Cyprus Mail
Business Cyprus

‘We were obliged to keep Laiki alive’ (FULL STORY)

CBC Governor Panicos Demetriades in the hot seat


By Poly Pantelides

HAD THE state not supported the now-defunct Laiki bank in June last year, the island’s banking system would have collapsed and Cyprus might not have been able to stay in the eurozone, Central Bank governor Panicos Demetriades said yesterday.

Demetriades, who took over as Cyprus’ Central Bank (CBC) governor in May 2012 testified at ongoing committee of inquiry investigating the events leading up to the banking sector’s and the economy’s near meltdown last year.

But he said that Cyprus should have applied for an EU/IMF bailout at the end of 2011, or beginning of 2012, rather than wait until June last year.  “With hindsight, it’s apparent that the delay hurt us,” Demetriades said.

As part of the island’s March bailout, Cyprus has been forced to wind down Laiki – the island’s second biggest lender – and force major losses on large depositors at the island’s biggest bank, the Bank of Cyprus (BoC). By then, the International Monetary Fund, the European Commission and the European Central Bank were not willing to have any of the €10 billion bailout amount serve the needs of the BoC and Laiki.

By contrast, an initial agreement in November 2012 had earmarked an amount for the recapitalisation needs of the two banks’, Demetriades said.

But he said that they could not have predicted what came afterwards. “We could not have anticipated the media assault by a particular country… we did not know what they had in store for us,” he said, referring to money laundering allegations originating in the German media in particular.

Media references this February also talked of a bail-in, whereby bondholders and depositors would be forced to bail out the lenders. Part of the Central Bank’s response was to inform the BoC that the country’s constitution and the European convention of human rights safeguarded depositors’ property rights. “Normally, there would be no depositors’ bail-in. What happened in Cyprus was unprecedented,” Demetriades said.

Meanwhile, it would be the looming ECB deadlines for withdrawing its approval to the CBC to help banks with emergency liquidity assistance (ELA) that would play an essential part in Cyprus’ negotiations with its lenders.

Demetriades said that in October and November last year, he warned the government in writing that the ECB would cease sanctioning ELA assistance after a January deadline expired. Eventually, the ECB decided to extend its ELA deadline to March, so a new government that would have been elected in February this year, “could have ownership” of the agreed memorandum and the bailout process, Demetriades said.

After the bail-in rumours appeared in the media, Laiki’s liquidity situation took a turn for the “dramatic”, with the bank losing some €400 million following media reports and some €550 million in the first two weeks of March, Demetriades said. Laiki was already relying on ELA, when the state decided in May last year to underwrite the €1.8 billion to keep Laiki afloat.

The bank’s insured deposits, those coming to less than €100,000, amounted to €7.3 billion, but the lender would only be able to compensate a tiny amount of that or less than 2.0 per cent, Demetriades said. Since the state was in no position to secure funding to protect Laiki depositors, they would have to wait for whatever compensation they could get by liquidating Laiki’s assets, he said.

But this would have meant that all Laiki depositors would have lost almost all of their money. “This would have led to the collapse of the whole domestic financial system and would have called into question Cyprus’ remaining within the eurozone,” Demetriades said in a lengthy written statement he submitted to the inquiry.

Demetriades said in his statement expounding on this unpalatable alternative was the “honest answer” he could give to the question of why the state chose to support Laiki and why it did not pull off the emergency liquidity assistance (ELA) that it provided to Laiki. “As the Central Bank, we were obliged to keep Laiki alive,” Demetriades said.

Asked whether Laiki met the solvency criteria necessary to draw on ELA, Demetriades said “as long as there was a prospect of a bailout, the bank stayed solvent”. He said that Laiki’s state bailout had rendered the bank solvent, because the lender had assets.

Demetriades also said bankers’ accumulation of massive amounts of Greek government debt, which would cost them dearly when the EU sanctioned a write-down in late 2011, was a “catastrophic investment”.

But he said that after their Greek bonds losses, Laiki brass and, to a greater extent, the BoC were not willing to consider ring-fencing their Greek operations, even though in May 2012 his Greek counterpart was willing to consider it. The bankers, however, “cited their presence in Greece as of strategic importance,” even though it put the whole economy at risk, Demetriades said.





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