On 18 February 2014 the International Monetary Fund
published the text of a conference call held on 11 February concerning Cyprus. One questioner attempted in vain to obtain a
clear answer on whether the IMF considers it fair or just that the €9 billion
in emergency liquidity assistance (ELA) secretly loaned to Laiki Bank in late
2012 has been made into a liability of former Laiki Bank depositors. (Emphasis added in yellow.)
Transcript of a Conference Call on Cyprus
Washington, D.C.
Tuesday, February 11, 2014
Tuesday, February 11, 2014
SPEAKERS:
Delia Velculescu, Mission Chief for Cyprus
Ángela Gaviria, Communications Department
Delia Velculescu, Mission Chief for Cyprus
Ángela Gaviria, Communications Department
[...]
QUESTIONER: Two questions if I may. Could you elaborate on how you
interpret this better than expected performance? Your original forecast for
2013, as you said, was worse than what we've seen, but the private sector was
expecting far worse. So if you could just give us a little bit more detail, why
do you think Cyprus has done better than what's expected?
The second question, with regards to Bank of Cyprus, is: could you tell
us what the IMF's position is with regards to how ELA funding from the European
Central Bank should be treated? Some shareholders have expressed concern about
Laiki's ELA burden being transferred to Bank of Cyprus. Do you agree that this
should be the case or do you think it should be treated differently?
MS. VELCULESCU: Let me respond to your first question, and I may need
some clarification on your second question. At the time of our initial growth
projections for the program, when we estimated negative growth of close to 9
percent last year, we were faced with incredible uncertainty about how
consumers and how the economy would behave in the face of a very large shock.
That shock was unprecedented, and there weren't any benchmarks to use at the
time.
We had made our best
assumptions looking at a variety of factors, including the capital restrictions
that were imposed, the possible effect of the bail-in on domestic participants
and their wealth perception, and the fiscal adjustment that was going to take
place through the economy, and we came up with our estimate.
Fortunately, our estimate
turned out to be too conservative. That is a positive factor. What has
transpired looking at the data ex post is that indeed demand has held out
better than expected. That's largely due to private sector consumption, which
reacted relatively less negatively to the initial shock than we had expected,
in large part due to consumption smoothing. On the supply side we have also
seen more resilience of both the service sector, which is a key growth driver
for this economy, and tourism.
On the second question, can you repeat or clarify what you asked?
QUESTIONER: Right. Since the program was implemented some people
have been insisting that Bank of Cyprus should not take on the 9.6 billion euro
ELA burden from Laiki Bank, and this has been a concern that has been voiced by
former depositors, now shareholders, and others consistently since last spring.
So I'm wondering what the IMF's position is with regards to burdening Bank of
Cyprus with Laiki's ELA exposure?
MS. VELCULESCU: As you know, Cyprus is under a program financed both by
the IMF and by the European Stability Mechanism. It is also a member of the
Eurozone, and the Central Bank of Cyprus is a member of the Eurosystem. So
within that context, ELA is a liability of individual banks, but also
ultimately of the Central Bank of Cyprus toward the Eurosystem. This is an
important consideration that one needs to take into account when looking at how
the resolution of the two large banks was done at the time.
QUESTIONER: But do you think that's a good idea? Do you think it's
fair? Do you think it's fair to shareholders that they've had their deposits
turned into equity in a bank they didn't necessarily want to own, but the ELA
liability remains intact in a new, healthy bank weighing it down, which surely
will affect how this bank fares in the asset quality review and the other tests
to go through?
MS. VELCULESCU: There are two separate issues there. One is the ELA
itself, and that has to do with the capacity of the bank to have access to
liquidity. The other one is regarding the deposit to equity conversion. This
bank clearly needed capital. It had borrowed beyond its means, and it had made
imprudent decisions as well. The bail in necessary to replenish its capital was
not related to the ELA.
[...]
Source:
International
Monetary Fund: Transcript
of a Conference Call on Cyprus (2014-02-18)
Considering that Ms. Velculescu, IMF Mission Chief for
Cyprus since May 2012, has been the Troika’s point person for Cyprus since the
beginning of Cyprus’ difficulties, her ignorance of the realities of the
banking situation – if not feigned – is breathtaking. Indeed,
-
Is
it true that the “emergency liquidity assistance” (ELA) merely had to do with
“the capacity of the bank to have access to liquidity”?
-
Is
it true that a “bail in” was necessary to replenish the bank’s capital, and if
so then why did the Troika go out of its way to limit this bail-in to only
certain customers?
-
Is
it true that the bail-in “was not related to the ELA”?
