Cyprus Mail

A tale of two presidents

BoC recently raised €1.0bn from foreign investors, including US-based Wilbur Ross (above) and the European Bank of Reconstruction and Development

By Savvakis C. Savvides

IN 2008, after failing to get its presidential candidate into round two of the presidential elections, DIKO did the unthinkable and backed Demetris Christofias – a die-hard communist of limited ability – to become president. Christofias’ five year reign gave Cyprus two explosions.

The first, at Mari, was physical, cost 13 lives and partially destroyed the island’s main power station at Vassilikos. The second exploded the very foundations of the country’s economy as a result of the worst economic management of public sector finances and a near total lack of regulation and control of the banking system.

Wikipedia accurately describes the role of Christofias in the banking crisis as follows: “The country’s banking crisis that came to a head in 2012 was blamed on Christofias, his lack of ability, and his refusal to take advice from his ministers.

In polls conducted shortly before the expiration of his presidential term, he was voted as the worst president to have held office since the foundation of the Cypriot Republic. [As a result] Cyprus asked for financial bailout in June 2012, but talks faltered when President Christofias balked at measures such as privatisation.”

Soon after taking over from Christofias, the newly elected government of Nicos Anastassiades found itself in dire straits regarding the state of the economy and the painful options that were laid out before it in the iniquitous Eurogroup meetings of March 2013.

The new president, in his beloved method of “charm them and win them over” tried his utmost to persuade our European partners and the World Bank representatives that no bail-in was necessary, and that if we had to do something, a “tax” all the deposit holders (including those accounts with balances of under €100,000 which as the head of the state he was obliged to be the guarantor and protector of) with an across the board bail-in of 9.9 per cent would suffice. It was curious number indeed, by the way.

It was as if some bigger force had mandated that a bail-in of higher than 10 per cent would not be acceptable.

It was a taste of things to come for a government and president that makes up policy by public relations. The problem with such a president of course is that he soon becomes vulnerable to organised interests who happen to have or can somehow secure access to the Presidential Palace.

Unfortunately, an over-confident president with a dominant and overwhelming personality, but one who, it would appear, is also superficial and conniving in his approach, is liable to drive the country into new and bigger dangers and risks.

And this, I am afraid, is what may be happening right now.

The latest piece of presidential political mastery may have come about in the role the president may have played in the recent take over of our systemic banks by hedge funds.

For about six months, when I was a member of the interim board of the Bank of Cyprus, we rebuffed hundreds of hedge funds who were trying every which way to enter through the back door and take over at greatly discounted prices the loan portfolio of the bank.

We slammed the door because we very well knew that the bank (and the country) could not sustain such losses. We also had a fairly good idea of how hedge funds operate.

They basically suck the blood out of governments and financial institutions in distress, making themselves a huge, quick profit and move on.

This was the last thing the post bailed-in Cyprus needed. A financial expert has characteristically recently commented, “We need hedge funds taking over our banks like we need the Ebola virus in Cyprus.”

Of course, when one is at the edge of the cliff and about to topple to a certain death one is perhaps willing and wise to accept a parachute even if it is full of holes.

At least this way, there is a chance of survival even if the cost is sustaining very serious injuries.

The question we should be asking, however, is why we allowed ourselves to come to this point? Why indeed did a whole year pass without either the government or the banks taking any reconstructive measures?

The proposal to create a development bank to take the lead in the restructuring of major projects in the economy for example was quickly thrown in the recycle bin.

Typically, the current debacle has unfolded following reports of private meetings at the Presidential Palace with Bank of Cyprus CEO John Hourican and some “prospective investors”.

Seemingly, as if the stage was set, soon enough we witnessed the parameters of the passing of control of ownership of the bank to hedge funds rather clearly spelled out and mandated by the Central Bank and strongly supported by the minister of finance.

The end result is that the hedge funds are now triumphantly, and as saviours, entering the Bank of Cyprus through the front door, but very suspiciously, via and courtesy of the Presidential Palace.

Our president, and in truth, most of our politicians who are now criticising the new and totally necessary law for a legal framework that allows for a quick resolution in liquidating mortgaged assets that secure non-performing loans have once again failed to understand how hedge funds operate and what is really at risk.

As Hourican and the new boss at Bank of Cyprus Wilbur Ross were so quick to point out in articles in the local press, almost as if they were already prepared for it, it is not their intention to engage in an immediate selling off of mortgages.

I believe them. In fact, the real threat is from selling the loan portfolio of the bank which will subsequently be packaged and sold to investors.

Indeed, if it were possible for investment banks to do this in the United States with packages of sub-prime loans, how much easier would that be with well collateralised loans that are likely to appreciate in value in the next three to five years?

Moreover, this is not likely to take place until after the bank passes the stress tests and becomes a member of the new European Central Bank (ECB) network of banks.

This way, it will be possible to sustain the losses the bank will inevitably incur from selling off their loan portfolio at hugely discounted prices as the ECB and the government of Cyprus will have to pick up the bill of recapitalising the bank once again.

Soon, after the selling off of the loans, I presume the hedge funds will also sell off their shares in the bank and move on to “save” other distressed countries and financial institutions around the world.

The auctioning of the acquired mortgages will happen gradually in order to cover the interest due to bond holders with a major sell off happening perhaps in three to five years when, as they expect, the property prices in Cyprus will recover and thus generate a huge profit for them.

What is really at stake is that this wealth transfer will go outside Cyprus. Even in the case where the bank takes over the properties or creates an asset management company in Cyprus, value would be preserved and remain to a large extent within the country.

This is the major risk our politicians must be aware of and should be thinking of ways to contain.

In my opinion, instead of asking for many changes to the new bill which are not even feasible let alone desirable, such as to compel the bank to settle the whole loan when it auctions a mortgaged property, our political leaders should try to understand what is likely to happen and think of ways to guard against or at the very least mitigate its impact on the people of Cyprus.

For example, a simple condition in the new law to be drafted making it illegal to sell off loan assets outside the Cyprus banking system (a very reasonable condition based on the lender-borrower contract) would go a long way towards achieving this objective.

The bottom line is that a president who cannot judge the character and true intentions of people around him or assess the real situation of the country, and I may add, one that is evidently more concerned with his image rather than substance, is the worst that could have followed the “egocentric and incompetent” style of the previous president. The country cannot survive two such presidents consecutively.

In fact, I don’t think any country can.

Savvakis C. Savvides is an economist, specialising in economic development and project financing. He is a former senior manager at the Cyprus Development Bank and has been a regular visiting lecturer at Harvard University and more recently at Queen’s University, Canada. Author page:

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