Our View: Laiki ruling could set a dangerous precedent

Everyone will have been surprised by the Limassol district court’s decision in favour of a Laiki Bank depositor who had sought compensation from the authorities for the loss of his savings in 2013. All cases brought against the authorities and banks for the loss of deposits during the 2013 haircut, had been lost, the courts invariably accepting the argument of the Central Bank of Cyprus (CBC), that the haircut was in the public interest as it protected all deposits up to €100,000.

The Limassol district court judge was not convinced by this defence, in the case brought by a Russian depositor, who had lost some €800,000 when Laiki went into administration. His lawyers argued that the money was lost because of the negligence of the CBC and the Cyprus Republic, which led to the extraordinary situation of 2013. In his decision, the judge concluded that the handling of the banks by the CBC and by state organs led to the haircut.

In his ruling, the judge said: “the diminution of the deposits of the plaintiff was owed to the negligent actions of Cyprus Republic and the serious negligence of the CBC and not to reasons related to the rules of the market. The economic crisis that hit Cyprus in 2009 was not faced as it should have been by the government, as the responsible institution for the planning, development and protection of the economy, nor by the CBC as the institutional organ – supervisor that was the guardian of the banking system and the correct operation of the banks.”

The judge’s decision reads a bit like an economics essay, based on too many value judgements. Is it for the courts to decide what is a correct or mistaken decision taken by the politicians? For example, he asserted that the former president Nicos Anastasiades was culpable for asserting that he would not allow the haircut of deposits, something that “justifiably” contributed to the “plaintiff not withdrawing his deposits at an earlier stage.” But did the judge expect the president to say, at the time, that bank deposits could be subject to a haircut and spark a bank run and complete collapse of the banking system?

There is little doubt that governments and the CBC performed their responsibilities negligently, in the lead-up to haircut, showing little awareness of the gravity of the situation and avoiding the necessary tough decisions that could have prevented the eventual meltdown. The fact is that Laiki was placed under administration because it was bankrupt, and Cyprus is not the first country in which this has happened to a bank, without the authorities being blamed. In fact, Laiki should have been shut down in 2012 – with the same consequences being suffered by depositors – but the government pumped in €1.8bn to keep it afloat for a few more months.

The legal service said it would appeal against the Limassol court’s decision and it is more than likely that the appeal will be upheld, because if it is not and a new precedent is set, another financial meltdown could be on the cards.