(Updates with additional comment and background)
By Stelios Orphanides
A central bank official warned members of the parliament on Thursday that failure to implement Hellenic Bank’s agreement with the Cyprus Cooperative Bank to acquire that latter’s operations would be “disastrous” for depositors, the Cyprus News Agency (CNA) said.
“Under the circumstances, and taking into account the information available, this is the best that could be achieved,” Yiangos Demetriou, the CBC’s head of supervision told the House watchdog committee. “Let me be clear, if the deal is not completed and if all that needs to be done is not done, the alternative solution would be disastrous.”
Demetriou declined to comment on the content of the agreement between the two banks but said he was expressing “the position of the supervisory authority”.
On Thursday, the cabinet approved a bundle of bills aimed at helping banks reduce their stock of non-performing loans, complying with the European Commission’s conditions in approving the Hellenic-Co-op deal.
After the cabinet meeting, Finance Minister Harris Georgiades warned that the parliament should not delay passing the bills and should do so before the summer recess. Every year in delay that passes, costs banks hundreds of millions of euros, state-broadcaster CyBC reported citing the finance minister. He added that parliamentary parties currently asked to pass the laws had already been consulted about the bills.
The European Central Bank and the Single Resolution Mechanism, which ensures the orderly resolution of failed lenders by minimising the impact on the real economy of member states, are already preparing, Demetriou said.
“Because the only alternative solution would be to put the Co-op under resolution, or if the Single Resolution Mechanism deems that there is no issue of public interest, the Co-op would be placed under liquidation and this in turn puts insured deposits at risk,” the central bank official added.
Failure of the Co-op would be the second time a systemic bank went out of business after running out of capital. In 2013, depositors at Cyprus Popular Bank lost all their deposits in excess of €100,000 while those at Bank of Cyprus recapitalised it with almost half of their uninsured deposits.
The losses were unavoidable after parliament rejected a Eurogroup proposal for a once-off levy on deposits across the banking sector to recapitalise stricken lenders.
Demetriou’s warnings came just a couple of hours after opposition deputies either said their parties would reject bills sanctioning the deal or sat on the fence on the matter.
Main opposition Akel MP Stephanos Stephanou said in a telephone interview on Thursday that while his party considers the Hellenic – Co-op agreement as the “worst possible,” the party, which has 16 seats, has not yet discussed the matter to decide how it will vote.
Christiana Erotokritou from Diko, the second largest opposition party with 10 deputies, left open what her party would do. In a statement on Wednesday, Diko said it would send President Nicos Anastasiades a letter with questions and proposals.
Solidarity, a party with two deputies established by former Disy deputy Eleni Theocharous, said it will take its final decision after its members discuss the matter. The Greens, which have two lawmakers, said in a statement that they would reject the government bills with “suspicious” provisions submitted to parliament in “express procedures”.
On June 19, the European Commission approved the state-aid that facilitated the transactions after receiving binding commitments from Cyprus that it would reform its legal and judicial framework to allow collection from non-performing loans by both the banks and the government, which deposited €3.5bn at the Co-op against collateral that included €6bn in non-performing loans.
The Co-op which failed to reduce it stock of non-performing loans, saw €2bn in deposit outflows in the first three months of the year.
The watchdog committee was meeting on Thursday to discuss the causes that led the state-controlled Cooperative Bank, recapitalised it in 2014 and 2015 with almost €1.7bn, to be sold to Hellenic on terms deemed unfavourable by many.
Under the deal, Hellenic agreed to pay €74m to acquire the Co-op’s assets, including €4.6bn in loans, €1.6bn in cash, and €4.1bn in government bonds. It will also assume its liabilities, including €9.7bn in deposits.
A Disy lawmaker said that the only alternative to state guarantees in favour of Hellenic would be to issue government bonds equal to the amount of Co-op assets sold.
“For the sake of political expediency, we make simple things unnecessarily hard,” Marios Mavrides, who also teaches economics at the European University of Cyprus said in a telephone interview on Thursday. “We keep sacrificing the economy at the altar of populism”.
Cyprus’s government debt, which last year fell to 97.5 per cent of economic output, is expected to rise once more over the 100-per cent mark this year reflecting the aid granted to the Co-op.
Auditor-general Odysseas Michaelides told lawmakers that the audit office considered it unacceptable for the agreement between Hellenic and the Co-op not to be vetted by the Republic’s legal adviser, a point raised during Wednesday’s meeting of the House finance committee.
The finance committee reviewed a bill that will enable the government to extend guarantees to Hellenic for possible impairments resulting from the acquisition of certain co-op assets.
“We consider it unacceptable for the Republic to sign any document which has not been legally vetted by the attorney-general,” Michaelides was quoted as saying by CNA. “The Republic and any minister cannot sign documents, especially those involving such sums of money, without consulting the attorney-general”.
Also Thursday, Attorney-general Costas Clerides appointed a three-member panel to investigate the collapse of the Co-op.