Exemptions of certain deposits from the ‘haircut’ will probably lead to an increase in the final ‘haircut’ of uninsured deposits over €100,000, according to data submitted to the Parliamentary Committee of Financial and Budgetary Affairs by Cyprus Central Bank Governor Panicos Demetriades, on Monday.
According to the data, the exemptions were the result of a joint Eurogroup – government decision to protect certain depositor groups such as charitable institutions, general government deposits, educational institutions’ funds and other groups.
“Every additional exemption increases the contribution of other unsecured deposits”, Demetriades said.
Excluded from international markets, Cyprus applied in June 2012 for financial assistance, after its two largest banks sought state aid, following massive write downs of their Greek bond holdings amounting to €4.5 billion or 25% of the island`s GDP, as a result of the Greek sovereign debt haircut.
The government concluded a deal with the Troika of international lenders, which needs to be ratified by national parliaments and the Eurogroup. The Eurogroup reached an agreement with the Cypriot authorities on the key elements necessary for the macroeconomic adjustment programme.
The island’s second largest bank, Cyprus Popular Bank (Laiki), splits into a "good" and a "bad" bank. The bank`s "good" assets are being transferred to the Bank of Cyprus, where a massive haircut is being imposed on uninsured deposits of more than €100,000.
According to the data submitted to the House Committee the initial value of assets acquired by the Bank of Cyprus from Laiki comes to approximately €13.8 billion, although this is still an estimate.
A percentage of 37.5% of unsecured deposits of a value of €8.1 billion will be turned into shares ‘A’ (worth approximately €3.1 billion). The above amount does not include €0.7 billion of client nominee and /or trustee accounts, of which the beneficiaries are still in the process of being determined.
He recalled that the Central Bank had agreed with the Troika (EC, ECB, IMF) the part of the memorandum which dealt with the financial sector since November 18, 2012 and kept pointing out the immediate need for a memorandum to be signed.
The Eurogroup of March 16 came to completely reverse initial planning, he said.
On March 4, the Cypriot Minister of Finance at the time Michalis Sarris was briefed and the Eurogroup announced that Cyprus would receive financing.
“We all believed that the announcement concerned the amount of €17 billion of the initial memorandum of agreement, of which €10 billion was to be given to the banking institutions,” he noted, adding that the Central Bank had prepared ways of moving forward as regards the financial sector based on that scenario.
Demetriades also said that the Eurogroup of March 15 decided to offer a loan of a value of €10 billion to be used for Cyprus’ fiscal and financing needs, whilst the remaining 7 billion should be raised from Cyprus’ own resources.
He pointed out that the Eurogroup decision on Cyprus’ banking system was unprecedented, adding that reaction to this decision is to be expected.
At the same time Demetriades said that an Alvarez & Marsal inquiry into the banking sector and specifically the Cyprus Popular Bank and the Bank of Cyprus is expected to be completed in the next few months.
The investigation will also focus on the purchase of Greek national bonds from the CPB, as well as on its expansion outside Cyprus and will look into responsibilities by all parties involved in the process.
He explained that the investigation could not have possibly had as a goal any offenses which might have been committed on the part of the Cyprus Central Bank. He recalled that a copy of the report, compiled so far, has been submitted to the Attorney General so that he may decide on further action, if necessary.
Finally, the Central Bank Governor assured all present that in cooperation with the government and all institutions, feasible solutions are being prepared so that by the end of the adjustment programme Cyprus can have a strong financial sector which will contribute to the economy’s growth.
