By Demetris Papadopoulos
WHAT DO AKEL, Athanasios Orphanides and Nicolas Papadopoulos have in common regarding the causes of the financial crisis? And how did these three entities come to form an alliance in the anti-foreclosure bill camp?
For those observing developments from behind the scenes, it is no secret that Papadopoulos’ ‘spiritual father’ and mentor is former Central Bank governor Athanasios Orphanides, who has been supporting the rejection of the foreclosure bill by the House. He is convinced that rejection will force the troika back to the negotiating table.
Orphanides expressed similar confidence to Papadopoulos (among others) after the first Eurogroup decision in March 2013. Orphanides – then considered something of an economy sage – believed the lenders were bluffing and were sure to table an improved proposal, because Cyprus posed a systemic risk to the Eurozone. This reasoning led political parties to reject the bill. By the time they realised what they had done, the economy was saddled with several billions in losses.
In an interview to the CyBC last November, Papadopoulos acknowledged that he had made a mistake. He is about to repeat that same mistake – on advice from the same man – once again with AKEL’s blessing.
When former President Demetris Christofias claimed that the banks were the Cyprus economy’s problem, his assertion was not completely erroneous. The back-to-back rating downgrades were primarily the result of the derailing of fiscal imbalances and the government’s inability to support the banks.
The cancer in the Cyprus economy was Laiki Bank, which had been bankrupt even before Greek bonds were haircut in October 2011. Since January 2011, Laiki hadn’t been in compliance with the regulatory minimum of 20 per cent required to calculate the liquidity coverage ratio. The bank’s liquidity ratio kept tumbling, and Laiki was forced to resort to Emergency Liquidity Assistance (ELA).
In September 2011, the bank absorbed its first ELA money – €500 million. Within a month, by October 2011, Laiki’s ELA shot up to €2.5 billion. During that same month, Laiki’s liquidity coverage ratio declined to 5 per cent for Euro deposits – for which the regulatory minimum is 20 per cent – and 5.5 per cent for deposits denominated in foreign currencies – which carry a regulatory minimum of 70 per cent. These figures included ELA funding, without which Laiki’s ratios would have been negative.
According to data from the Central Bank, in order to comply with minimum liquidity indices, Laiki required a total €5.7 billion! And all this before Greek bonds were haircut. In short, Laiki had been facing liquidity issues since the end of 2010 and was insolvent at the end of 2011.
How did an insolvent bank survive two more years? In February 2012, with ELA up to €5.2 billion, auditors PWC refused to sign off Laiki’s accounts unless the government committed in writing to supporting the bank. The Christofias government gave written assurances that it would support the bank and initiated the process of issuing a government bond for €1.8 billion – money it didn’t have.
The decision was a political one because AKEL did not want a bank to implode in its hands, while it refused to enter an economic adjustment programme. In a moment of honesty, AKEL leader Andros Kyprianou admitted as much during an interview to Sigmalive (August 27, 2013):
“With regard to the €1.8 billion to Laiki we had different approaches within the party,” he said. “Some of us argued that Laiki Bank should be left to fail, or enter resolution status, and the Bank of Cyprus protected. Others said that Laiki must be saved at all costs, and in the end we decided to rescue Laiki. This is what experts had advised us. We deferred to the experts and decided to bail out Laiki, which maybe we shouldn’t have.”
For its own reasons, AKEL decided to support an insolvent bank and saddle the taxpayer with its obligations, but why did the oversight authority – the Central Bank, then headed by Orphanides – allow it? At the end of 2011, the Central Bank was fully aware of Laiki’s predicament, and that was the reason Orphanides had forced managing director Efthymios Bouloutas and group chairman Andreas Vgenopoulos out.
If Orphanides had refused to approve Laiki’s bailout by the government and comply with the rules that forbid granting ELA to insolvent banks, the Christofias administration would have been forced to do what circumstances called for: resort to the European Stability Mechanism and pass legislation facilitating bank resolution.
So why did ‘economy sage’ Orphanides offer AKEL such an easy way out? For the reason most prevalent in Cyprus: ego. Just like the government needed Orphanides to push the hard decisions down the road, so did Orphanides need the government in order to secure his re-appointment. It is well known that Christofias would not even speak to Orphanides after he was spotted outside the Presidential Palace in a protesting crowd of Indignants immediately after the Mari explosion in July 2011. As well, the governor had sent Christofias a memo warning that the Mari explosion’s economic impact would be worse than that of 1974.
This imbalance in relations between the two men was rectified in August 2011, when Kikis Kazamias took over the finance ministry. Kazamias restored the relationship with Orphanides, worked well with him, and, according to sources close to the former governor, promised him the renewal of his mandate. In anticipation of such renewal – for which he remained hopeful until the last minute – Athanasios Orphanides did all of Kikis’ favours.
However, when the time came, Kikis resigned citing “leg pain”, and Christofias appointed Panicos Demetriades, who undertook to implement the government plan to bail out Laiki 15 days into his term. Meanwhile, upon Orphanides’ departure from the Central Bank in May 2012, Laiki’s ELA had been €5.7 billion, but June saw it spike to €9.5 billion.
It was only when Orphanides failed to secure a second term that he became a vocal critic of AKEL, but even then he served the party’s stalling tactics from behind the scenes. As is well known, Orphanides was the godfather of disputing PIMCO’s estimates for the recapitalisation needs of Cypriot banks.
The Christofias government had agreed to an adjustment programme since November 2012, which had been missing only PIMCO’s number. The government had no authority to determine the number, but its consent was required in setting it. In October 2012, AKEL’s Central Committee decided to exhaust all options, irrespective of consequences, leaving the programme decisions to the next government. By disputing PIMCO’s figures, which proved rather modest in the end, Orphanides gave AKEL the perfect cover to drop decision-making into the new government’s lap, with all the dramatic aftermath that ensued.
These days, grasping at the foreclosures bill, Orphanides is once again suggesting to the political world options and tactics that risk pushing the country off the cliff. His motives are once again the same. He was not utilised by the Anastasiades government, and so he is undermining it, obviously in hopes that its fall will allow his glorious return through Nicolas Papadopoulos.