Did the European Union sell Cyprus down the river to save Greece?
In 2012 and 2013, as the financial crisis hit Europe, the European Union, the European Central Bank and the International Monetary Funds struck a deal that ultimately saved Greek banks and destroyed Cypriot ones.
Cyprus has been reluctant to publicly criticize the deal. The country is still reliant on the goodwill of the European Union and the central bank. But an impending court case brought about by Cypriots who lost all their savings in the deal has highlighted just how much resentment still remains.
The plaintiffs’ lawyer, Kypros Chrysostomides, is acting on behalf of 120 clients, whom he describes as “normal people who simply had their savings in their accounts.” He is seeking €100 million, or $113 million, for his clients at the European Court of Justice.
The story of Cyprus' grievances started in 2012, when the country's economy crashed. Until then, the 800,000-people island nation appeared to the thriving. Its low taxes and lax financial supervision made it something of a tax haven and the financial sector was booming. Indeed, the balance sheets of the three biggest banks – Laiki, Hellenic and Bank of Cyprus – had grown to eight times the gross domestic product.
If Greek clients were hit by losses at the Cypriot banks, the banking sector in Greece might in turn collapse.
This all changed in April 2012 when the Greek crisis hit. All significant investors, including Cypriot banks that were exposed to the Greek economy, agreed to write off 70 percent of their exposure to Greek bonds - a so called haircut.
The agreement, thrashed out by the troika of European Union, ECB and IMF, resulted in Cypriot banks ultimately losing €4 billion, the equivalent of a quarter of Cyprus' GDP.
The government-backed Laiki bank was hit particularly hard, with losses of €1.8 billion. Very soon, it became clear that Cyprus as a whole was in trouble.
Like Greece, Ireland and Portugal before it, the island nation applied for loans from the euro-zone countries.
On March 3, 2013, the new Cypriot Finance Minister Michael Sarris flew to Brussels to negotiate emergency loans. Cypriots had just elected a new conservative government that promised to fix the country's broken economy. But when Mr. Sarris arrived in Brussels, he realized there was little to discuss.
The troika and euro-zone finance ministers had decided that a credit line was to be extended to Cyprus, but that none of the money was to be used to set off losses by banks.
Upon Germany’s insistence, the euro zone’s finance ministers wanted to make an example of Cyprus. Unlike in all other euro-area countries before, “those who caused the problem should be held responsible,” as German Chancellor Angela Merkel said.
Cypriot savers were to be hardest hit. It was decided that all deposits of more than €100,000 were to be used to cover the banks’ losses of up to €8 billion.
There was just one problem: About one third of the business of Laiki, Hellenic and Bank of Cyprus came from Greece. If Greek clients were hit by losses at the Cypriot banks, the banking sector in Greece might in turn collapse. Greece had just received a €40-billion loan from the European Stability Mechanism to prevent the bankruptcy of its banks. A finacial crash would be disastrous.
European officials argued instead that Cypriot banks should sell their entire business in Greece to shield the Greeks from the financial shock waves from Cyprus.
The deal was clear: There was to be no emergency loan to Cyprus if the banks did not sell off their Greek branches and divisions with exposure to Greece.
“We were supposed to get out of Greece, immediately, even though something like that usually takes months of preparation and the support of experienced investment bankers,” Mr. Sarris said. He, on the other hand, had 12 days.
The ECB took charge of drafting the necessary legislation to seal the deal. The law allowed the Cypriot central bank to take over banks in times of crises and therefore allowed it to force the institutions to sell their business abroad.
Then-ECB President Jörg Asmussen threatened to stop the flow of money to Cypriot banks and thereby to kick Cyprus out of the euro zone. Stavros Zenios, member of the board, Cypriot central bank
No one in Cyprus's new government knew that in January 2013, even before the Cypriot elections, a group of ECB officials simulated the scenario of an “involuntary” split of the island’s banks. They wrote an exhaustive, but confidential and restricted, memo that was available only to a very limited number of people.
The memo concluded that Laiki and Bank of Cyprus would be “technically bankrupt” if their Greek branches were to be sold at a price that already accounted for all potential future losses. The report basically predicted that a forced selloff of the Greek business would break the Cypriot banks’ neck.
One of the authors of the memo was a Greek lawyer with close connections to the Greek Piraeus bank.
The former Greek central bank chief George Provopoulos was also involved. In the past, he had worked for then-Piraeus head Michalis Sallas.
The Cypriot banks could not even negotiate the terms of the sale directly with Piraeus Bank. That was done by the Cypriot finance ministry and central bank officials.
The Greeks “ruthlessly exploited our predicament,” one of the Cypriot officials involved in the negotiations said later. The central bank of Cyprus estimated the net asset value of the three major banks' Greek businesses to be worth around €8 billion at the time. But the Greeks only offered €500 million.
Cypriots believe that even the E.U.-appointed mediators sided with the Greeks and included all potential future losses in the valuation of the Cypriot bank.
The heads of Laiki, Hellenic and Bank of Cyprus rejected the offer. Finance Minister Mr. Sarris refused to sign the deal as well.
But on the night of March 15, 2013, the European Union decided that it would only extend credit to Cyprus if it accepted the Greek deal.
Then-ECB President Jörg Asmussen threatened to stop the flow of money to Cypriot banks and thereby to kick Cyprus out of the euro zone. “That would have been the even bigger catastrophe,” said Mr. Sarris. “It was ‘do or die’ for us.”
In the end, the island nation’s banks sold their Greek business for only €524 million to Piraeus bank.
Bank of Cyprus alone lost €2 billion in one fell swoop, its entire equity. That’s why it went bankrupt, just as the ECB analysts had predicted it would in the secret January memo.
The whole thing stinks. Stavros Zenios, member of the board, Cypriot central bank
Laiki bank lost another billion as well. The central bank then took control of the two institutions under the emergency provision law and merged them. Their customers lost around €6 billion in deposits. Two thirds of these losses were borne by foreign investors, but the remaining €2 billion was lost by Cypriot savers, pensioners, pension funds, universities and companies. Cyprus’ economy plunged into a deep recession, thousands lost their jobs.
In Athens, on the other hand, things are looking up. Piraeus Bank reported a profit of €3.4 billion “from the acquisition of the Cypriot banking network in Greece” in its next quarterly report.
The troika, therefore, has one less problem to worry about. The Piraeus group, previously bankrupt itself because of the Greek debt cut, was suddenly solvent again and became the biggest Greek bank overnight. Its share price surged 400 percent.
Did troika officials conspire with a Greek bank to take €3 billion from the Cyprus banking sector to profit Piraeus?
“The whole thing stinks,” said Stavros Zenios, economist and member of the Cypriot central bank’s new board. He said he is not sure whether this was a case of "corruption or just incompetence,” but said there should be an urgent investigation in the deal.
It is simply not acceptable, he said, that this question “is still unresolved, looming over Europe’s institutions.”
This is the abridged version of an article that first appeared in daily newspaper Der Tagesspiegel. It is based on research for an investigative TV report to be broadcast in Germany on February 24. To contact the author: [email protected].