By George Psyllides
ACTING in a methodical, systematic and criminal manner, the management and the officials of the now defunct Laiki bank led the lender, and, at the same time, the Cypriot economy to collapse, a probe into the causes of the island’s economic failure has found.
The House Ethics Committee concluded there had been a strategy of unloading debt onto Cyprus through Laiki’s Greek operations, forcing the bank to increase its exposure to Emergency Liquidity Assistance (ELA) and possibly transferring it to Greece to cover interbank lending there.
“This however, in the view of the committee, in combination with the loss of deposits, was the main reason for the continuous increase of ELA that brought about the dramatic effects and the collapse of the banking sector in Cyprus,” the report said.
The report, spanning some 440 pages, 1200 with the annexes, covers an 18-month investigation carried out by the committee into the collapse of the economy.
The committee said tapping ELA was done without restrain and without considering the negative effects for the economy.
By March 28, Laiki had borrowed €9.1bn in ELA, more than half the country’s GDP.
The committee censured government officials for not seeking assistance from the European stability mechanism right after the write-down of Greek debt in October 2011, considering that the state could not provide Laiki financial support.
In just 42 days, the report said, between May 23 and July 3, 2012, Laiki’s ELA borrowing increased by €6.2bn.
The committee recommended further investigation of this fact to determine why Laiki had drawn saw much liquidity and where this liquidity ended up.
In its conclusions, the committee said that an important factor for the increased liquidity was the large increase in loans compared with deposits, as well as the rise in provisions for bad debts for problematic loans in Greece.
“Those amounts were covered by liquidity from the parent company, Laiki Cyprus, effectively by drawing ELA,” the committee said.
“The committee thinks further investigation should be carried out into whom and under what conditions, criteria, and guarantees, they approved drawing ELA, especially after July 2012, when Laiki came under state ownership, and with what procedures/approvals, this capital was channelled to Greece,” the report said.
It was proven that Laiki would never have been able to pay back the ELA it had borrowed with the approval of the Central Bank of Cyprus and the European Central Bank, whose roles should be probed further, the committee said.
The reasons behind the government’s decision to prop the bank with €1.8bn, knowing the real situation, must also be investigated.
“The liquidity and solvency problems were known to government officials who possibly acted in gross negligence, providing assurances and state guarantees so that an effectively insolvent entity could continue to operate,” the report said.
The report also outlines the differences in the size of the bonuses paid in Greece and Cyprus.
Between 2007 and 2009, 1,820 workers in Greece received €33.3m in bonuses compared with the 17.8m received by 2,546 workers in Cyprus.
The ten highest bonuses paid to executives in Greece between 2007 and 2013 reached €13.6m compared with €2.2m in Cyprus.
“Furthermore, the committee considers the behaviour of certain executives of Cyprus Popular Bank Public Co Ltd on one hand to be granted bonuses and on the other not to repay their loans as unacceptable and unethical,” the committee said.