* Pressure from CB, Christofias for Sarris to go *
Andreas Eliades, the chief executive of the Bank of Cyprus, has resigned after eight years in the job, citing a broad lack of consistency in dealing with the banking crisis, with the government under pressure to find someone to blame for the exposure to toxic Greek bonds and a subsequent European bailout.
He is seen as the first scapegoat in a string of resignations that the communist-led administration has demanded in an effort to divert attention away from its poor handling of the economy and the lack of austerity measures that should have brought public finances in order.
Instead, the government seems to have propped up the amount needed for a Cyprus rescue to 10 bln euros, only a quarter of which is for the banks, with the balance probably headed to pay public sector wages and other government development projects.
President Demetris Christofias and most of his cabinet members, as well as leading figures within the communist Akel party have consistently blamed the banks for all the ills of the economy. From early 2012 they launched a scathing attack on former centralbanker Athanasios Orphanides, who they say, should have prevented the banks from investing in Greek sovereign debt.
The former Central Bank governor had long ago warned that public spending was out of control, truths that this administration and Akel had never appreciated and probably caused his downfall.
Orphanides has recently publicly defended his actions, saying the president never accepted to discuss these issues with him and blaming Christofias for not negotiating financial aid for the banks last October.
The current administration, that is not expected to win a second term of office next February, has now targeted former Finance Minister Michalakis Sarris who joined the Popular Bank as a caretaker chairman late last year to get the bank out of its current difficulties. He negotiated a plan with the incumbent and previous finance ministers that eventually saw a capital injection of 1.79 bln euros and taking an 84% stake.
Effectively nationalised, the government appointed five new board members with more expected soon.
Reports suggest that Central Bank Governor Panicos Demetriades demanded Sarris’ resignation, saying this was President Christofias’ wish.
Sarris has said that he will stay on to finish the job he started – to return the island’s second largest lender to a path of recovery. Instead, Sarris is expected to propose to the next board meeting that Chris Pavlou be appointed deputy chairman.
LACK OF MOBILISATION
Eliades, who headed the Bank of Cyprus operations in Greece for 15 years and later oversaw the bank’s expansion to Russia, said there was lack of "joint mobilisation" in dealing with the crisis, suggesting a lack of cooperation with the state.
The Christofias administration has demonised the “greedy” banks for their investment in Greek government bonds in 2010, hammering their share values to record lows and turning them to penny stocks.
The Bank of Cyprus board said it will convene on Thursday to discuss various issues, including the issue of succession. First Deputy CEO Yiannis Pehlivanides or Deputy CEO Yiannis Kypri are expected to step in, while recent retirements have also paved the way for a wider management change.
Bank of Cyprus, Popular Bank and Hellenic have been hurt by accumulated losses of about 3 bln euros from their holdings of Greek sovereign bonds, while their exposure to the Greek retail market is estimated at about 25 bln euros.
However, cabinet members have been trying to offload the stake to Chinese or Russian investors in order to get a refund on their bailout and inject more money to support the public sector, where austerity measures have been too little and too late.
As a result, a delegation of the ‘troika’ from the European Union, the European Central Bank and the International Monetary Fund were in Cyprus last week to review the situation and see if the country will be able implement the necessary cutbacks and reforms to justify a bailout of at least 10 bln euros.
Bank of Cyprus rattled domestic markets by unexpectedly seeking 500 mln euros in state financial support just prior to a regulatory deadline to bolster its core tier 1 capital last month.
Capital requirements of the Popular Bank was a key reason forcing Cyprus into requesting an international bailout on June 25.
"The challenges we are experiencing throughout Europe are exceptionally difficult, and demand joint mobilisation by all, inside and out of the bank," Eliades said in his resignation letter.
"What we see going on around us proves this mobilisation does not exist," he wrote.
DILUTED STAKE
It seems Governor Demetriades wanted Eliades to resign because the 500 mln euros aid was not raised at the shareholders meeting in June, while major shareholder Dmitry Rybolovlev was also furious that his mammoth investment and 9.9% stake in the bank had disappeared into thin air. After the recent capital increase, the Russian investor’s share was diluted to 5% as his did not partake in the rights exercise.
Cyprus has already taken a 2.5-bln-euro loan from Russia to help meet its short-term financing costs and Russia's finance ministry confirmed the island was asking for a further 5 bln euros.
Finance Minister Vassos Shiarly, a former top banker, said Cyprus's economy, fuelled by a once-buoyant property sector and strong services industry, would not have run into such severe problems were it not for the PSI decision.
"Effectively, because of our close proximity, financial proximity to (Greece), we were called upon to pay a very heavy price," he told journalists.
"Cypriot banks that owned Greek sovereign bonds lost about 80 or 81% of their total investment, which in actual terms amounts to 4.2 bln euros," he said, pointing out that the sum was equivalent to a quarter of Cypriot output.
"The real problem stems from that particular investment. If you ask me whether this was a fair way to deal with it, I would say no, this was not a fair way of dealing with it."
Instead the minister argued that 100-bln-euro writedown of Greece's debt should have been distributed on the basis of the size of each euro zone economy.
That would have meant Germany paying the most – around 27% of the total – and Cyprus just 0.2%.
"What we should have done is share that loss fairly, on a level playing field, as the Europeans do," Shiarly said.
"If our share had been fairly evaluated … our total loss might have been in the order of 200 mln euros – one would say petty cash these days."
BANKERS UPSET
Meanwhile, bankers are upset with government officials and central bank chief Demetriades for leaking reports to the media that the banks need a 10 bln euro bailout because of the way they calculate non performing loans, something that was never raised by the troika delegation.
Banking sources are also concerned that government officials have not realised that by warring with the banks they are causing more harm to the island’s economy. Some are even worried that whenever the government talks of a bailout and EFSF support, Russian depositors are considering moving their deposits elsewhere.
