In response to suggestions that Laiki Bank was kept active in the summer of 2012, rather than being liquidated and dissolved, the Central Bank of Cyprus (CBC) wishes to state the following:
1. The continuous downgrades in the creditworthiness of the
2. At the same time, under the European Directive on Capital Requirements, and after supervisory review, the
3. The effort to attract private investors began in late 2011 and continued until June 2012 without any result. It should be noted that, in November 2011 Andreas Vgenopoulos resigned from Laiki’s Board of Directors, followed by Efthimios Bouloutas in December of the same year. Michalis Sarris took over as President of the Board of Directors of Laiki Bank in December 2011. Given the failure to attract private investors, Laiki’s Board of Directors asked the government to cover a capital deficit of €1,8 billion. The government agreed to this request after passing a relevant bill through Parliament and with the consent of the new CBC Governor, Panicos Demetriades, who took office in May 2012.
4. The capital shortfall was covered by the government through the issuing of an unfunded bond worth €1,8 billion, in order to acquire equity of equal value. With this procedure, Laiki Bank essentially became a state-owned bank, since the government acquired 84% of its share capital.
5. As a result of the political uncertainty in
6. In May 2012, the Greek covered bonds held by Laiki Bank, which were worth €1,2 billion, were downgraded. This development led to a corresponding increase in the liquidity absorbed through the ELA.
7. On 25 June 2012, the third and last downgrade of the
8. As a result of the three above-mentioned events - loss of deposits in Greece amounting to €2 billion, downgrading of Greek covered bonds worth €1,2 billion and downgrading of Cyprus bonds amounting to €2,6 billion- the ELA increased by €5,8 billion. The total debt to the ELA increased from €3,8 billion in May 2012 to €9,6 billion on 3 July 2012.Consequently,the government, following the CBC Governor’s suggestion and a decision by Parliament, applied to the EU Support Mechanism. Hence, negotiations with the Troika began in July 2012.
9. Throughout this period and thereafter, the CBC Governor warned through presentations, statements and interviews for the urgent need to design and implement a programme that would allow
10. On 18 November 2012, the CBC announced its own agreement with the Troika regarding the programme for the financial sector. Since no subsequent agreement with the government was reached regarding fiscal matters, the Troika left
11. The prompt recommendation of the CBC Governor to the government to announce its intention to sign a Memorandum of Understanding (MoU) averted the risk of collapse of Laiki Bank, the second largest and systemic bank in Cyprus, which would have led to the collapse of the entire financial system.However, a final agreement on the MoU could not be signed before the completion of the independent diagnostic checks of Cypriot banks by PIMCO, which were aimed at identifying the capital needs of Cypriot banks, a condition stipulated in the MoU.
12. When the findings of PIMCO were submitted in January 2013, the country was already in a pre-election period. Hence, the Troika deliberately abstained from any action that could serve or be interpreted as a political intervention. Consequently, at the end of January 2013, the ECB’s Board of Directors extended the deadline of ELA to Laiki Bank until 21 March 2013. In making its decision, the ECB’s Board of Directors indicated that this decision was taken in accordance with the Terms of Reference of the Eurogroup, in order to urge the new government of the
13. This was followed by the first Eurogroup decision on 16 March 2013 for a general ‘haircut’ on deposits of all banks operating in
14. On 21 March, the ECB’s Board of Directors implemented its decision to cease the provision of ELA to Laiki Bank, with a requirement to repay on 26 March 2013. The implementation of this decision would have led to a disorderly bankruptcy of Laiki Bank and to an immediate activation of the Deposit Protection Scheme, which had only €125 million in funds.This would have resulted in an obligation for the Republic of Cyprus to repay the €6,4 billion of insured deposits in Laiki Bank, which would have caused the bankruptcy of the country itself.
15. Faced with this disastrous outlook, the CBC Governor publically stated on the evening of 21 March 2013 the need for immediately passing a series of bills through Parliament, including the bill for the resolution of banks, so that Laiki Bank could be resolved immediately and avoid liquidation and dissolution.
16. The second Eurogroup decision followed on 25 March 2013, whereby a support programme for the
17. Consequently, the simplistic and unsubstantiated allegation that the CBC Governor "allowed" the continuation of the provision of liquidity to Laiki Bank through the ELA is incorrect and is refuted by the above facts. On the contrary, it is clearly evident that the Governor, with his timely statements and actions (given the two political decisions taken at the Eurogroup) prevented a disorderly bankruptcy of Laiki Bank and consequently of the country itself.