Cyprus Mail

Tough week ahead for economy, BoC

By George Psyllides

MONDAY is the start of a tough week for the government and possibly the country as major developments are expected that could derail the course of the economy, which appears, at least on paper, to be going smoothly.

The first major obstacle for the government is the bill on foreclosures and other related legislations, which the majority of parties oppose.

The administration has amended the general framework, mainly to convince its erstwhile partner DIKO whose chairman, Nicolas Papadopoulos, appears sceptical.

DIKO abandoned the government shortly after Papadopoulos won the party leadership, ostensibly on account of President Nicos Anastasiades’ stance on the Cyprus problem.

Papadopoulos, who previously said the fastest way to get rid of the terms of the bailout was to implement them, has now formed an alliance with AKEL and EDEK to fight it.

Observers suggest his motives are purely political and are none other than the presidency itself. It remains to be seen whether he would be willing to put the country’s interests at risk since, as officials warned, rejection of the bill would spell trouble.

Failure to pass the foreclosures bill would preclude Cyprus from receiving the next tranche of financial aid in September.
Beyond the direct and indirect repercussions for the state, it would also mean trouble for the island’s fragile banking system.

During discussion in parliament earlier this month, Finance Minister Harris Georgiades and Central Bank Governor Chrystalla Georghadji warned that rejection of the legislation would have negative repercussions.

“Without a healthy banking system we have no economy. The banks may be blamed for a lot of things but that doesn’t mean that debtors shouldn’t pay their loans,” the CBC Governor said.

The Governor said the value of the mortgaged loans in the upcoming stress tests would be zero if the bill was not passed, meaning Cypriot banks would need more capital.

Without an effective loan recovery tool, banks, which will be put under a single supervisory mechanism in November, could be asked to make 100 per cent provisions for their loans.

The finance minister also warned that if Cyprus’ sixth bailout tranche was not disbursed in time, “we will face difficulties and consequences beyond our control and planning.”

As if this headache was not enough, the government must also keep an eye on Bank of Cyprus (BoC), which is in the process of completing a €1.0 billion capital raise. But not if its old shareholders get their way.

Numbering approximately 88,000, the bank’s old shareholders saw their shares’ value diminished to 1.0 per cent in March 2013 when the bank was restructured following a conversion of 47.5 per cent of uninsured deposits into equity, the absorption of failed Laiki bank and the selling off of the bank’s Greek operations to Piraeus bank.

Now, 285 shareholders want an injunction banning the increase in share capital before the value of their stock is restored to the level of March 15, 2013 or else suspend an extraordinary general meeting (EGM) scheduled for August 28 to vote on the capital raise.

The court decision is expected on Tuesday. Without the extra cash, BoC would have a difficult time passing the upcoming pan-European stress tests on systemic banks that will be put under European supervision.

But even if the court rejects the request, the capital raise may be defeated at the EGM as shareholders claim it is tantamount to a second deposit seizure.

The motion must be approved by 75 per cent of those present. The government has 18 per cent of the vote but some Russian shareholders have signalled they would vote to reject.

Former deputy chairman of the board Evdokimos Xenophontos compared it to taking their rights and handing them over “just like that on a plate. These things are illegal.”

Xenophontos, wrote to the head of the European Commission’s mission chief for Cyprus, telling him it was wrong to put a patient who is under “intensive care” through a “stress test”.

“Such a test should be postponed. Right now the Bank of Cyprus is undergoing a recovery process,” Xenophontos told Maarten Verwey.

Xenophontos argued that the way the fresh capital was secured alienated the bailed-in depositors and effectively put the bank in the hands of foreign interests.

“How can the Bank of Cyprus and the country regain its credibility when it keeps doing such bad practices? Why don’t we follow a policy of small but frequent rights issues which in actual fact are “voluntary/optional bail-ins?” a method used successfully after the 1974 Turkish invasion.

Verwey’s response was that the stress tests were a pan-European exercise and postponement was not an option. On top of that, the European official said, it would not help reestablish confidence in the Cypriot banking system.

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