DECISIONS on the banking sector do not always seem to be thought through. In the previous week it was reported that the Bank of Cyprus would release some €900 million held in fixed interest accounts by the end of January. Although there has been no official confirmation, no denial has been issued by the bank, suggesting that this was its plan. The BoC chairman built up the expectations by saying recently that the bank “expected to announce some good news”.
However the release of the funds, which appears to have the support of the government because this would boost liquidity, does not have the approval of the Central Bank and troika. Both, reportedly, have reservations about releasing the funds, especially as the BoC had the ability to keep them frozen for another six months. Then again, if the bank’s board, which has a full picture of the situation, decided that there was no risk involved it is difficult to argue against the release.
The news has been positively received, most people believing, rather optimistically, that the release of €900 million would provide the market with much-needed liquidity. Others have argued that it could boost confidence in the BoC because not being obliged to extend the freeze on deposits would be viewed as an indication the bank was on the road to recovery. An academic speaking on a radio show yesterday, speculated that such a show of strength might even encourage people to take their money back to the bank.
It was a valid point as confidence is influenced by public perceptions. But there is the possibility that the Central Bank and the troika, erring on the side of caution, would argue in favour of extending the freeze for another six months. What would that do to the low confidence in the banking sector? This was why it was wrong to build up expectations, without knowing that the approval of the troika and Central Bank were a given. Perhaps the board already had consultations with both and was given the go-ahead, which would be the ideal situation.
Returning to the issue of public perceptions, was it really necessary for the legislature to announce its approval of the granting of €2.9 billion in government guarantees for the issuing of bank bonds? Could this not have been done in secrecy? It is a sound decision, but has anyone thought how it would be perceived by people, who still remember that government guarantees of €1.9 billion had been given to Laiki in order to help it draw liquidity? The announcement of the approval of the government guarantees could lower confidence in the banking sector, even if the €900 million is released.
Confidence in the banks is so low and fragile that politicians, bankers and technocrats really need to tread carefully, thinking everything through before making public announcements about the sector.