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CBC governor agreed to pay ‘recapitalisation fee’ to Alvarez & Marsal (Updated)

By George Psyllides

CENTRAL Bank (CBC) Governor Panicos Demetriades had agreed with an international company hired by the regulator to provide various services to afford it a 0.10 per cent commission on any amount needed to recapitalise the banks, including when cash was seized from depositors, the Cyprus Mail learned on Wednesday.

The clause had not been included in the first letter between Alvarez and Marsal and the CBC – the “engagement letter” sent on December 31, 2012– but was inserted later.

On March 23 – while Cyprus was trying to save its banking system after the Eurogroup decided to seize deposits — A&M sent Demetriades a new letter introducing the term “success fee” for the first time.

“ … plus a success fee of 0.10 per cent (10 basis points) of the total gross capital benefit into the banking system however this is achieved. This shall be payable upon the transfer of any capital pursuant to the recapitalisation,” the letter said.

The agreement was sent to the CBC’s legal adviser Alecos Evangelou who suggested deleting the phrase “however this is achieved” and replace it with “… a success fee of 0.10 per cent of the direct capital injection from external sources e.g. European Stability Mechanism or private investors, excluding any bail-in of depositors, senior and junior bondholders or any other creditors.”

Evangelou’s recommendation, which meant that no fee would be paid if depositor cash was used to recapitalise, was ignored with Demetriades appearing to agree that A&M should collect a fee based on the rate of the haircut.

The agreement was subject to the approval of the CBC board.

On March 28, A&M Head of Global Asset Risk Hal Hirsch sent Demetriades an email with the recommendation to sign the agreement again without the clause that it was subject to the approval of the board.

“We need to be retained and have the recapitalisation agreement approved. I suggest that the best way to do this is simple, to re-sign the Recap agreement without the ‘subject to BOD’s language’ since the agreement is not applicable to a supplement.

“Certainly, if there is an objection at any time by any party, we will have to deal with it then. I will forward a copy with the proper signature line for execution in a moment,” Hirsch said.

The new email sent to the governor from Hirsch on the same day said: “To augment the fees for these services, you have agreed that we shall receive a recapitalisation fee (Recap Fee) of 0.10 per cent (10 basis points) of the total gross capital benefit into the banking system. This shall be payable on October 31, 2013.”

The agreement was signed on March 28 but it is dated March 23.

A&M estimated that its share was €11 million but they were willing to settle for €4.75 million.

The CBC responded yesterday saying that according to its legal advisers “payment of the fee was not justified based on the terms of the contract.” The CBC was referring to the “success fee.”

Former CBC deputy governor Spyros Stavrinakis told web-based news outlet Sigmalive that the success fee had been agreed after A&M proposed finding the money necessary to recapitalise the banks in a bid to avoid the haircut on deposits.

This was after the first Eurogroup, on March 15, when it was decided to impose a haircut on all deposits, in all banks, to raise €5.8 billion, Stavrinakis said.

“Since they did not succeed in securing the capital and none of their efforts yielded a result, why are they asking for the fee,” Stavrinakis was quoted as saying.

Meanwhile, the House Ethics Committee has asked to see the contract signed between A&M and the CBC.

Committee chairman Demetris Syllouris suggested also looking into whether these companies had contributed to the destruction of the island’s banking system.

Referring to PIMCO, a company hired by the CBC to carry out an audit on bank portfolios to determine recapitalisation needs, Syllouris said the manner they evaluated immovable property was unacceptable and wrong.

DISY, which was in opposition at the time, had accused the government and the CBC of   deliberately allowing the figure to become so high in a bid to confirm the administration’s position that the banks were to blame for the mess the economy was in.

“We are not only asking for the contract. We also want to know the appointment procedures,” Syllouris said.

The MP said they also wanted to know how these companies operated before and after the haircut.

“For example, one of these companies had a young employee who more or less acted as if he was the manager of Bank of Cyprus and Laiki during those days,” Syllouris said.

He added that they also had information that A&M was trying to get new contracts and extend its role.

The Cyprus Mail was initially told that the CBC board would convene yesterday afternoon with the intention of seeking explanations, but sources later said the meeting had been cancelled.

State broadcaster CyBC said the board would be meeting this Friday and some members might ask for Demetriades’ resignation. One board member, who did not want to be named, told the Cyprus Mail on Wednesday evening that he was not immediately aware of such a meeting.

The CBC had hired US-based A&M to lead a probe into the circumstances that led two of the island’s banks to seek state support.

A&M was also involved in restructuring the Bank of Cyprus (BoC), after the EU decided to recapitalise it by seizing deposits.

BoC also absorbed part of Laiki Bank, which was shut down as part of the island’s bailout agreement.

These decisions were taken by a second Eurogroup on March 25.

The Central Bank issued a second announcement on Wednesday evening on behalf of the governor in which it accused “certain quarters” of orchestrating efforts to force the governor to resign or to promote A&M interests.

The announcement said the attorney-general would be asked to intervene in relation with leaking confidential documents, “a serious criminal offense.”

“The publicity given to this issue is not only detrimental to the best interests of the CBC and the banking system, but could also cause serious damage to the Cyprus economy in general,” the announcement said.

 

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