The head of the Central Bank of Cyprus said that the island should have applied for European funds at the end of 2011 or early 2012, and agreed with most earlier witnesses in a public inquiry that the delay was “damaging, if not catastrophic.”
The inability of the government to support the banking sector because of a heavy exposure to Greek government bonds and a runaway public sector deficit, forced Cyprus to seek an international rescue in March, after which the Eurogroup imposed a bail-in of unsecured deposits on one bank and closed down another as part of the deal for a 10 bln euro bailout.
Governor Panicos Demetriades, who took office in May 2012, added that Cyprus could have petitioned for aid just after Greece’s debt writedown was agreed by EU leaders in late 2011.
“If we had gone (for aid), possibly immediately after the Greek public sector involvement, we could have got better terms,” he told Judge George Pikis, who heads the judicial inquiry on the fallout of the Cyprus economy.
Demetriades said a preliminary memorandum of understanding with lenders IMF, ECB and the European Commission in late 2012 had earmarked a bailout amount which would have taken into account recapitalisation needs of both Popular Laiki and Bank of Cyprus.
Instead, there was a rapid deterioration with the banking sector bleeding deposits, and the sector came under sudden scrutiny on allegations of money laundering.
“Nobody expected it, what happened was unprecedented, particularly with regard to deposits. Nor did we expect the assault against our banking sector from the media, in one country in particular,” he said, suggesting Germany.
He said that despite a state recapitalisation of 1.8 bln euros, the liquidity problem at Popular Laiki started to deteriorate in January 2013, while in February, when elections ousted communist president Demetris Christofias for his poor handling of the crisis, deposits were leaking at rate of 20 mln euros a day. In the first two weeks of March alone, he added, total deposits that fled reached 550 mln.
Demetriades was hesitant to reply to questions about letters sent from his predecessor Athanasios Orphanides to President Christofias, warning of the dangers of the runaway public debt, adding that Orphanides did not mention other problems that were apparent in the banking system.
He said these included a significant deterioration in the banking sector due to the recession, while the local banks, primarily Laiki and Bank of Cyprus, had proceeded with overseas takeovers, such as the controversial buyout of Uniastrum in Russia, as well as the purchase of Greek bonds “which were catastrophic and should never have happened.”
Demetriades added that Orphanides’ final description of the situation in July 2011 as being similar to the destruction of the economy after the Turkish invasion and occupation in 1974, said that perhaps that was too dramatic.
Every one can comment on whether there was any comparison to 1974, he said, adding that he recalled the situation at the time and that was much more dramatic.
The Governor revealed a confidential letter to President Christofias on October 5, 2012, saying that the European Central Bank warned that negotiations with the Troika of international lenders were moving very slowly, a warning he repeated on November 18 where he said that the Central Bank had reached an in-principle agreement on the banking sector with the Troika and that a deal ought to have been concluded “within days”.
He said that the memorandum of understanding was concluded at the end of November, but the final deal did not materialise.
“It’s said, because the initial MoU included a bailout of 10 bln euros and a bail-in of unsecured deposits could have been avoided.”
The government-appointed judicial probe continues in late August with testimony from Athanasios Orphanides, President Nicos Anastasiades and former president Christofias.
So far, it has questioned former finance ministers and senior executives of most commercial banks on their supervisory roles, decisions on the purchase of Greek bonds and rapid overseas expansion.
