Cyprus – learning the lessons

cyprus flagThe “Cyprus scenario” is back in the news in Greece because of another extortion: on the evening of February 20, the representatives of the Troika told Greek finance minister, Yanis Varoufakis, that if he didn’t sign a four-month extension of the programme of the EFSF mechanism to support the Greek banks, he would be forced to apply capital controls, and the country would be led to exit from the euro. But while we do not know all the details of the recent negotiations, that’s not the case with what happened in Cyprus. At the moment the government of Greece is taking forward a number of bills that the Troika contests. Today’s revelations unfortunately only tell us a story that has already been written: Europe today is not being governed by the will of citizens, and employs blackmail to get what it wants. The Greek government, as well as the people who support it, will have to very seriously consider this, and its implications.

The Press Project has provided in-depth reporting on new information shedding light on the Cyprus events of 2012 that trashed its financial system and led the country into a Memorandum and all that followed.

See full report by Costas Efimeros here. Excerpts below. 
The story that follows is based on a series of documents from the Central Bank of Cyprus (CBC), internal documents of the European Central Bank (ECB), including the document revealed by TPP, documents from international auditing companies, a confidential internal 40 page report requested by president Anastasiadis after the signing of the Memorandum, and 440 pages of findings of the Institutions Committee of the Cyprus Parliament following the deposit haircut (bail-in) of the Cypriot banks. The data gives us the big picture of what happened between 2011 and March 2013, when the Cypriot government signed a Memorandum of Understanding and was brought to the brink of economic collapse based on a programme of “salvation.”

Cyprus, with its 800,000 residents, was one of several tax havens in Europe along with Luxembourg and the Netherlands. The value of its banking system was 8 times greater than the GDP of the country and had swelled to this level because of the low tax rate and loose control mechanisms. The Cypriot economy was driven towards collapse for two reasons: a) because of high exposure to Greek debt and b) because of a bank: the Marfin Popular Bank, managed by Mr. Andreas Vgenopoulos.

Don’t mess with Europe

The documents we have show that the bank “was in a very difficult position because of bad banking practices and its exposure to the Greek economy” already in 2010. On March 14, 2011 the bank had a liquidity ratio of 16.55% in violation of the minimum requirement of 20%, while by the end of the year the rate had dropped to below 10%. So when Evangelos Venizelos, then the Greek finance minister, went ahead with the PSI haircut the bank wasn’t ready to face the blow.

In September 2011 the bank’s management calls the Central Bank of Cyprus for the first time and asks to be added to the ELA (emergency liquidity assistance) mechanism. The central bank asks the Marfin Popular Bank to submit a restructuring plan but the response received on September 30 is considered “incomplete” and “vague”. Central banker Athanasios Orphanides informs the then president of Cyprus, Demetris Christofias, and sends him the CBC’s assessment, according to which the bank is essentially bankrupt.

On October 25, 2011, one day before the PSI, Christofias calls an emergency cabinet meeting and announces his decision to nationalize the bank. This option is in stark contrast with the ECB’s recommendations but is within the ideological framework of the communist AKEL party. From the minutes of the meeting, contained in a confidential committee report, it seemed that Christofias did not want to use the the EFSF mechanism, having seen the devastating consequences of the imposed Memorandum in Greece. The decision to nationalize the bank marked the start of a real economic war whose collateral damage was the destruction of an entire economy. Europe was determined to teach a lesson about “democracy” in Cyprus.

A time of conflict

At the end of 2011, specifically 27 December, the ECB conducts the famous Stress Test. Today we know that the scenarios used were very optimistic, and constructed more to convince observers that the European banking system was strong, than to explore the real capital needs of banks. Even so, Marfin Popular Bank presents a capital shortfall of 1.9 billion euros. Immediately after the completion of stress tests, the Cypriot government prepares a bill for the acquisition of the bank’s debt.

Until that moment Europe had shown that the salvation of the banks was a top priority, but in the case of Cyprus, an effort had been launched to address the problems without using the EFSF mechanism, which european ‘partners’ did not like at all. The ECB reacted immediately to the bill, responding that the cost of the bank rescue would be borne by the state budget and that if a loan was granted by the Troika, this amount would be excluded.  It concludes that the bill violates Article 123 of Cyprus’ accession to the EMU Treaty which prohibits monetary financing by the state. In other words, the ECB is saying that no other economic model than that of liberal capitalism can be applied within the Eurozone, regardless of the will of citizens. Sound familiar?

