Cyprus Mail

Demetriades had final say on ELA collateral evaluation

Panicos Demetriades said his actions saved the country

By Stelios Orphanides

THE FINAL decision on the value at which the Central Bank of Cyprus evaluated collateral it offered to the European Central Bank (ECB) to tap emergency liquidity assistance for Cyprus Popular Bank was taken by the then governor, Panicos Demetriades, a central bank official has said.

New York Times reported on Friday that requests for emergency liquidity for Laiki were met with scepticism at the ECB governing council meetings two years ago by Jens Weidman, head of Germany’s Bundesbank. Weidmann expressed doubts on the bank’s solvency and said the bank’s collaterals were overvalued.

“The viability problem was there; a bank must be viable and solvent in order to be eligible for ELA,” the central bank source with knowledge of the situation said on condition of anonymity. “When the problems arose in Greece and loans were not serviced, the bank had losses on the asset side of the balance sheet which finally proved fatal.”

While the value of a bank’s collateralised asset depends on factors such as its performance in the case of loans, or on credit rating in the case of bonds, “the final decision on the value of collaterals is taken by the governor. The governor may ask for opinions but what becomes official is what the governor says,” the central bank source said. “The ELA law doesn’t prescribe a mathematical formula for the value of collaterals. It merely says that any liquidity should be covered by ‘adequate’ collateral.”

Laiki collapsed in March 2013, less than a year after it was recapitalised with taxpayer’s money, when parliament turned down the first eurogroup bailout plan which also provided for the lender’s recapitalisation via a general haircut on deposits in the banking system.

On Saturday, former central bank governor Panicos Demetriades defended his handling of Laiki and said that his actions saved the bank and the economy. “In order to provide ELA, the central bank was taking Laiki Bank assets as collateral which were worth more than the liquidity it was granting,” he said.

The increase of the ELA caused by withdrawals of deposits and a worsening of asset performance, was exacerbated after Fitch Ratings became the third rating company to cut Cyprus’s rating to non investment rate and “Cyprus ceased to be an eligible counterpart,” the central bank official who insisted on anonymity said.

He added that the overall amount in ELA tapped by Laiki, which exceeded 9 billion euros, would have been contained if the government under former president Demetris Christofias had agreed the bailout terms with international creditors earlier.

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