Cyprus parliament to approve ‘nationalised’ Laiki board members

Parliament is expected to approve today the appointment of five officials representing the state on the board of part-nationalised Popular Bank, as part of a whirlwind bailout deal that saw the government agreeing to underwrite a 1.8 bln euro rights issue to recapitalise the bank.
The bank needs to raise the money to replenish its core tier 1 capital by June 30, in accordance with European Banking Authority demands.
The three-way deal struck by Popular’s management, the Finance Ministry and the Central Bank, was rushed through parliament in a marathon debate on Thursday night that will see an average of 12.5% in annual pay cuts in addition to redundancies and the reduction of operational costs by at least 7%.
Similar to the part nationalisation of Lloyd’s and the Royal Bank of Scotland, the government will take up the balance of unsold rights through a bond-for-equity swap, but will seek an early exit. The rights issue will first be offered to existing shareholders, then through a private placement to potential institutional investors, according to the prospectus submitted to the Securities and Exchange Commission.
The amount, equivalent to about 10% of Cyprus GDP, forms the bulk of a 1.97 bln euro capital shortfall identified by the EBA.
Popular was hit heavily by a writedown on its Greek sovereign bond holdings. It reported record losses of 2.8 bln euros in its full-year results for 2011, mainly on the back of a 76% writedown in the value of some 3 bln euros in Greek debt.
The capital shortfall of the bank is a predicament for Cyprus, the euro zone's third smallest economy, due to its own limited funding options.
Fiscal slippage and exposure of its banking system to Greece has meant the island has been shut out of international capital markets for a year. Without approval of the legislation, its cash-strapped government could have potentially faced the need to resort either to bilateral lending, or to a bailout to aid the bank.
Asked whether the need to seek a bailout had been avoided, Finance Minister Vassos Shiarly told reporters: "This gives us the ability to examine other options and we will work in the time ahead to examine every option possible to avoid the (support) mechanism."
Wary of the experience of Greece and keen to maintain its coveted low-tax status for businesses, Cyprus has done its utmost to avoid turning to its EU partners for any financial aid. It received a 2.5 bln euro bilateral loan from Russia in late 2011, disbursed in three tranches from December 2011 to April 2012.
State underwriting of Popular will have an immediate impact, with the government appointing five of the bank's 13 directors. Should it acquire a shareholding, the state will be entitled to appoint the majority of its directors, who will have veto powers.
The bank recently announced a convertible bond issue, while operational cutbacks, disposal of assets and an improvement in 2012 profits should help it improve its financial strength.
Finance Minister Shiarly has reiterated in statements that the bank was “safe”, despite a run by some customers to withdraw deposits.
The House Finance Committee will be in session on Wednesday morning to approve the five state appointees that include, according to a report in Politis, former SEC chairman George Charalambous, former central bank director Andreas Philippou, Nicos Michaelas from the Coop’s Demetra Investments, former Universal Life insurance executive Spyros Episkopou and economist Loucas Marangos.
MPs were upset that while the bank urgently sought state support, that needs parliamentary approval, the bank was slow to vacate some of its board seats. Only former interim chairman Constantinos Mylonas and executive board member Neoclis Lyssandrou resigned on Tuesday.
Two opposition MPs abstained from the vote on Thursday night, with Kyriakos Hadjiyiannis of Disy saying he was unconvinced of the viability of the deal.
The Union of Bank Employees (ETYK) also expressed its disappointment over the bill that was approved by parliament, saying that decisions were taken by both the government and the House of Representatives without consulting the bank’s employees. This, according to ETYK is against collective labour agreements.