Let us take a brief look at how the Cyprus crisis
developed, recalling along the way some of the many moments when the Central
Bank of Cyprus (CBC), the Cypriot government, the European Central Bank (EBC),
and/or the IMF exerted themselves – often in collusion together – to keep
ordinary depositors in the dark about the true risks facing their deposits, and
about the massacre that was being prepared for them behind the scenes.
Note: In recent years the official name of the bank has
oscillated between “Marfin Popular Bank” and “Cyprus Popular Bank”. (This particular bank has chosen to have its
official name registered in English rather than in Greek.) But throughout this period it has been
referred to colloquially in Greek as “Laiki Bank”, since “laiki” (λαϊκή)
is the Greek translation of the English word “popular”.
Chronology
Let us begin with some background from a prospectus
that Laiki Bank issued on 19 May 2011 (emphasis added):
Marfin Popular Bank
Group offers a comprehensive range of banking, insurance and related financial
services. The Group also offers insurance services through a related company.
It operates in Cyprus, Greece, the United Kingdom, Australia, Guernsey, Serbia,
Romania, the Ukraine, Estonia, Malta and Russia.
The Group is primarily based in Cyprus, where it holds a
18.77% market share in deposits and a 17.00% market share in loans (Source:
Group Data, Central Bank of Cyprus (December 2010, including cooperative
banking institutions and International Business Units (IBUs)). The main part of the Group's
business is currently undertaken in the Greek market, in which the Group is
active since 1992.
The Bank
commenced its operations in 1901, upon establishment of the Popular Savings
Bank of Limassol. The Savings Bank grew into a full Banking Institution and was
registered as the first public company in 1924, with registration number 1,
under the name Popular Bank of Limassol Ltd. In 1967, the Bank was renamed
Cyprus Popular Bank Ltd, and has been rapidly expanding its business throughout
Cyprus since 1969. On May 26, 2004, it was renamed Cyprus Popular Bank Public
Company Ltd., in accordance with the provisions of the Cyprus Company Law,
Chap. 113. Finally, on October 31, 2006, the Extraordinary General Shareholders’
Meeting approved the change of the name of the Bank to Marfin Popular Bank
Public Co Ltd.
The prospectus helps us with some useful chronological
data:
2006:
§ Merger with the Greek financial groups “Marfin Investment Group
Holdings S.A.” (“MIG”) (formerly, “Marfin Financial Group”) and “Egnatia Bank
S.A.”, and a decision to acquire 100% of the share capital of “Laiki Bank
(Hellas) S.A.”.
§ The Bank is renamed to “Marfin Popular
Bank Public Co Ltd” (“MPB”).
2009:
§ The Boards of the Bank and its subsidiary
“Marfin Egnatia Bank S.A.” approved to commence the procedures for the merger
of the two banks.
2010:
§ According to Articles 201(xvii) and
201(xix) of (Cyprus) Companies Law, the joint request of the Bank and Marfin
Egnatia Bank SA regarding the approval of the completion of the merger was
examined by the District Court of Nicosia which issued a decision setting
31.03.2011 (at 12.00 pm) as the date of effect of the merger.
2011:
§ Completion of the cross-border merger of
Marfin Popular Bank Public Co Ltd with Marfin Egnatia Bank S.A.. From the date
of effect of the merger (1 April 2011) Marfin Egnatia Bank operates as a Branch
of the Bank in Greece.
As indicated in an
earlier article in this column, the 2011 merger of Marfin Egnatia Bank in
Greece with (into) Marfin Popular Bank in Cyprus, and the subsequent conversion
of Marfin Egnatia from a subsidiary into a branch of the Cypriot parent,
resulted in the transfer of one or two billion euros worth of liabilities (bad
loans and bonds) from the Greek banking system to the Cypriot banking
system. European Commission directive 2005/56/EC
(the “Mergers Directive”) gave the Central Bank of Cyprus no voice in
permitting or blocking the merger, and for the subsequent conversion of the
Greek bank from a subsidiary into a branch the CBC had only the choice of
accepting it or forcing the Greek bank to cease operations.
Sources:
Marfin
Popular Bank Public Co Ltd – Prospectus (English translation): Public
Offering and Listing for Trading on the Cyprus Stock Exchange and the Athens
Stock Exchange of up to €294 Million Convertible Enhanced Capital Securities of
Nominal Value €1 Each (2011-05-20 15:02:09)
Marfin
Popular Bank Public Co Ltd – Prospectus (Greek original): Δημόσια
προσφορά και εισαγωγή για διαπραγμάτευση στο Χρηματιστήριο Αξιών Κύπρου και στο
Χρηματιστήριο Αθηνών μέχρι €294 εκ. Μετατρέψιμων Αξιογράφων Ενισχυμένου
Κεφαλαίου ονομαστικής αξίας €1,00 το καθένα (2011-05-19 14:51:50)
[To be continued]
