28 Mar 2013

How Greece exported a bank default to Cyprus

For nearly a fortnight this island has been turned into a giant economic laboratory. A grand experiment has been carried out on the Cypriot people, involving trying to take part of their savings, closing their banks, and then essentially destroying their main industry.

Today draconian rules on withdrawing, exchanging, and exporting currency too. But the inside story of what led to this, is more remarkable, even than that.

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The fate of this nation has been determined at late night, often botched, negotiations in Brussels, where Cyprus was considered too small to have to bail out.

Chris Pavlou, a Cypriot and former leading British banker, was at the heart of financial discussions in Nicosia with the President, regulators, and the Troika.

Until last week he was vice-chairman of Laiki also known as Popular bank, Cyprus’s second biggest. He spoke to Channel 4 News exclusively.

Channel 4 News: “It does seem as if Berlin or Brussels or Frankfurt were very keen to communicate to Cyprus’ leaders that ‘you’re not systemic, in some ways you don’t matter, you have no negotiating power’.”

Pavlou: “Unfortunately that’s what they said, yes. Unfortunately yes. And it’s not very nice actually to see two or three people half your age, clever people, coming over there and shaking their hands at the President and saying ‘you have to do this, otherwise we’ll bring you down’.”

C4N: “30 year-olds?”

P: “Well 30-35 year-olds. It is very painful for somebody who’s just been elected to actually face that.”

C4N: “Humiliating?”

P: “At best.”

There is telling footage of a shocked Cypriot finance minister Michael Sarris in Brussels 11 days ago, as his 16 eurozone colleagues agreed a first botched bailout after 10 hour meeting.

That proposed bailout brought in cuts to all Cypriots and foreigners’ savings. hitting small savers was a Cypriot inititiative, though signed off by all, but it would have kept the main two banks including Laiki, alive.

However a week ago it was spectacularly rejected by MPs – amid euphoric protests, the opposition leader triumphant about facing down the troika when I spoke to him then, suggesting the troika had gone too far, and needed to learn a lesson. Celebrated at the time, it turned out to be a calamity.

PAVLOU: “The second time we went to Brussels, the government went to Brussels, and they came back with a situation that was twice, three times, 10 times worse than the original one we rejected.

C4N: “So the government has accepted a plan that was three times worse than the original plan?”

P: “Yes, everybody knows that, everybody knows that the one we accepted in Brussels a couple of days ago is many many times worse than the original one that they gave us and the House of Parliament rejected.

C4N: “But that would have hit small depositors?”

P: “Yes, it would have hit small depositors, but the amount that they would be forced to pay, it was something like one and a half year’s interest.”

So there’s sufficient blame to go around in Cyprus. There can be no doubt that the system became too dependent on Russian deposits. But looking at actual data rather than hearsay, innuendo, and never-published German intelligence reports, it is pretty clear that the sharp rise in “Russian” deposits over the past half-decade is nearly exactly matched by a sharp rise in deposits from within the Eurozone.

All roads lead to Greece.

A deal signed off this week saw the Greek subsidiaries of Cypriot banks snapped up by a lucky Greek bank, that has seen its share price rocket.

That’s not even the half of it. The key sticking point in troika negotiations was the status of these subsidiaries. Why? Because there were awful corporate loans in some of them.

Something odd happened.

The end result: Greece and its banking system were spared any sort of default or haircut, for losses arising wholly in Greece. Cyprus was left holding the baby. Greece exported its bank default to Cyprus. And the people running the Eurozone were left without yet another Greek headache in a politically sensitive year.

Mr Pavlou, the chairman of the Laiki audit committee, says he was shocked at what he found in the Greek subsidiary of his Cypriot bank. Billions were lost when the EU arranged a massive cut to Greek government debt. But as much was also lost in opaque lending by the Greek unit of the now defunct Laiki.

Pavlou: “In some of the loans in Greece, there was absolutely nothing behind it. Collateral was almost zero, and very low interest rates.

C4n: “So very low interest rates, we’re talking multi-million pound deals…”

P: “Multi-million pound deals, very low… ”

C4N: “Sketchy connections maybe, between the bankers and the recipients?”

P: “One could find evidence of some connections there, yes. A conflict of interest.”

C4N: “Would you say that that subsidiary was rotten?”

P: “I wouldn’t use the word rotten, because there was a lot of people working there.”

C4N: “There was a lot of rotten lending in that subsidiary?”

P: “In the UK we used to use the word ‘dodgy’. I think some of the lending there, some of the practices were very dodgy.”

C4N: “Yet this is the part of the bank, which was if you like, the cancer within the bank. Where have those losses ended up? Have they ended up in Greece?”

