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'Gun To Our Heads' - Anastasiades on Bailout


Cyprus had a gun to its head during the bailout, and the main responsibility for the island's economic collapse lies with the previous government, not Greece, said President Anastasiades.

Testifying in front of the investigative commission, Anastasiades said that Central Bank Governor Panicos Demetriades never informed him of the intention to shut down all the banks for 16 days and enforce a haircut on deposits. It was the government's policy not to accept a haircut on deposits, he said.

However, it was unavoidable in the end, because the state's finances were so far in the red that there were only two choices; disorderly bankruptcy, or taking a percentage of deposits in Bank of Cyprus and Laiki.

The commission has finished with its public hearings and will now consider the evidence it has gathered during the course of its investigation.

During the last three days, the men at the very epicentre of the war over who is responsible for the financial and economic crisis testified to the commission - former central bank governor Athanasios Orphanides and former president Demetris Christofias. They are bitter political enemies, having fallen out at the beginning of Christofias' term in office, over fiscal spending and other turf wars.

The recession and unemployment have put the economy into a state of emergency that could be worse than after the 1974 invasion, said Orphanides. The explosion at Evangelos Florakis naval base threw the country into a recession and destroyed more than half the electricity supply, he said.

When Cyprus was ruled out of the international borrowing markets due to ratings downgrades, Orphanides said he knew the situation would become extremely difficult, and asked the banks to strengthen their capital base in early 2009. In 2011, a supposed stability fund from the banks was actually diverted to the government instead, said Orphanides.

The ex-central banker said he sent several alarmed letters to former president Demetris Christofias, but never received any answers.

"I felt strongly that I had a responsibility to pressure (the government to slow down spending) but I did not succeed...It is the duty of the central bank to give advice on public sector finances," said Orphanides.

Even up to May 2012, there was a chance the island could have avoided entering the bailout mechanism, he said. When the ECB started buying sovereign bonds, this was an opportunity for Cyprus to get cheaper borrowing costs, but his letter to Jean-Claude Trichet and attempts to arrange a meeting with Christofias were fruitless.

After Cyprus applied for a bail out, it took far too long for the deal to be made, said Orphanides. Cyprus applied at the same time as Spain, but it took elections and a new government under President Anastasiades to confirm a 10 billion-euro loan from the Troika, according to his testimony.

Even as early as March 2008, the new government made a bad impression on him, said Orphanides. During his first meeting with former finance minister Charilaos Stavrakis, he was asked not to make any statements against the government's policies, and to sell the island's gold so that the government's projects could be implemented. The new government immediately increased spending in 2008, starting with an Easter bonus, said Orphanides. Subsequent government spending ended up reversing the efforts made to get into the Eurozone and destroying former president Tasos Papadopoulos' fiscal savings, he said.

The communist government, and president, deliberately demonised the banking system, and undermined it for political gain, said Orphanides.

For his part, Christofias astonished the country after he deliberately refused to testify to the commission, an offence punishable by a fine of 5000 euros or one year in jail. Instead, he delivered a 25-page communist polemic on the reasons that the economic crisis was due to the 'capitalist system'. The attorney-general is now responsible for deciding whether to sue Christofias or not.

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