January 23, 2020

Head of Cyprus’s Biggest Bank Resigns

Antreas Artemis complained that authorities rode roughshod over him and his board of directors by moving unilaterally to sell off units of the bank in Greece and planning to hit big depositors to pay for losses.

The changes at the Bank of Cyprus are part of the latest bailout deal negotiated between Cypriot officials and the so-called troika of international lenders: the European Commission, the European Central Bank, and the International Monetary Fund.

Mr. Artemis’s resignation, while not wholly unexpected following the controversial decision by international lenders to impose significant losses on the bank’s larger depositors, still caught the market by surprise and was a further reminder of how volatile and uncertain Cyprus’s financial system has become in recent days.

Bankers say that the fact that the board of the country’s largest bank had been left largely in the dark as its future was being discussed in Brussels and that an outside administrator had recently been named to oversee the bank in the coming months were factors likely to have contributed to his decision.

Despite promises since last week that the country’s banks would reopen Tuesday, the government late Monday ordered all of them, including the Bank of Cyprus and Cyprus Popular Bank — the nation’s largest financial institutions, with most of the accounts on the island — to stay shut through at least Thursday. The extended bank closing is to reduce the risk of a bank run by nervous depositors. Automated cash withdrawals will be limited to €100 a day.

On Tuesday, the Cypriot central bank said it had appointed Dinos Christofides, a well-known local businessman, to act as special administrator for Bank of Cyprus. Mr. Christofides, who operates a business advisory service in Nicosia, has long experience in auditing and advising major local and international companies.

Administrators are often assigned by governments, creditors or courts to replace management at troubled institutions, with a goal to restoring their finances.

In a statement, the bank said the resignation had not been accepted and “will only apply if not withdrawn within one week,” Reuters reported.

The island’s faltering banks suffered a new indignity on Tuesday, as Fitch Ratings said it was cutting its credit grades on Cypriot banks because of the losses imposed by the bailout deal on senior creditors.

Fitch said it was cutting its rating on Cyprus Popular Bank, known as Laiki Bank, to “default.”

Fitch also cut its rating on Bank of Cyprus to “restricted default,” a grade Fitch said means the bank has experienced a payment default on a bond, loan or other material obligation but has “not entered into liquidation or ceased operating.”

Laiki’s soured assets are being hived off into a so-called bad bank. Its good assets are being transferred to Bank of Cyprus, which is being recapitalized by converting uninsured depositors’ claims into equity. Fitch said it expects the losses on Bank of Cyprus’s uninsured deposits “to be material.”

Piraeus Bank of Greece said Tuesday it had acquired the Greek operations of three Cypriot lenders — Bank of Cyprus, Laiki Bank and Hellenic Bank — for €524 million.

The Greek branches of the Cypriot banks will reopen on Wednesday, Piraeus Bank said, and deposits “will not be subject to any emergency contribution or ‘haircut’ decided on for Cyprus.”

The acquisition, proposed last Friday by Greek authorities, “secures the stability of the Greek banking system, helps Cyprus tackle its crisis and protects depositors, customers and staff” of the banks, Piraeus Bank said.

The upbeat statement did not reflect the rueful mood in Greece, where newspaper headlines continued to lash out at Germany and Northern Europe for their tough stance in negotiations and lamented the possible implications for Greece, which is bracing for the return of troika inspectors next week.

Article source: http://www.nytimes.com/2013/03/27/business/global/europe-officials-seek-to-contain-cyprus-damage.html?partner=rss&emc=rss

E.C.B. Hardens Deadline for Cyprus Bailout Deal

Meanwhile, the mood turned sour on the streets of Nicosia, the Cypriot capital, where people flocked to cash machines Thursday morning to withdraw as much money as possible after the government declared that banks would remain closed until next Tuesday to give officials time to renegotiate the bailout deal.

