Cyprus Mail

Destroying the banks

Central Bank governor Panicos Demetriades disregarded the banking sectors interests

Since becoming governor of the Central Bank, Panicos Demetriades has focused his attention on destroying the Bank of Cyprus. George Christou explains how. What no one can explain is why

The main responsibility of a Central Bank is to ensure the health and soundness of a country’s financial sector to protect depositors and maintain confidence in banks. If the sector is in trouble, as has been the case in Cyprus, the Central Bank has the added responsibility of helping it overcome its problems because its smooth operation is essential to the economy.

This may all be stating the obvious, but for reasons that only the governor of the Central Bank of Cyprus (CBC) Panicos Demetriades can explain, the obvious has not been happening in Cyprus. In fact, we have been witnessing the exact opposite, ever since Demetriades was appointed to his post in May 2012. From day one, the new governor declared war on the banks, publicly accusing their boards and executives of mismanagement and recklessness, while promising to clean up the mess.

He may have been correct in his general appraisal, but these views should have been discussed behind closed doors, because the governor had an obligation to protect the banking sector. Instead, he spoke like a member of the AKEL Central Committee, lambasting the banks at every opportunity in order to deflect attention away from the precarious state of public finances.

This unrelenting war on the banks, by the state custodian of the financial sector, was also conducted through leaks to the media that usually exaggerated the problems. One such example was the CBC’s tip-off to Phileleftheros, after a meeting of the governor with the troika in early July 2012, placing the capital needs of the banks at €10 billion. This was before a consultancy firm had even been hired to evaluate the capital needs. Given the continual negative publicity – in a speech in the US in December last year he accused bankers of engaging in ‘casino banking’ – the surprise was that the Governor had not sparked a bank run.

“The banks were the enemy for Demetriades,” said one bank executive, who spoke on condition of anonymity. “He adopted a vindictive approach; his only concern being to discredit banking. His line was that banks were useless and mismanaged and his mission was to clean them up.”

But he could have handled the situation in much more sensible way. “By all means punish all those responsible for the banks’ problems but save the banking sector first and then punish them,” said the banker who added that Demetriades never consulted the banks about his ideas and what he planned to do.

“He simply issued directives which we had to obey. He never discussed anything with the Association of Cyprus Banks, never asked for feedback about his plans.”

This attitude has continued in the wake of the Eurogroup’s decisions on Cyprus’ bailout, a period during which the Central Bank was expected to work together with the new managements and boards of the banks in order to help the recovery of the banking sector and gradually restore public confidence. If anything, Demetriades has made this recovery as difficult as possible, delaying decisions, imposing stricter banking regulations than those in force in other EU member states and incurring the wrath of the government which has had several run-ins with him.

Finance Minister Harris Georgiades, on several occasions, called on the Central Bank to speed up the restructuring of the BoC, so it could be put on the road to recovery, while in September President Anastadiades also lost his patience with Demetriades who kept delaying giving his approval to the people standing for a seat on the BoC board.

He had failed to approve them by the time of the AGM, claiming he had been too busy and saying he would do this subsequently. This prevarication led to a TV outburst by Anastasiades, fed up with the governor’s power-games which were undermining what little confidence the BoC might still have enjoyed.

The government knows that the survival of BoC is the key to the eventual recovery of the economy and felt that instead of helping this process Demetriades was actively preventing it. Why, nobody could say, but there is little doubt that the survival of the bank was not a concern for him.

In fact, if it were up to him the BoC would have suffered the same fate as Laiki. The finance minister’s advisor Irena Georgiadou was present at a meeting with a delegation of the troika, between the two Eurogroup meetings in March. While the finance minister and his team were putting a case for a plan B – raising the required €5.8 billion through a solidarity fund – the troika people bluntly “said that their plan B was the immediate closing down of Laiki and Bank of Cyprus”.

Georgiadou said: “At that moment the governor of the Central Bank and then deputy governor (Spyros Stavrinakis) entered the meeting and confirmed that everything was ready for the closing down of both banks.” It was a “huge shock” and the Cypriot team immediately contacted the president who undertook the initiative to save the BoC. It was saved but only through the catastrophic bail-in.

Anastasiades might not be an economist but he was perfectly able to understand the cataclysmic, long-term consequences the closure of the biggest bank would have on the economy and Cypriot society. Demetriades, the economics professor, in contrast behaved as if the closure of the island’s systemic bank was a routine matter, a bit like winding down a neighbourhood kiosk. He did not attempt to dissuade the troika, dutifully preparing the resolution law that would have sent the Cyprus economy back to the 1950s, like an obedient clerical officer, oblivious to the interests of his country.

This was also evident in the way he had handled the re-capitalisation of the banks. The job of evaluating the banks’ capital needs was awarded to international consultancy firm PIMCO which had to carry out a due diligence exercise in order to arrive at the amount required. There was much debate about the assumptions and methodology used by PIMCO in arriving at the €10 billion figure, which was released last February.