P: “They ended up in the bank. Greece was part of the bank. Yes. Some of the losses were taken, we have taken some 5.5bn euros worth of losses, and there were some other expected losses. And I understand that when the Greek parts of the Cypriot banks were sold to Greece, all the expected losses were covered by the Cypriot taxpayer. ”

As people continue to protest… helicopters buzzed around Nicosia. To police a riot? No.

Amazingly in four Green lorries, with armed and chopper-escort, the European Central Bank had delivered billions of euros for Cypriots to extract if they want to when banks reopen at some time today.

Just in time delivery. Incredible economic history in the making. Mainly, of the wrong sort.

Follow @faisalislam on Twitter.

17 reader comments

  1. Philip Edwards says:

    Faisal,

    So it WASN’T “the Germans” after all? It WAS “the Greeks”? Or even “the Russians”?

    What happened to all those “risk-taking global entrepreneurs” who, back in the 1980s, were going to save the world – if only they were given enough “freedom” to realise their “talents”?

    So….capitalism – a system that produces nothing but steals everything – had NOTHING to do with enabling this theft of a nation? To say nothing of what its IMF organisers are guilty of in other countries?

    The only real questions at issue here are….What will capitalism do to perpetuate itself, and who will it employ to do it?

    My money is on a steadily intensifying combination of suppression, war and inflicted poverty, all of it accompanied by the drivel of mainstream media propaganda………You know, as forecast by Orwell in “1984.”

    1. gbilios says:

      this is what happens over time when people get too greedy!! capitalism is not capitalism anymore!! capitalism has morphed into communist, fascist, totalitarian, aristocratic system..its the love of money that’s pushing the world to an abrupt end..

  2. Fergus Murray says:

    The Greek business of Popular Bank – Laiki – was converted from a subsidiary to a branch in 2011 shifting liability for losses from the Greek to Cypriot authorities. This looks like a disastrous decision in retrospect. Why did it come about ? Why was the Cyprus CB persuaded to take on those liabilities? – see Gabriel Sterne’s fantastically detailed report from July 2012 at Exotix 120705exotixcyprusolivebranches.pdf

  3. Andrew Dundas says:

    There are lessons here.
    Small economies are exceptionally vulnerable to their own bank defaults. Look at Iceland, Eire and now Cyprus. Each allowed themselves to become deeply lent to risky borrowers.
    That’s why the Scottish Parliament asked for a merger with the English Parliament over 300 years ago. Speculators had “bet the farm” on a risky colonial venture in central America. When that venture went sour, Scotland faced massive default unless a bail-out could be provided by its biggest trading partner.
    It’s possible to avoid such risks. Be like Malta, Luxembourg and other small polities: keep the debt to national income ratio well below ratios of much bigger economies. I.E., below 50% of national income.
    Scotland’s debt ratio would be much higher because it’ll have to accept its share of the UK debt that’s risen rapidly since 2010 to over 80% of national income.
    One alternative is to give up much of Scotland’s financial services. Which is what Cyprus is having to do, with awful consequences for jobs.
    Oh dear!

  4. StuartM says:

    It is disappointing how often our highly paid leaders fail to see the consequences of their decisions. So may decisions sound good but then there are knock-on impacts. Not only the Greek issues impacting Cyprus, but look in the UK at e.g. funding for Lending devastating savers (or maybe that was the plan), the latest government underwriting home loans where expert analysis says it will just cause a housing bubble (again) and not really impact housebuilding.

    Our politicians (or all flavours, through much of the western world (and maybe beyond)) seem less and less capable whilst getting fabulous employment terms (pensions, perks, etc.) and they just let down the people they are meant to be representing.

    I feel that the public can expect more of our “leadership”

  5. Meg Howarth says:

    An excellent interview all round with Chris Pavlou, Faisal, revealing the Greece-based dodgy loans and the first-/second-round discussions with Troika etc. Thank you, and thanks to him.

    Re the 30-35 year-olds bureaucrats telling the president of Cyprus what to do: reminds me of the 30-somethings Labour party prospective parliamentary candidates emerging from their local councillor chrysalis-state as wannabe MPs before serving even a full-term with the local authority. There’ve been two such by-elections in my area in less than twelve months, costing the local council-taxpayer up to £50,000 each time. It’s seems that these wannabes were only ever using their local borough as a stepping-stone on a personal parliamentary career. If they weren’t prepared to serve a full term, then they or their local party should have funded the by-election costs.

