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Offsetting loans with bonds to cause chain reactions, blow to BOC (Update-1)

Finance Minister Harris Georgiades claimed on Monday that many of the government's economic reforms had been introduced

Finance minister Harris Georgiades said that the approval of a draft bill offsetting loans of Bank of Cyprus and Cyprus Popular Bank bondholders with the value of their securities wiped out in 2013 crisis would cause losses to current shareholders and deal a blow to Bank of Cyprus, possibly causing a chain reaction in the economy.

“It will also damage Cyprus’s image as a reputable financial centre and its attractiveness to foreign investors,” Georgiades said in a letter dated April 11, to the chairman of the finance committee Nicholas Papadopoulos, who is also chairman of DIKO. Writing down these loans would increase the bank’s capital needs, the finance minister added.

“A provision which stipulates that the offsetting will take into account the nominal value of a bond makes the problem even more complicated,” the finance minister said.

“The bonds are subject to trading in the Cyprus Stock Exchange and (their value) dropped significantly,” already ahead of the March 2013 decisions of the Eurogroup, as the body of the euro area’s finance ministers is widely known, and that of the resolution authority, which comprises the board of directors of the Central Bank of Cyprus, Georgiades said.

The finance minister added that the draft bill, proposed by House speaker Yiannakis Omirou, former chairman of EDEK, and based on the assumption that all bond issues carried out by banks were illegal or in violation of regulations, “violates the principle of equality” by treating investors in an unequal manner, as well as the separation of powers stipulated in the constitution.

“Non-institutional” investors, a term not explicitly defined by law, are better off compared to uninsured depositors who had no loans to offset, contrary to the provisions of Cypriot law and decrees issued three years ago, the eurogroup’s decisions and the European acquis, the minister said. The finance minister added that the treatment of investors who took a loan to invest in these securities is more favourable compared to those who took no loan to do so or any other borrower with difficulties to repay the loan and as a result the bill may conflict with article 28 of the constitution on the equality of citizens.

As part of Cyprus’s bailout terms agreed in March 2013, Bank of Cyprus had to convert 47.5 per cent of its uninsured deposits over €100,000 into equity, while uninsured deposits of Cyprus Popular Bank, also known as Laiki, were wiped out. Bank of Cyprus subsequently absorbed Laiki’s operations. While bondholders saw their securities also converted to equity, their overall share in Bank of Cyprus’s capital was diluted as a result of the bail-in.

The finance minister said that the proposed bill, expected to be put to a plenary vote on Thursday, will force the Bank of Cyprus to write down its assets, and also conflicts with articles 23 and 26 of the constitution on the protection of property and the right to enter contractual agreements.

Bank of Cyprus rejects bondholders’ demands for compensation, many of which said they had been victims of a scheme by Bank of Cyprus or Laiki employees to invest when the two sought to increase their capital after the eruption of the Greek crisis and took legal action against the lender.

“It’s not warranted for the legislative to interfere by passing a law in the responsibilities of the judicial power, as there are hundreds of court cases pending,” Georgiades said.

“The bill creates an additional complication as there can be no offsetting of debts on the one hand and collateral on the other, as many loans belong to Bank of Cyprus and others to Laiki,” Georgiades continued. “Following the resolution authority’s decree, Bank of Cyprus incorporated loans from legacy Laiki into the asset side of its balance sheet but it never included the Laiki bonds in its liabilities”.

Bank of Cyprus is therefore being asked to offset loans in its possession against the liabilities of another corporation “which have zero value, to boot”, the finance minister concluded.

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