of growth for the bank and its shareholders. The Vgenopoulos-controlled Marfin Investment Group (MIG) is now under investigation in relation to loan agreements between Laiki and MIG that were secured using MIG shares as collateral, while a Nicosia court has frozen Vgenopoulos’ assets and has banned MIG from making any transfers to his benefit.
Also testifying yesterday at the inquiry, former senior CBC official Costas Poullis official said 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.
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.
Government bonds theoretically carried no risk which in effect meant banks did not need to offset any risk of purchase of Greek bonds with additional capital, Poullis 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, but the Central Bank could do little else, he said.
Asked to comment on reports on bad banking 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.