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Finance minister lied about Co-op, says auditor-general (Update 1)

Auditor-general Odysseas Michaelides

Auditor-general Odysseas Michaelides said on Monday that Finance Minister Harris Georgiades publicly lied and misled the both the council of ministers and the bank’s supervisor over the donation of Co-op stock to the its customers.

The European Central Bank’s (ECB) Single Supervisory Mechanism (SSM), which together with the Central Bank of Cyprus supervised the bailed out state-owned bank, had dismissed the idea of allocating stock to the customers, Michaelides told the committee investigating the demise of the Cyprus Cooperative Bank, according to the Cyprus News Agency.  The idea had first been tabled by Georgiades in 2016.

Georgiades “had a letter from the supervisor listing 1,000 reasons why he should forget this matter, had (also) a letter from the Central Bank of Cyprus, and he still lied publicly that (it) was not conflicting with supervisory requirements,” which included additional €1bn in capital, Michaelides said. “I believe that this serious delay in taking action was the basic reason why the Co-op failed.”

It was the second part of the deposition of the head of the government’s Audit Office, after he had accused the finance ministry on Thursday of resorting to blackmail to bar his agency from auditing the lender. The committee was appointed by Attorney-General Costas Clerides.

Michaelides presented correspondence as exhibits related to the bank’s initial plan of tapping €200m in private equity as part of a capital increase which referred to expected losses of up to €1bn at the Cyprus Co-operative Bank.

The Co-op, which in June agreed to sell its healthy operations to Hellenic Bank after it failed to reduce its non-performing loans (NPLs) stock fast enough, has not produced yet accounts for the financial year 2017. Its NPLs account for six tenths of its total loan portfolio.

“When the ship was sinking, even in May 2018, they were still preparing notes about the free of charge allocation of shares,” Michaelides was quoted as saying. “This is proof of amateurism, superficiality, incompetence and stubbornness in the handling of a serious matter, which though it did not materialise and therefore had no consequences, was a distraction from the ultimate goal which was finding equity.”

This may have been “an attempt to save face if they had to admit that their idea was wrong,” he said.

A note prepared by Dionysis Dionysiou, a finance minister official who oversaw the government’s investment in the bank, dated November 2016 and sent to the finance minister, says that the European Commission warned that in case the bank needed additional capital and failed to have its stock listed at the stock exchange or the bank was not attractive to investors, a bail-in would be the only option.

The chairwoman of the SSM Danièle Nouy expressed in June 2017 her disagreement with the minister’s intention to hand over shares of the then struggling bank which would have been detrimental, as well as her disappointment over the bank’s unacceptably unambitious target setting, Michaelides said. Nouy had said that introducing new capital and expertise was both critical and urgent.

Two months later, in August 2017, Dionysiou prepared another note, this time to the permanent secretary of the finance ministry ahead of a meeting of the parliament’s watchdog committee. He wrote that the number one challenge the bank was facing was implementing a listing on the stock exchange based on the cabinet’s decision, which provided for the donation of stock, Michaelides said.

“Even after the supervisor told them that it would be disastrous, he prepared a note saying that the foremost challenge was to implement the cabinet’s decision,” Michaelides exclaimed.

Georgiades then misled Nouy by letting her know in November that the idea to donate stock had been shelved, “while the minister was forwarding draft bills to the Attorney General about the stock grant”, the auditor said.

Nouy warned that the situation in the meantime had deteriorated at the Co-op both in regarding corporate governance and non-performing loans and as a result the bank would need more than €200m initially estimated in private equity, Michaelides said.

Dionysiou said in a note to the minister on January 3, 2018 that the SSM’s in situ inspection was going to show that “the situation is worse than that reflected in data and that the attempt to find an investor will fail” as the capital requirements were in the range of €500m and €1bn, he continued.

“He (was the) one who was telling in a note to the council of ministers that everything was well,” he exclaimed again.

On March 13, just six days before the Co-op announced its decision to sell its assets, Georgiades complained to the Central Bank of Cyprus about the SSM’s “extreme assumptions” in calculating the Co-op’s capital needs, just to receive a response from governor Chrystalla Georghadji that the Co-op’s representatives did not contest the assumptions in an earlier meeting with a delegation of SSM, the auditor said.

Michaelides also said that the way the bank’s chief executive Nicholas Hadjiyiannis, the bank’s former chairman and childhood friend of Georgiades, who was appointed under questionable circumstances, acted in the selection of Spain’s Altamira for the handling of the Co-op’s €7bn in non-performing loans was “flawed and unacceptable”.

He added that Hadjiyiannis may have been inept “beyond description” when he was publicly saying that the Co-op had met its targets and would need additional capital only if it decided to change its plans on the management of the non-performing loans, when the supervisor was saying that they needed up to €1bn in fresh capital.

Hadjiyiannis’s actions led to the Co-op ending up having only one option to choose a partner to negotiate the management of its delinquent stock, the auditor said.

“It looks like Hadjiyiannis played a defining role in leading the Cyprus Co-operative Bank to having Altamira as the only option and there are negative comments made also by the (bank’s former) chairman (Christakis) Taoushanis about his role,” Michaelides continued.

He also alleged that Hadjiyiannis, before joining the Co-op first as chairman, had left Bank of Cyprus after the latter had initiated a disciplinary probe against him. When asked by the committee how he got the information, Michaelides said that he received it from a reliable source. He did not disclose the source but clarified that it was not Hadjiyiannis’s predecessor Marios Clerides who told the committee on August 3 that there were rumours about Hadjjiyiannis’ departure from Bank of Cyprus.

Altamira, which started managing the bank’s bad loans in January after the Co-op entered their agreement a year ago, is failing to meet its targets, he added, citing a document prepared by Dionysiou. The actual reduction in non-performing loans is €300m below that of the target while the reduction of loans in arrears for 90 days or more is €60m below, he said.

The government’s chief auditor said that the finance minister is also to blame for approving the deal with Altamira which the shareholders passed in a general meeting.

“I don’t believe that the finance minister’s responsibility concerns the final approval, but the fact is that he knew via Dionysiou very well of what was happening, and should have intervened,” Michaelides said. “The final approval he gave shows that he could have had a say.”

Dionysiou, Michaelides added, while being on the finance ministry’s payroll, also got paid by the Co-op for participating in board meetings as observer.

“That person whom the parliament placed in charge of approving the board’s decisions, was getting a €25,000 baksheesh every year on top of his salary,” he said.

In addition to his annual salary and the remuneration from the Co-op, the finance ministry official also got another €6,000 in 2014, €5,754 in 2015 and €11,000, in the form of allowances from the ministry.

Lastly, Michaelides said that the finance ministry requested in 2015 from the Co-op to write down loans and other favours including, restructuring and grace periods, in the case of 54 loans of communal councils, municipalities and various individuals, which violated the principle of the government staying out of the management of the Co-op.



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