The Cypriot government ignores the ECB’s recommendations for the second time, and continues planning, but on the basis of the results of the stress tests. The actual needs of Marfin Popular Bank were of course much larger and getting worse by the day because of a strong capital outflow. The bank is now dependent on ELA funding.

On March 5, 2012 the government sends a request to the ECB for state recapitalization of 1.9 billion euros, who for the third time said no. This time Europe requires the integration of Cyprus in a memorandum and gives Cyprus a three day deadline to present a complete bank restructuring program (which is practically impossible), and for the first time threatens to disrupt the bank’s access to the ELA. The Minister of Finance receives the ultimatum and resigns the same day, stating health problems.

Finally at the end of May, after Christofias had first appointed in April a new governor of the CBC, Panicos Demetriades, the Cabinet decided to ignore the ultimatums of the ECB and approved the recapitalization of the bank. Mario Draghi is furious.

While the statements from Europe seriously aggravate the outflow of capital, Christofias made his final effort to avoid the Memorandum. He attempted interstate agreements with Russia and China, and in accordance with the internal documents available to us, tried to delay the announcement of the international firm Fitch’s assessment, which 3 days later demotes Cypriot bonds to the category of junk, thus closing automatically the funding from the ECB.

Christofias’ efforts to secure a loan of 6-9 billion from Russia or China fell on deaf ears and in July talks begin to include the country in a support program. On the 26th of the month, he gets the first Memorandum in his hands and rejects it immediately, stating from London where he was attending the Olympic Games that “we have a different assessment of the state of the economy.”

Instead of agreeing to the Memorandum, the Cypriot Government sends the ECB a new restructuring program for the Laiki bank drawn up by KPMG (the audit giant) which Draghi rejects in record time, refusing to accept it as proof of solvency for continued ELA funding of the Laiki Bank.

Eventually Christofias is forced to return to the negotiating table and after consecutive meetings, is finally on November 22, 2012 invited to Brussels to attend a meeting before the Eurogroup (this, also, will sound familiar) and is informed by representatives of the EU, ECB and IMF that if he did not agree with the Memorandum, the following day ELA funding to Cypriot banks would be cut. The same evening the President of Cyprus issues a statement: “After tough negotiations with the troika and always bearing in mind the difficult circumstances, we are very close to signing a Memorandum of Understanding (MoU) with the troika.”

Until that moment, the Troika had been discussing with Christofias the level of “reforms” to be undertaken by Cyprus, but not the loan agreement, with the justification that the evaluation hadn’t yet been completed by PIMCO, the international firm that had been tasked with the assessing Cyprus’s recapitalization needs. Still no one had understood that the Troika had decided for the first time to make individuals pay the cost of economic salvation.

Meanwhile, Europe is preparing. The EU summit takes the decision to ask the European Parliament to approve new regulation on the liquidation of credit institutions on the basis of an ECB proposal of July 2nd. The draft law, entitled “Consolidation of financial institutions”, which was also passed by Cyprus, essentially provided the legal framework for a bail-in. The aim was to deal with the legal problems concerning the sale of the Greek network of Cypriot banks to Greece, but also to prepare to recapitalize the banks. For the first time in two years, the night the legislation was passed, there was an immediate positive (if not enthusiastic) response from the ECB. However, the Cypriot MPs had not understood what exactly they were agreeing to.

As 2013 begins, presidential elections are approaching in Cyprus. In the last Eurogroup that the AKEL government would participate in, it was decided that the Memorandum would be signed by the new president that would emerge from the elections. The plan in the hands of Christofias is already too heavy for the island but nowhere describes the involvement of the private sector.

The Presidential elections bring a change in power. The new President, Anastasiadis, five days after his election, participates in his first Eurogroup and learns to his surprise that the agreement includes a deposits haircut. Anastasiadis returns late that night to Cyprus and announces that the banks will not open the following day.

On March 19 Anastasiadis brings the memorandum to a vote in the Cypriot Parliament, which after an intense meeting, rejects it. Attempting a new negotiation, the next day the President announced that he would ask for less money from the Troika to reduce the haircut of deposits. While a conservative government was now in power, Europe intended to punish the country on the basis of a draft that had been prepared months ago. They delivered the ultimatum, according to which Cyprus had 48 hours either to magically find the money, or to sign the memorandum.

On March 23 Eurogroup met again, and after an 11 hour meeting agreed to loan 13 billion to Cyprus with even more onerous terms. The programme envisaged that Cyprus should raise 7.5 billion from a deposit haircut of its banks.

