Cyprus Mail

ECB memo reveals preparation for deposit seizure

The European Union’s decision to seize bank deposits and sell Cypriot bank branches in Greece, as part of the island’s €10 billion bailout, was outlined in a confidential European Central Bank (ECB) memo published by the PressProject, dated two months before the March 2013 decisions.

Entitled Ring-Fencing of Cypriot Banks’ Branches in Greece, the draft memo provides the outline of a road-map for the separation of the banks’ Greek operations from the parent companies in the event of a bail-in or haircut on deposits in Cyprus.

The focus of the memo was on the separation of Laiki, or Popular Bank, from its parent company but most of the considerations also applied to the branches of the other Cypriot lenders – Bank of Cyprus (BoC, Hellenic)

“The objective pursued by the proposed separation is to avert a deposit run in Greece in the event of (i) a default of Cyprus Popular Bank (CPB), or (ii) a bail-in of depositors in CPB,” the memo said. “The risk that the bail-in of deposits in Greece could spill over to domestic Greek banks and trigger system-wide outflows of deposits is high.”

According to the memo, the move would render both Laiki and BoC insolvent and in need of recapitalisation.

“The current state of discussions around the prospective programme for Cyprus suggests that some of the creditors would not be willing to provide funds for recapitalisation of the Cypriot banks and would require a bail-in of uninsured depositors to be implemented instead.”

The two banks would have to be resolved quickly, the memo said, leading to their abrupt downsizing from €67 billion to around €24 billion of total assets.

“In this process, over €17 billion of deposits (mainly coming from residents of non-EU countries, but also including some Greek deposits collected in Cyprus) would be frozen in the two banks under liquidation.”

In exchange for the €10 billion bailout, Cyprus closed Laiki and seized 47.5 per cent of deposits over €100,000 to recapitalise BoC.

Cypriot banks’ branches in Greece were sold to competitor Piraeus Bank for around €500 million, a move that cost Cyprus over €3.0 billion in losses.

Read memo  ecb

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