IT WAS amazing to be informed that Alvarez & Marsal, the consultancy firm hired by the Central Bank of Cyprus (CBC) to offer its expert help in the restructuring and the recapitalisation of the banks, had asked and been granted a ‘success fee’ for its services. What ‘success’ it had achieved, to justify an additional reward of €11 million only the company could tell us. Could the banking sector, which A&M restructured and re-organised, actually be in a worse position than it is now?
In the letter of engagement, from A&M to the Governor of the Central Bank, dated 23 March 2013 – the day before the critical Eurogroup meeting – stated: “… plus a success fee of 0.10% (10 basis points) of the total gross capital benefit to the banking system however this is achieved. This shall be payable upon the transfer of any capital pursuant to the recapitalisation.”
Although this was subject to the approval of the CBC’s board of directors A&M got round this sticky point by sending a second letter, with the same date, without this condition being included. The second letter however, was signed on March 28. It said: “To augment the fees for these services, you have agreed that we shall receive a recapitalisation fee (‘Recap Fee’) of 0.10% (10 basis points) of the total gross capital benefit into the banking system. This shall be payable on 31st October 2013.”
A&M is now demanding its payment, but has offered a discount asking for only €4.75 million as a ‘Recap fee’. It has let it be known that it would pursue the matter in court if it does not receive payment, as the letter of engagement with stipulating a cut of the “total gross capital benefit into the banking system” had been signed by the Governor and was legally valid. In effect, A&M had a direct interest in over-estimating the capital needs of the banks, when doing the restructuring, as this would increase its ‘Recap fee’.
This was the firm that negotiated, on the behalf of the CBC, the sale of the Cypriot banks’ branches in Greece at a bargain basement price, which, in effect, led to the transfer to Greece of Cypriot assets of an estimated worth of €3 billion. The price was irrelevant to A&M as it would receive a percentage of the total gross capital benefit, irrespective of where it came from. When the final letter of engagement was signed (March 28, 2013), the bail-in of depositors had already been agreed, so A&M was in a ‘no-lose position’, even if the “capital benefit” was from people’s deposits.
This could have been avoided if the CBC had a Governor who knew what he was doing. But time and again Panicos Demetriades has proved that he is out of his depth and incapable of acting in the country’s best interests. Of course, according to the logic of European Commission and the ECB, this monumentally inadequate Governor is free to keep blundering on with impunity, because he is an independent state official that nobody can remove from his position.