Cyprus’s president is due to present international lenders with a revised plan later Thursday with the goal of raising enough money to satisfy creditors while also passing muster with Parliament. Cypriot lawmakers voted down a bailout proposal on Tuesday containing a controversial tax on bank deposits that had been negotiated with Cyprus’s European Union partners over the weekend.

The European Central Bank gave Cyprus until Monday to reach an agreement with the European Union and the International Monetary Fund if it wanted to continue to receive the low-interest loans that are essential to keeping its banks afloat.

From that point onward, the E.C.B. said it would only consider a fresh influx of emergency funding, as requested by Cyprus, “if an E.U./I.M.F. program is in place that would ensure the solvency of the concerned banks.”

Cypriot banks, which have been closed since Saturday, will remain closed through a national holiday Monday, the government announced late Wednesday, hoping to avoid a bank run while the bailout is being renegotiated.

But at branches of Laiki Bank and the Bank of Cyprus in downtown Nicosia, where lines had virtually disappeared over the last three days, there was an air of exasperation, anger and anxiety Thursday morning as people hoped that funds would still be on hand by the time it was their turn to make a withdrawal. Only one of two cash machines at each bank branch was working.

“Time is up — we want our cash,” said Maria Melitou, an accountant.

“Our friends in Europe brought us to this point,” she added. “We expected more.”

Irena Margilou, 32, the 13th person in an 18-person line at Laiki Bank’s cash machine, spoke in an embittered voice. “We don’t know what the future holds,” she said.

She questioned what she said was German insistence that the Cypriot government skim money from people’s bank accounts to secure a €10 billion, or $13 billion, bailout. “It’s like you’re telling us to just leave our money in our mattress,” she said. “What is happening to European solidarity?”

After the Cypriot Parliament on Tuesday rejected a plan to impose a one-time tax on bank deposits of 6.75 percent for accounts under €100,000 and 9.9 percent for amounts above that, the government on Thursday was planning to propose nationalizing pension funds from state-run companies and conducting an emergency bond sale to help raise the €5.8 billion the indebted country needs to secure the bailout.

The proposals are meant to sharply reduce the amount of money that would be raised by the tax on bank deposits, which was a condition of the original bailout deal negotiated with Cyprus’s three international lenders — the E.C.B., the I.M.F. and the European Commission, known collectively as the troika.

But even the revised plan contains a bank tax that, while much smaller than originally proposed, might still not be palatable to Parliament.

Under the new plan, all Cypriot bank deposits of up to €100,000 would be hit by an immediate one-time tax of 2 percent. Deposits above that threshold would be subject to a 5 percent levy.

The fallback was being cobbled together as Cyprus’s finance minister pressed his case in Moscow on Wednesday in hopes of securing additional aid from Russia, many of whose wealthiest citizens have big deposits in Cypriot banks.

Representatives of the troika were in Nicosia on Thursday but were not certain to sign off on Cyprus’s latest plan.

Cypriot banks have frozen all accounts in a financial crisis here that risks tipping the country into default and sowing turmoil across the euro zone.

The authorities have ordered Cypriot banks to keep automated bank machines filled with cash as long as their doors remain shut. But that has been of little help to the thousands of international companies who do banking in Cyprus, which cannot transfer money in and out of those accounts to conduct business.

Melissa Eddy contributed reporting from Berlin.

Article source: http://www.nytimes.com/2013/03/22/business/global/ecb-hardens-deadline-for-cyprus-bailout-deal.html?partner=rss&emc=rss

Political Economy: Cyprus Goes After the Little Guy

Cyprus’s proposed deposit grab is a bad precedent. Money had to be found to prevent its financial system from collapsing. But imposing a 6.75 percent tax on insured deposits is a type of legalized robbery. Cyprus should instead impose a bigger tax of on uninsured deposits and not touch small savers.

Confiscating savers’ money will knock confidence in the banks. Trust in the government will also take a hit, since Nicosia had theoretically guaranteed all deposits to a level of €100,000, or about $130,000. Small savers should be encouraged, not penalized. Those who squirrel away their savings are the quiet heroes of the financial system, not those who drag it down by engaging in borrowing binges.

