The ill-fated nationalised Laiki (Popular) Bank applied 70 times to the European Central Bank (ECB) for emergency lending between 2011 and 2013 before finally collapsing and dragging down the rest of the financial sector with it, according to information from Auditor-General Odysseas Michaelides’ investigation.
The astonishing result of the investigation has been handed over to the public prosecutor’s office as evidence in the ongoing probe into the crisis in the economy and financial sector.
Cyprus Popular Bank started borrowing the ECB’s emergency lending funds in 2011 after it lost 2.5 billion Euros in the Greek debt writedown, and was nationalised in May 2012. By the time it had gone out of business in March 2013, it had borrowed 9.8 billion Euros from the ECB. That money is now being paid back by Bank of Cyprus, which took billions of Euros from depositors’ accounts in the 2013 bail-in.
Depositors in BoC and Laiki with deposits of over 100,000 Euros lost most of their savings when their money was taken by the state during the 2013 liquidity crisis. Although their money was swapped for bank shares, many of them suffered financial hardships, especially in the cases of people who were saving to buy homes or education for their children, and had put their money in CoCo bonds in Laiki Bank. Not only were their savings wiped out, but they were in the position of having debts based on their savings and co-convertible bonds. The older shareholders lost a great deal of money, either by having their deposits sheared or because their dividends dried up as the shares were diluted during the bail-in.
The wider economy - which was already weaker due to government overspending and the EU sovereign debt crisis - suffered heavily from this, as housing purchase plans and other investments fell by the wayside. The headlines in the international media about rich Russians having their deposits sheared failed to take into consideration the many smaller savers – people who had nest eggs. In one distorted case, a family member of one of the victims of the Helios Airlines crash had their compensation money taken in the bail-in. Others had capital from recently-issued debt, like mortgages, and ended up seeing their bank account zeroed but the debt remaining on the books.
Concerns
The economy is just starting to recover its losses. While headline growth figures put GDP at 2.7 percent for 2016, the three-year recession is still taking its toll. True economic recovery can really only be claimed after several years of consistent growth and prudent fiscal management. Unless the state and government continue to be careful of their costs, another recession is not far away, given the slow growth in the Eurozone. Another concern is whether the economy can be updated and modernised with the right reforms, this is particularly true for the public sector which is extremely slow to adapt to new circumstances. Cyprus Airways bankruptcy is just one example, and it can only be hoped that the other semi-government organisations like the electricity authority and telecommunications authority don’t follow the same downwards spiral.
The government plans to keep pushing economic reforms through the House of Representatives, but faces considerable opposition from the communist AKEL party and occasional stonewalling from the DIKO party.
In 2013, Cyprus had no choice but to agree to a financing deal from the ECB and IMF after several years of recession, rising state debt and no access to international lending markets. This followed the previous communist government’s fiscal mistakes of overspending in a slowing local and international economic climate.
Although the island has exited the bailout deal successfully and is back in positive growth territory, several challenges remain, including high unemployment and deflation. It’s also a significant vulnerability that the state owns banks like the Bank of Cyprus and Cooperative – these are specialised financial services and have to be run by experts. Bottom line? Any further threats to the banking sector will have a devastating knock-on effect on the state’s budgets.