    As for their grasp of economics – it’s not even as if the party they want to represent has an alternative to the dead-end GDP-fail/full-employment-myth old economic model. There’s more intelligent, alternative economic debate on Twitter, eg current discussion about the neede for an EU-wide unconditional Basic Income aka Citizens…

  6. jens says:

    In an earlier post, some commentator called you, Faisal Islam, the “best commentator on economics on tv UK today.” I couldn’t disagree more. Granted, you do have great talent, which, however, you you should take to politics rather than journalism. Your kind of reporting is a crude work of anti EU propaganda in its complete lack of balance. You hardly ever challenged people’s believes in Cyprus if their thinking might lack some logic and sense. I would even go as far as saying that you did your bit of rabble rousing there in Cyprus. As I said, join politics because your journalism is unethical.

    1. Meg Howarth says:

      I wouldn’t call Faisal ‘unethical’ but I, too, have been concerned at what appears to be his anti-EU stance. Had intended to add to previous comment, so thanks for reminding me of my omission.

    2. Nigel Wilson says:

      Out of all commentators around on the Cyprus banking issue I feel that Faisal has been the most objective. The fact that his reportage might seem anti-EU is quite simply because the European authorities have screwed up badly on this delicate issue. I very much hope they do better next time, as sadly there will be a next time.

  7. Joeninho says:
  8. Ray Turner says:

    As always happens in a free market economy, a few get rich at the expense of the majority.

    We see it at one level here in the UK, where business leaders and bankers are pocketing huge sums at the expense of everybody else.

    On an international level, we see China booming whilst the smaller countries like Cyprus suffer…

    Not sure how this sovereign debt problem is going to shake out in the longer term, but I do know that bailouts are a bad idea as it shuffles the debt onto countries like the UK. Keep doing that and sooner or later we’ll have the same problem as Cyprus…

    1. gbilios says:

      greece just does not want to pay its debts and hands it over to cyprus,,maybe greece can bring down turkish economy and take cyprus back without a fight; next constantinople!!

  9. John NW says:

    I see the weakness in all the commentaries as being the simple fact that the banks are bankrupt. If you have money in a bankrupt organisation everyone loses. I find it amazing how everyone being interviewed assumes the rules don’t apply to them. They have invested in a dodgy company audited by their own government which seems to have ignored the dodginess. Not only that but it appears there has been no attempt to correct the dodgy pathway. Now we would all love to have a wealthy friend to bail us out when things go bad. In this case the Germans are waving he euro stick at member countries and saying that they need to get their house in order. I suspect that they want those responsible being jailed.
    Of course, if I was in Cyprus I too would be screaming as loud as their best.

  10. jens says:

    Dear Nigel, I would agree that EU officials created a PR blunder of the first order. But I would also like to stress that Faisal’s style helped, for example, to create the impression with many C4 viewers that people around Anastasiades were the victims here. One example is Faisal’s coverage of whose idea it was to put a levy on small savings. Until a few days ago he kept saying (later strongly suggesting) that it was the EU’s proposal. Faisal could have put it on the table that there might be the chance (as it turned out to be) that Anastasiades was skillfully manipulating public opinion on the streets of Cyprus by making the EU the culprit and himself the wide-eyed innocent.
    Again, I think that Faisal must be more circumspect so as to not appear to be following his own agenda.

    1. Faisal Islam says:

      Respectfully Jens, it is clear that Cyprus was ambushed, using the threat of withdrawal of emergency funding from the ECB, and told by the German finance minister and others that it was too small too matter, and did not have contagion bargaining power. I’m willing to believe that CY came up with < 100k hit, but Eurogroup signed off proposal, a week later deemed to be "against European principles". On top of that, 2nd deal, all the Troika really cared about was CY:Greece firewall. German elections big factor here. No agenda here, as you will see from previous gushing praise of German economic model.

  11. jens says:

    Equally respectfully Faisal, first, I want to apologize for my strong wording. Next I would like to stress that, yes, I do have a German perspective while at the same time trying to exercise a multiperspective approach. That you find “gushing praise” for the German economic model is flattering but, unfortunately, placed at the wrong doorstep since I am neither a nationalist nor a real patriot. Yet, I certainly take offense at Merkel & Co being associated with the usual Nazi cliche (something I don’t blame you for, of course), which might explain my poorly chosen words regarding you as a journalist.

  12. Lincoln says:

    Ever heard about politicians having ” no spine”? Cyprus politicians had their chance to flip the bird to the “troika”, leave the euro, and get help from the Russians. Instead those cowards decided to just bend over. Germany LOVES this kind of events, because it brings the euro down making their exports even more competitive. I find it very hard to understand what Cyprus has to gain on the EU. Switzerland is out and doing good. Even Iceland after a straight face default is doing pretty good. So can somebody explain me what is the big advantage of belonging to the Euro zone?

Comments are closed.