The Cypriot government, however, had a little problem in finding these billions because a day earlier the sale of the Greek network of Cypriot banks, together with their property, had taken place. They were sold to a Greek bank (Piraeus) whose chairman, as Reuters wrote, and as was submitted to the Institutions Examination Board of Cyprus, had borrowed via an SPV (Special Purpose Vehicle) more than a hundred million euros from the Marfin Popular Bank. His name is not unfamiliar: Michalis Sallas.

Piraeus Bank becomes the largest bank in Greece

Of particular interest in this whole affair is the sale of the Greek Cypriot banking network to Piraeus Bank. The multi-page conclusion of the Cyprus Parliament states that “the requirement of selling the network of Cypriot banks in Greece was made clear by our lenders for the first time during their visit to the island in the first fortnight of March 2013”. From the confidential internal ECB document revealed by TPP though, it is obvious that the design had begun months earlier, in fact as early as January. The ECB not only knew that Cyprus would be forced into a bail-in, but also foresaw the sale of the network of Greek branches “to a Greek bank.”

The ECB notes that the legal framework is not sufficient for what they want to do and so they change it. In late 2012, the EU Summit adopts the recommendation of the ECB for the restructuring of financial institutions and as mentioned above, manages to get the bill passed by Cyprus as well. This bill put a gravestone on the Cypriot economy, but no one had quite understood that yet.

In early March, Cyprus’s creditors inform the CBC of their intention to sell the network of branches in Greece, and also told them how it would be done (without ever asking Cyprus), as is described clearly in the confidential ECB document. The negotiation would be undertaken directly by the central banks of the two countries, and would be binding for the boards of the banks. Over 11 and 12 March, the Cypriots arrive in Athens, but consultations fail “because of the large gap in the valuation of the loan portfolios of the banks whose operations were being sold.”

This failure didn’t faze the EU, which intervened through DG Competition, preparing draft conditions of sale which included the valuation of the loan portfolios. This gave the  Hellenic Financial Stability Fund (HFSF), an active role “as a provider of funds for the acquisition,” which after consultation with George Provopoulos of the Bank of Greece, went to Piraeus Bank. The plan provided that the cost of the sale would be shared by the buyer and the seller: the Laiki bank and Cyprus Bank were invited to contribute through the loss of several billion, while additional funds for the sale would be offered by the HFSF, and not Piraeus. The Cypriots reacted and eventually the second attempt also led to an impasse.

On March 15, 2013, during Eurogroup, they brought out the big guns. Cyprus was faced with blackmail for the fourth time in a few months. Under the threat of ELA funding to its banks being cut, they succumb. The date for a new meeting is set for March 23, and would bring together Piraeus Bank and representatives of the Greek and Cypriot Troika. Cyprus no longer had a say in the negotiations.

Finally, after a rather easy negotiation, it was decided to sell the network of Greek branches to Piraeus, which ultimately paid 524 million euros, after having previously agreed to deduct 450 million from the amount for ‘adjustment costs’. Piraeus assumed responsibility for all deposits on March 15, 2013, which according to the findings of the Institutions Committee of Cyprus amounted to 15 billion euros. The agreement, however, included some terms which were “creatively ambiguous” and allowed the bank in certain cases to choose which loans of the Cypriot banks they wanted to buy. The conclusion notes that “the terms of the sale were very onerous for Bank of Cyprus as they resulted in losses of around two billion euros” and goes on to state that “the Piraeus Bank’s profit for the quarter amounted to approximately 3.6 billion euros including ‘negative goodwill’ calculated at 3.4 billion euros and incorporating positive deferred tax of 540 million euros. ”

On the conclusions of these findings, the Committee indicates that “many critical questions were raised around the acts of those who were involved” in the sale of the network to Piraeus Bank since “bank executives have allegedly received large sums of money in the form of loans from Laiki Bank, even with inadequate collateral” and that “the Committee expresses its deep concern regarding the selection of the bank and whether this was the most appropriate choice under the circumstances, and whether it was a random selection, or one made in the service of specific interests.”

The internal document published by The Press Project, together with the other documents we have, offer a very clear picture of how the Troika works. Until today those who claimed that the closed offices of Brussels developed plans for the salvation or destruction of entire economies were automatically considered populists and conspiracy theorists. But the evidence in these documents suggests otherwise. When the ECB, months before Cyprus appealed to the EFSF, wrote that “both Cypriot parent entities would become insolvent as a result of this move”, they considered this not as a problem that needed to be addressed, but as an achievement of the hard line that they had already decided to take.

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