Nicosia has not technically broken its promise to guarantee small deposits. That is because it is not the banks that are failing to repay savers — something that would have set off the insurance program. Instead, it is the government itself grabbing a slice of deposits. The pill is also being sugared by giving savers shares in the banks as compensation. That said, the mechanism is still an effective breach of promise.

There is no denying that Cyprus needed a solution. The small Mediterranean island was on the brink. Its banking system — which had grown to eight times its gross domestic product on inflows of Russian money and aggressive expansion in Greece — was technically bust. Its exposure to the Greek economy, Greek government debt and Cyprus’s own burst property bubble had seen to that.

Nicosia’s euro zone partners made it clear that there was no time to waste. They had chosen to hold their finance ministers’ meeting Friday night, knowing that Cyprus already had a bank holiday scheduled Monday. The country’s president said the European Central Bank was threatening to cut off liquidity Tuesday if there was no deal. The banking system would have collapsed.

In total, Cyprus requires €17 billion — almost 100 percent of G.D.P. — to rescue its banks and deal with the government’s own bills. If Nicosia had borrowed all that cash on top of its existing debt, it would have been carrying an unsustainable burden. It would have been only a matter of time before the debt needed restructuring.

Cyprus’ euro zone partners and the International Monetary Fund rightly decided not to lend it so much money, limiting the bailout to €10 billion. This means Nicosia should end up with debt equal to a manageable 100 percent of G.D.P. in 2020.

The problem was where to find the extra €7 billion. Because Germany and other northern European countries were not prepared to give a handout, there were two options: force the government’s own bondholders to take a loss, or hit bank creditors.

The option of a haircut on government debt — as Greece imposed last year — was rejected. Many of the bonds are held by Cypriot banks, so a haircut — a loss on investment — would just have increased the size of the holes in their balance sheets, meaning they would have needed an even bigger bailout. The Cypriot government’s credit would have been destroyed for little benefit.

So, pretty much by default, the banks’ creditors had to be tapped. Ideally, bank bondholders would have taken the strain. But Cypriot banks have hardly any bonds. So there was not much money that could be grabbed there.

This, incidentally, rams home the importance of requiring all banks to have fat capital cushions, consisting either of equity or bonds that can be bailed in during a crisis. The sooner international regulators come up with a minimum standard for so-called “bail-in” debt, the better.

Given that Cypriot banks did not have such a cushion, the remaining option was to hit depositors, for €5.8 billion in total. There was even some rough justice in the policy. After all, as much as half of the country’s €68 billion in deposits is held by Russians and Ukrainians, and some of this money is thought to be black money laundered through Cyprus.

What is more, the country’s banks have been paying high interest rates in recent months — in some cases of as much as 7 percent on euro deposits. That is clearly danger money. Depositors should have known there were risks attached to such high rewards.

If the deposit tax had been confined to uninsured deposits, which are facing a 9.9 percent levy, such arguments would have merit. But the insured savers have also been hit with a 6.75 percent tax. It would be better to get the money entirely from the €38 billion of uninsured depositors. That would require raising the tax to about 15 percent. It is still not too late for Cyprus’s Parliament to change course.

The Cypriot government did not want to do this, because uninsured deposits are disproportionately foreign and it was feared that such a high tax would undermine its status as an offshore financial center. Even if there is domestic political logic in cushioning Russian mafia at the expense of Cypriot widows, such a policy is bad for the rest of the euro zone.

There probably will not be any immediate contagion to other crisis countries from Cyprus. After all, banking systems in Greece, Spain, Portugal and Ireland have recently been recapitalized. Meanwhile, the combination of Cyprus’s relatively huge banking sector and the fact that it is perhaps small enough to experiment with make it a special case.

Even so, citizens in the rest of the euro zone now know that if push comes to shove, their insured deposits could be grabbed too.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/03/18/business/global/18iht-dixon18.html?partner=rss&emc=rss