Cyprus Mail

MPs backtrack on bondholders, pass controversial loan offset bill

Lawmakers on Thursday passed a law offsetting loans granted to buyers of bonds issued by Bank of Cyprus and Laiki Bank before the 2013 banking crisis, reversing a decision taken earlier in the day to postpone voting on the bill.

The item passed by a majority vote, amid pleas by DISY leader Averof Neophytou to delay the vote and warnings that the legislation would almost certainly be deemed unconstitutional.

Earlier, AKEL and DIKO, the two major opposition parties in Cyprus’s parliament agreed to vote in favour of the draft bill, proposed by House speaker and former EDEK chairman Yiannakis Omirou.

It’s understood the offsetting exercise would guarantee a good profit to certain depositors at the expense of its shareholders.

Legislators chose also to disregard repeated warnings from finance minister Harris Georgiades who expressed strong reservations concerning provisions conflicting with the constitution and the impact on Bank of Cyprus.

While not explicitly stated – or threatened – in Georgiades’ letter of concern to parliament, it was hinted that the bill might be vetoed on grounds of unconstitutionality, as it would treat one class of citizens – bondholders – more favourably than others – depositors whose uninsured deposits were seized but are entitled to no loan offsets.

The Cyprus Business Mail understands that approval of the bill by the parliament will help certain groups of investors make a good profit from their decision to invest in bonds. Those who are expected to lose are the current owners of the Bank of Cyprus, which include bailed-in depositors and investors who participated in the lender’s capital increase in 2014 by injecting €1bn in fresh capital, as the direct impact on the bank’s profitability is estimated at €180m.

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. Uninsured deposits of Cyprus Popular Bank, also known as Laiki, which went bust three years ago, were wiped out after the same had happened with the values of its bonds. Bank of Cyprus subsequently absorbed Laiki’s operations.

While Bank of Cyprus 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 and, subsequently, the 2014 capital increase.


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