Former Top Cypriot Bankers Cited in Report

LONDON — Two of the most senior executives at Bank of Cyprus may have deleted crucial e-mail documents last year relating to what proved to be a disastrous decision to invest heavily in Greek government bonds just before Greece’s international bailout in 2010, according to an investigative report commissioned by the central bank of Cyprus.

The report said forensic experts found that the computer belonging to the bank’s former chief executive, Andreas Eliades, who was forced to resign last summer, had “wiping software loaded which is not part of the standard software installations” at the Bank of Cyprus.

Investigators also found such software on the computer of Christakis Patsalides, a senior executive in the bank’s treasury department who, according to the report’s findings, was one of the masterminds behind the decision to buy the Greek government bonds. Mr. Patsalides has also left the bank.

Efforts to reach Mr. Eliades and Mr. Patsalides late Thursday were not immediately successful. The report said Mr. Eliades did not “participate or assist” in the investigation, despite being urged to do so by the bank and its outside lawyers.

The Bank of Cyprus, long considered the better run of the two large banks that have been at the center of the Cypriot bailout debacle, decided to speculate by accumulating a €2.4 billion position from late December 2009 until June, just as the Greece government was running out of money.

That decision resulted in the Bank of Cyprus sustaining a loss of €1.9 billion, or $2.5 billion, when bond investors were eventually forced to take a 75 percent discount on the value of those bonds under the final terms of the Greek bailout, worked out last year.

That loss, and the larger one absorbed by the other big Cypriot bank, Laiki Bank, in a similarly misguided investment foray, together totaled €4.5 billion. That was more than Cyprus, with a gross domestic product of only €18 billion, was able to sustain. And the losses resulted in a near-collapse of the Cypriot banking sector, leading the island’s government to see a €10 billion bailout from the troika of international lenders: the International Monetary Fund, the European Commission and the European Central Bank.

Under terms of the bailout, the Bank of Cyprus’ biggest depositors will be forced to take losses of as much as 60 percent to help absorb the cost of cleaning up Cyprus’s financial mess.

The issue of how the banks became laden with Greek government bonds has become an explosive issue in Cyprus as politicians and regulators scramble to explain to furious taxpayers why the country has been forced to impose harsh measures on bank clients of all sizes, including restrictions on fund transfers and withdrawals.

A committee of judges has already been appointed by the government to get to the bottom of the matter.

The report that surfaced Thursday had been commissioned by the Cypriot central bank last August, well before the country’s bailout was made final. The central bank hired Alvarez Marsal, a financial consulting firm, to investigate how and why the Bank of Cyprus had come to make such a high-risk gambit — one which, in the end, would push Cyprus to the verge of bankruptcy. Investigators say that from Aug. 12, 2012, the central bank had ordered that all electronic data at the banks be preserved.

The report did not say when the file-wiping software on Mr. Eliades’s and Mr. Patsalides’s computers was installed. But investigators did suggest that digital documents could have been disposed of during the many delays that followed the Alvarez evidence request.

The findings of the Alvarez Marsal report, especially the claim that top bank executives may have obstructed a central bank investigation, are likely to resonate widely in Cyprus. And while the top executives and board members most closely tied to the Greek bond purchase are no longer with the banks, the allegations could raise further questions about the Bank of Cyprus’s ability to survive as a viable financial entity.

Under the terms of the bailout, Bank of Cyprus will take on €9 billion of short-term loans provided by the central bank to Laiki Bank, which is being shut down.

But bankers and lawyers are only now discovering that the Bank of Cyprus will also be saddled with €6.7 billion of Laiki’s nonperforming loans.

Originally, it was thought that these most toxic of Laiki’s assets would remain in its bad bank so as not to further infect the Bank of Cyprus’ already dubious loan book.

The Alvarez Marsal report provides new details on the extent to which Bank of Cyprus executives were hoping that the high yields generated by the Greek bonds would cover the bank’s imploding loan book. More explosive, though, was the claim made by the report that the bank was obstructing its investigation well into last autumn.

“Mass deletion of data appears to have been undertaken on the Patsalides computer on 18 October 2012,” the report said.

Article source: http://www.nytimes.com/2013/04/05/business/global/former-top-cypriot-bankers-cited-in-report.html?partner=rss&emc=rss