Both the government and the Central Bank of Cyprus (CBC) on Monday voiced reservations on a legislative proposal aiming to compensate bondholders stricken in the 2013 financial meltdown.
The bill, tabled by House Speaker Yiannakis Omirou, would have the banks – essentially Bank of Cyprus – offset bondholders’ loans against the nominal value of their high-yield securities wiped out in the March 2013 ‘bail-in’.
The issue dates back to the late ’00s, when Bank of Cyprus (BoC) and now-defunct Laiki Bank issued the first of a series of Convertible Enhanced Capital Securities (CECS), an exotic financial product that offered high yields at high risk.
Of some €2.5 billion issued by the two lenders, most of the securities were purchased by institutional investors, but around €1 billion was sunk by private individuals now claiming that the bonds were presented to them by their bankers as something of an equivalent to bank deposits.
Following the March 2013 events, the CECS issued by BoC and Laiki were obliterated. Bank of Cyprus’ securities were technically turned into ‘Category C’ bank equity, meaning they are so far down the line of priority they have zero chance of ever approaching their original value.
Now, the bill tabled by Omirou – and understood to have the backing of EDEK and possibly AKEL – is designed to write off the loans which bondholders had taken out as collateral for these securities.
This would apply only in cases where the loans are distressed or in arrears, and not to affected borrowers/bondholders who have been keeping up with their payments.
If implemented, it is assumed that BoC would take a significant hit, although at this time it is not clear by how much.
A CBC official told the House committee that the nominal value of the securities was about €1 billion.
But a member of the bondholders association cited other figures, according to which the loans taken out to obtain CECS amounted to €180 million at former Laiki Bank and another €20 million at BoC – for a total of €200 million.
He said that BoC currently has on its books 1837 loans linked to these securities. According to the bondholders association, BoC would end up paying €133 million and that it has already made provisions for €87 million.
It became apparent at the committee that there was some confusion about the figures.
The CBC pledged to come back with precise numbers on the value of non-performing loans linked to the securities.
Finance ministry officials pointed out that the law would discriminate against individuals who bought the securities using their deposits, rather than by taking out loans.
Though it was not clear when the committee would next follow up on the bill, a source told the Mail that evidently its backers intend to put it to a vote before parliament is dissolved ahead of May’s legislative elections.
“Let’s assume that the amount of the bonds held with Laiki was €180 million. When Laiki was absorbed into BoC after the bail-in, at that moment the bonds were already at zero, since Laiki did not exist anymore,” the source said.
“So these bonds were offloaded onto BoC, which did not want them. That is the sequence of events. Now, with this proposal, effectively they want to take money away from the shareholders of BoC, in other words the very depositors who suffered a haircut in return for equity.”
The same source said also that the bill poses legal issues, a major one being that it intends to legislate the contractual obligations of a private entity, in this case a bank.
“Moreover, how can you possibly offset two different types of contracts against one another?” the source added, alluding to the purchase of the bonds and the loans.
Yet another sticking point is that the bill, as it stands, does not apply to persons who have been repaying the loans they had taken out in exchange for the securities.
“So are these people saps?” the source remarked. “And won’t they decide to stop being cooperative borrowers once such a law is passed?”
And in the meantime, a number of bondholders have filed lawsuits seeking compensation.
The Attorney-general’s office has yet to weigh in on the matter.
Speaking to reporters later, EDEK MP Nicos Nicolaides said the legislative proposal is designed to “put right” an injustice perpetrated against hundreds of people.
It was illegal for the banks to have granted loans in exchange for the securities in the first place, he claimed.
Chiming in, Greens deputy George Perdikis said the reaction of the finance ministry, the banks and the CBC was predictable.
“It seems that these three have banded together, they have formed a gang that hunts down borrowers, hunts down the citizens of this country, their only concern being that banks should not incur any losses.”