Cyprus Mail

New York Times: Demetriades inflated Laiki needs to keep it afloat

Former Central Bank of Cyprus (CBC) governor Panicos Demetriades

By Angelos Anastasiou

FORMER Central Bank of Cyprus (CBC) governor Panicos Demetriades has found himself in hot water again as the New York Times reported yesterday that he had played down concerns raised over the granting of some €9bn in emergency liquidity assistance (ELA) to now-defunct Laiki Bank in a series of 2012 sessions of the European Central Bank’s governing council.

ECB rules stated that ELA funding, available to solvent but illiquid commercial banks only against collateral, was the responsibility of national central banks, with the governing council holding effective veto power.

According to governing council minutes cited by the paper, late in 2012, and as Laiki’s ELA lifeline mounted, German centralbanker Jens Weidmann started raising objections about the extent of the ECB’s exposure to the woefully undercapitalised bank.

“It was not the governing council’s job to keep afloat banks that were awaiting recapitalisation and were not currently solvent,” Weidmann was quoted as saying in a December 2012 meeting.

And in January 2013, two months before the dramatic Eurogroup decisions that wound Laiki down and converted roughly half of uninsured deposits into Bank of Cyprus equity, Weidmann claimed that the value of the collateral posted by Laiki for ELA had been inflated by about €1.3bn.

This, the New York Times said, was a powerful charge against then-CBC governor Panicos Demetriades, as it implied he had played down the bank’s problems in order to keep it alive.

In June 2013, Demetriades admitted that Laiki had been kept “on a ventilator” until Cyprus’ February 2013 presidential elections.

According to the governing council minutes, Demetriades rejected Weidmann’s claim and said that his risk experts had a better understanding of the assets in question than their counterparts in Frankfurt.

Christian Noyer, the head of the French central bank, said that he was “very much concerned” by the aggressive way that the Cyprus central bank was valuing the collateral, adding that it “doubled the risk” for the ECB.

Klaas Knot of the Dutch central bank also chimed in, saying the collateral issue made him feel “very uncomfortable.”

“If ELA was provided without adequate collateral, this would be a grave issue,” Weidmann concluded, according to the minutes, as he pushed for the loans to be withdrawn.

But despite having received a draft report from the asset-management company Pimco that said the bank needed about €10bn in fresh cash — or about ten times its capital at the time – the governing council decided “not to object” to the continuance of the lifeline.

In a statement, the ECB once again pointed squarely at Demetriades, arguing that national banks, and not itself, are responsible for authorising ELA disbursements, and that in the case of Laiki, the governing council had relied on Demetriades’ assurances as to the bank’s solvency.

“The ECB neither provides nor approves emergency liquidity assistance,” the statement said.

“It is the national central bank, in this case the Central Bank of Cyprus, that provides ELA to an institution that it judges to be solvent at its own risk and under its own terms and conditions.”

“In this specific case, there was full consensus in the governing council on the need to get assurances from the Central Bank of Cyprus that this bank was solvent. The solvency was confirmed explicitly by the Central Bank of Cyprus, which also confirmed the proper valuation of collateral after an intense dialogue between it and the ECB.”

“The ECB was not the supervisor and fully relied on the assessment of the Central Bank of Cyprus.”

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