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Our View: Many unanswered questions about the alleged solvency of Laiki

 

THE GOVERNOR of the Central Bank Panicos Demetriades, appearing before the investigative committee for the economy yesterday, insisted that Laiki Bank was solvent throughout the period that he was authorising ELA from the European Central Bank. As he told the committee, it was entirely possible that a bank with liquidity problems could be solvent.

Even though Laiki had been given €9bn in ELA by August last year, this did not mean it was insolvent, Demetriades said yesterday. And after the re-capitalisation of Laiki by the state in May 2012 it had become solvent. But had it, considering the Cyprus government, recapitalised Laiki by the issuing of worthless shares? It certainly did not have the €1.8bn that was used for the recapitalisation and could not raise it by issuing government bonds because it was excluded from the markets. So had the bank become solvent because of an exercise on paper?

The committee panel also reminded Demetriades of his March 26 statement, that Laiki was “kept alive for nine months through the life-support of ELA,” and that the previous government had wanted it to be kept afloat until after the presidential elections. Although its liquidity situation had become “tragic”, the Governor maintained that it was solvent, because of the assets it had. Then again, he is obliged to repeat this claim, because if Laiki was not solvent, securing ELA would have been a gross violation of ECB rules.

The second in command at the Central Bank until recently, Spyros Stavrinakis, who was the Governor’s right hand man, contradicted the claims of solvency when he appeared before the committee a week earlier. Stavrinakis had said: “In the case of Laiki Bank, all the decisions taken for granting ELA to Laiki were taken, under the assumption that a programme was in progress for the recapitalisation of the bank that would make it solvent.”

According to Stavrinakis, Laiki was insolvent. He made this clearer, by telling the committee that granting ELA to a Laiki that was insolvent was not unusual as the bank was expected to become solvent as a result of the bailout programme. Laiki did not become solvent as a result of the programme, but was instead wound down. Had it become insolvent in that week in March between the two Eurogroup meetings when it was put under resolution? And if Demetriades and Stavrinakis were so confident that the bank would be solvent once bailout deal was signed, why had they drafted the detailed bank resolution bill, some four or five months before it was submitted to the legislature for approval?

There are many unanswered questions about the alleged solvency of Laiki to which another has now been added: whose evaluation should we believe, Demetriades’ or Stavrinakis’?

 

 

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