The AKEL government and his successor at the helm of the Central Bank intentionally inflated the numbers with regard to banks’ capital needs in 2012 in order to convince the public that the financial crisis was caused only by the banks, former Central Bank governor Athanasios Orphanides said on Tuesday.
This led to the decision to seize the holdings of depositors, shareholders, and bondholders, for the recapitalisation of the banks in March 2013.
Addressing the House ethics committee in a packed room, Orphanides made a point of complaining that he has not been allowed to speak publicly at parliament, even though he has asked to repeatedly since December 2013.
“The previous parliament denied a teleconference and declined to invite me during the summer months, when I am in Cyprus,” the MIT professor who lives permanently in the United States said.
What happened in Cyprus in March 2013, when Laiki Bank was wound down and Bank of Cyprus recapitalised using uninsured deposits, can only be characterized as “theft”, Orphanides charged.
“However, even though some continue to withhold crucial information, namely in drawers at the central bank and the finance ministry, certain conclusions can be reached,” he added.
“The haircut could have been avoided even as late as the first days of the newly-elected Anastasiades government, the sale of Cypriot banks’ branches in Greece to Piraeus Bank had been planned months in advance, the PIMCO report had been guided, and the Central Bank of Cyprus, as well as the European Central Bank, had been aware that providing Laiki with emergency liquidity [ELA] was illegal, at least during the last months of its existence.”
The PIMCO report, a diagnostic exercise to determine Cypriot banks’ recapitalisation needs conducted by US investment-management firm and delivered in February, 2013, featured heavily in the former governor’s analysis, after he claimed that the “AKEL government”, as he persistently referred to the Christofias administration, had deliberately bloated the numbers to demonstrate that the crisis had been brought on solely by the banks.
“The CBC’s actions in the months leading up to the March 2013 meltdown are of crucial importance, because they inflated the banks’ supposed capital needs,” he said.
“Τhis bloating is what made the ensuing haircut inevitable. But the planning of the bloating appears to have started as early as June 2012, when, in a global first, the government and the Central Bank publicly discredited the banking system. Nowhere else in the world has such a thing happened.”
Indicative of the plan to inflate the banks’ capital needs was a report run in local daily Phileleftheros in July 2012, Orphanides claimed.
“It reported capital needs of €10 billion, supposedly decided by the Troika,” he said.
“At the time, the Troika had made no analysis and had certainly come to no such conclusion. I would say that the source of the report was elsewhere, closer to Ayia Paraskevi.”
He was referring to the area in Nicosia hosting the Central Bank’s building, implying that the figure came from his successor, AKEL-appointee Panicos Demetriades.
“That this figure would lead to a haircut was a mathematical certainty to those who realised what it meant,” Orphanides, who was replaced by Demetriades in May 2012, explained.
Another conclusion that can be drawn when studying the facts is how disastrous the effects of procrastination can be, he added, using an analogy with the 2011 Mari disaster, when 98 containers with explosives, seized from a Syria-bound ship and stored in open space at Mari for over two years, exploded, killing 13 and destroying the island’s main power-production plant.
“In both cases, the AKEL government used the same recipe, stalling decision-making to avoid short-term cost,” Orphanides charged.
Meanwhile, he added, a €2.5 billion loan from Russia in 2011 also proved a bad idea, since it allowed the government to forestall decisions necessary to reverse the economy’s downward spiral.
“I told [then-Finance Minister] Kikis Kazamias, when he told me about the loan, that it could prove a good thing if the government took measures to fix the economy,” the former governor said.
“At the end of June 2012, when the government realised that an adjustment programme was inevitable, it falsely claimed that it was necessary only because of the bad shape of the banks. The point is that, by bloating the capital requirements figure to €10 billion, we left the Troika with no options other than a haircut.”
Procedurally, Orphanides explained, the inflating was achieved through the writing-down of the value of loans in the Cypriot banking system.
“PIMCO’s instructions were to assume exceedingly pessimistic estimates of the hit on the property market, to the tune of 23 per cent, when the actual drop was roughly 18 per cent,” he said.
“Also, it was told to discount the value of unencumbered collateral because it was very hard for banks to foreclose, as well as personal guarantees. These were valued at zero, pushing up the supposed need for capital.”
The Ethics committee session will resume on Tuesday, with Orphanides set to speak on other issues raised by deputies on the committee.