Cyprus Mail
Business Cyprus

Criminal investigation launched into A&M deal (Updated)

Deputy attorney-general Rikkos Erotocritou

By George Psyllides

AUTHORITIES will launch a criminal investigation into a controversial agreement between the Central Bank (CBC) and a consulting firm to pay them a 0.10 per cent fee on any amount needed to recapitalise the banks, including when cash was seized from depositors, it was announced on Thursday.

At the same time, reports said CBC Governor Panicos Demetriades was under duress when he signed the controversial deal with consultants Alvarez and Marsal.

Announcing the investigation, deputy attorney-general Rikkos Erotocritou said it will look into charges by Demetriades that confidential documents had been leaked to the media, but also potential document forgery, and deception of board members.

Erotocritou said the probe will cover the board and the governor, and possibly third parties.

He said instructions had been given to police on Thursday to look into the case.

“It is the duty of the Legal Service to intervene. It will not wait for one of those involved to lodge a complaint,” Erotocritou said.

The deputy attorney-general pointed out that the governor had warned that he would refer the matter to the attorney-general for investigation.

“On the other hand, some CBC board members say they have been deceived, references are made about possible forgery relating to backdating a specific document, and there are also references concerning third parties,” Erotocritou said.

He added: “It is not simply about information conveyed by third parties in the form of gossip. They are the views of those who are directly involved and it is very different.”

Two newspapers, Politis and Simerini, reported on Thursday that Demetriades allegedly signed the agreement under the threat that A&M, contracted by the CBC to advise on the restructure of the island’s stricken banking system, would leave on March 28, the day before the banks opened after some two weeks.

They had closed to prevent a bank run following a Eurogroup decision to seize deposits, or bail-in depositors, to recapitalise the lenders.

According to a document prepared by external lawyers of the CBC, A&M are seeking a “recapitalisation fee” of €4.75 million as payment.

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

This had not been included in the initial deal signed with the company.

On Wednesday, the CBC said payment of the fee was not justified.

A spokesperson for A&M declined comment when asked by Reuters.

A legal report compiled by CBC legal consultant Alecos Evangelou says A&M agreed with Demetriades a fee of 10 basis points ‘of the total gross capital benefit into the banking system’.

An attached letter to the lawyers’ report, purported to be from Alvarez and Marsal to Demetriades, makes such a reference. Demetriades has not publicly specified the terms of the arrangement.

The fee would be payable on October 31.

Former CBC deputy governor Spyros Stavrinakis told web-based news outlet Sigmalive on Wednesday 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 in a statement released Thursday evening, the CBC said A&M never had any “intention” to receive compensation from a bail-in.

In the statement, the CBC said it had received a letter from A&M on Thursday, in which the consultants stated that “at the time of the agreement there was never any intention of requesting compensation from the bail in and this continues to be the firm’s position.”

But this did not mean A&M are waiving their fee, sources said. Rather, the consultants consider that they are entitled to a ‘success fee’ regardless of how Cypriot banks got capital – with or without a bail-in.

“In other words, they consider as a success the mere fact the Cypriot banks were recapitalised,” the sources said.

However, the Mail was told also that Panicos Demetriades’ latest counter-offer to A&M amounts to €1.8m; whereas the consultants are still asking for €4.75m.

The €1.8m proposal, the sources said, corresponds to 0.10 per cent of the combined €1.8bn needed for recapitalising the co-operatives (€1.5bn) plus the estimated €300m that Hellenic Bank needs in new capital. Unlike Laiki and Bank of Cyprus, which were bailed-in, the co-operatives were bailed out.

It’s understood that Demetriades’ counter-offer to A&M was made earlier this week – most likely after news broke of the contentious deal between the Central Bank and the consultancy.

If true, this would suggest that the governor, or the CBC, or both, did agree to pay A&M a success fee, but that the former are now seeking to redefine the so-called “Recap fee” so that it applies only to a bailout.

 

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