When the report was released, sparking political outrage because the recapitalisation figure would make Cyprus’ debt unsustainable, Demetriades wrote to PIMCO to complain about the assumptions used, but in its reply the company pointed out that the assumptions “were direct inputs from the Steering Committee”, on which representatives of the Central Bank and finance ministry participated.

Demetriades, in a show of disregard for the banking sector’s interest, did not attend the SC meetings, even though, as governor he had the right to chair meetings and the final say over all decisions. These meetings were of critical importance as the assumptions that were agreed would determine the capital needs, but the governor was represented by one of his minions.

Worse still, when PIMCO was carrying out the due diligence, Demetriades forbade any contact between the firm’s technocrats and the management of the BoC. When a similar exercise was done by Black Rock for the banks in Greece, the governor of Greece’s Central Bank insisted that the consultants worked together with management of each bank. Unlike his Cypriot counterpart, he encouraged co-operation between the two sides because his objective was not to punish the banks.

This was not the only case of the governor’s bias against the BoC. On August 21, 2012, CBC contracted another international firm, Alvarez & Marsal to investigate the circumstances under which Laiki and BoC asked for state assistance. Demetriades had promised an in-depth investigation of the banks to identify the people responsible for the banking crisis.

In the preface of the report prepared by A&M, the company said it received instructions from the governor of the CBC on issues that they had to investigate. “By agreement with the governor, the investigation mandate was set to cover an examination of the following four areas”:
1) The losses of the Bank of Cyprus from the investment in Greek bonds.
2) The purchase of shares of the Romanian bank Banca Transilvania.
3) The acquisition by the Bank of Cyprus of the Russian bank Uniastrum.
4) The merger of Marfin Laiki with Egnatia and specifically the conversion of Egnatia to a Cypriot bank from being a subsidiary of Marfin Laiki.

Although the problem bank was Laiki – which required state assistance amounting to €1.8 billion, had drawn ELA in the region of €9 billion and, was technically speaking, insolvent – Demetriades asked A&M to focus its investigation on BoC, the problems of which were much smaller. The merger of Marfin Laiki with Egnatia was only included because AKEL had often used the merger in its attacks on the previous governor, claiming he should not have allowed it to happen. Interestingly, the A&M report said that the law did not give the governor the power to have prevented the merger.

When the A&M report came out last April and politicians begun asking why Laiki had not been investigated, the CBC issued a statement saying “the investigation will continue to cover the purchase of Greek state bonds by Laiki Bank.” On April 8, Demetriades told the House Finance Committee that “the investigation into Laiki Bank is expected to be completed in the coming months.” It is now December and we have heard nothing about the investigation into Laiki, because it never took place. The BoC was the target.

The biggest damage Demetriades caused the BoC was through the sale of its branches in Greece to Bank of Piraeus in March; the branches of Laiki and Hellenic Bank were also sold in what was described by former vice-chairman of BoC Evdokimos Xenophontos as “a crime” which constituted “a massive present to Greece”. This was a transfer of €3 billion worth of Cypriot assets to Bank of Piraeus, which paid only €500 million for them.

While the fire sale was part of the ring-fencing ordered by the European Commission and ECB, a governor who defended his country’s interests would not have allowed the sale to go ahead at such a preposterously low price. But Demetriades was not involved in the negotiations, which were conducted on behalf of the CBC by Alvarez & Marsal.

Interestingly the €1.94bn losses for the first nine months of this year that the BoC announced on Wednesday were directly related to the fire-sale of its Greek branches. It had lost €1.5bn in assets to Piraeus Bank.

In the post bail-in period, Demetriades, rather than trying to help the put bank back on the road to recovery, had been doing the opposite. The restructuring process dragged on without being completed for far too long, angering the finance minister while it took months to finally decide what percentage of uninsured deposits would be bailed in.

“I still cannot say whether he has done all this because he wants the bank to fail or because he has not got a clue,” said the banker who spoke on condition of anonymity.

Apart from the big losses, the BoC now also has to cope with the CBC’s ultra-strict definition for NPLs (non-performing loans). Last month, the new CEO of the BoC John Hourican said the Central Bank’s “foolish” definition of NPLs must change as this trapped vast amounts of capital and would probably prolong the recession.

To make matters even more difficult for the BoC, Demetriades is refusing to accept collateral on NPLs as security for drawing ELA. How ironic this is considering the BoC had been lumbered with the €9.5bn ELA debt that Demetriades had irresponsibly granted to an insolvent Laiki Bank.

Now that he is dealing with the BoC, in the words of the banker, “he is stricter and tougher than the troika”. It would appear that medicine the Governor is administering to “restore the health and soundness of the banking sector”, is more likely to kill the patient than cure it.

Is it any wonder that when asked, in an interview with The Independent published on Friday, whether the BoC could go down, Hourican said: “I am not going to say no, because we have to work our way through the problems.”

One thing is clear – if the bank survives it would not be thanks to the Governor of the CBC, but in spite of him.

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