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Former central bank governor says co-ops were ‘murdered’ (updated)

Former central bank governor Athanasios Orphanides testifying via teleconferencing from the USA on Wednesday

The Co-Op Bank did not close naturally, it was ‘murdered’ by the actions of the Christofias government, former central bank (CBC) governor Athanasios Orphanides told an inquiry on Wednesday.

Orphanides told the three-member panel via teleconference from the US that when the 2013 Pimco report was filed on the capital needs of the banking system in Cyprus, an effort was made by the central bank to lessen the capital needs of the Co-Op.

Pimco was hired by the CBC and following the guidance of the steering committee chaired by the CBC, reached the inflated numbers. In order to inflate these sufficiently, it was necessary to change the methodology for the worse compared to similar audits that took place in other countries, Orphanides said. Orphanides was central bank governor between 2007 and 2012.

By such actions, the CBC added billions of euros to the calculations for the banks’ capital needs, but achieved the outcome then ruling-Akel wanted: the needs of the banks exceeded the fiscal needs of the government.

“Yes, there were problems, but with the correct management, the problems would have been manageable,” said Orphanides.

On the 2013 Pimco report, Orphanides said that while in other banking institutions it was shown that 19 per cent of the loans were a lost cause, the Co-op showed to have only 12 per cent of bad loans.

“A game was played to show that the Co-op looked to be in better shape,” Orphanides said.

He added that the Pimco mechanisms remained in place and were used by the Single Supervisory Mechanism (SSM) to assess the Co-op.

“Who was responsible for the supervisor of the Central Bank in January 2013? Was it perhaps the same people who are on the SSM now? Those individuals, who accepted Pimco’s assumptions, are the same individuals that caused the banks fall then and they have caused the fall of the Co-op.”

Orphanides said that it is one thing to say there are losses of a few million, and it is another to have a hole or billions.

“That hole was created by the wrong calculations and it was created by the government, and the central bank,” he said.

Regarding a letter he sent in 2012 to the then head of the Co-op Erotokritos Chlorakiotis on capital losses of €816 million, Orphanides blamed the government of former president Demetris Christofias. He said that the loss was due to the decisions made by the president and his partners on October 26, 2011 to attempt to maintain the capital to cover the name and financial value of the state-bonds held by banks.

“That was insane, it was something that the government should not have agreed to.”

He added that the decisions were made by Christofias and his partners, and that they decided to increase the capital adequacy of the bank to nine per cent.

Orphanides said that the lapse in capital at the Co-op did not occur from non-performing loans, but from the fact that the bank had many Greek bonds and many Cypriot bonds, ‘which were garbage’.

The EU leaders then decided to raise the capital and to ask for provisions on the bonds, which was not compatible with the regulations that were in place at the time, he added.

Orphanides told Chlorakiotis in the letter that the government had to work to solve the problem.

The former CBC governor also said that the Strovolos Co-operative Bank, the largest co-op, ran the biggest risk of closing and losing people’s deposits, but only the government could have intervened since the sector was ruled by a “closed circuit”.

“If you asked, which bank would it be, if a lender was to close in Cyprus and put deposits in danger, my answer would be the Strovolos Co-op is the most at risk,” Orphanides said.

The former bank supervisor said the Strovolos Co-op’s profits were fictitious because bad loan provisions were significantly inadequate. If the correct practices had been followed, the co-op would have recorded losses, he added.

Orphanides said the problem was that the independent audit service that examined their books had never asked for proper provisions to be made.

The head of the Strovolos co-op, Dimitrakis Stavrou, was also the chairman of its committee, said Orphanides, and “that’s what made the circuit a closed circuit”.

Stavrou should have been removed, he said, but that was the job of the commerce ministry’s co-op supervision and development service.

Orphanides said he realised that the central bank could not do anything to correct things when he received a letter from the head of the audit service, Constantinos Lyras, essentially telling him that the co-op movement should not be touched.

Stavrou, Lyras, the former head of the co-operative central bank, Erotokritos Chlorakiotis, and six others, including two companies, have been charged in connection with loans worth €3.6m secured in 2007.

Orphanides said the central bank had determined in 2009 that co-ops had a deficit of several hundred million, but this was not enough to make them insolvent.

“There were big differences from co-op to co-op; some had capital deficits, the professional ones were in better shape, while certain others, especially Strovolos, were highly problematic and corrections had to be made immediately.”

One of the reasons was poor corporate governance relating to the people who held the important posts.

In 2009, it transpired that substantial loans granted to Chlorakiotis and the head of the audit committee of the co-operative central bank, Nicos Nicolaou, were never serviced.

Orphanides said the biggest part of the deficit in the co-ops, which ballooned to €816m in 2011, was the decision to write-down Greek government bonds held by banks.

Orphanides had disagreed with the EU’s decision at the time to write-down Greek government debt, which inflicted huge losses on Cypriot banks.

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