Laiki, the ECB and the New York Times

Financial Mirror (Cyprus) - - FRONT PAGE - By Dr. Jim Leon­ti­ades

The bank­ruptcy and ac­cu­mu­lated debts of Laiki Bank were a key el­e­ment of the Cyprus fi­nan­cial cri­sis. A re­cent ar­ti­cle (“To Re­store Con­fi­dence in Econ­omy, A Test of Europe’s Bank’s”, Oc­to­ber 17) in the dis­cusses the stress tests to be im­ple­mented by Eu­ro­zone banks. In this con­nec­tion, the ar­ti­cle also looks into the min­utes of the Euro­pean Cen­tral Bank (ECB) rel­a­tive to the cri­sis in Cyprus and the de­ci­sions which brought about the demise of Laiki.

The ECB had been sup­ply­ing fi­nan­cial aid in the form of Emer­gency Liq­uid­ity As­sis­tance (ELA) to keep Laiki afloat since 2011. It con­tin­ued to sup­ply ELA right up to the March 2013 ne­go­ti­a­tions be­tween Cyprus and the Eurogroup. By that time the ac­cu­mu­lated debt of Laiki to the Euro­pean Cen­tral Bank had reached a level of 9.4 bln Euros. This level of debt was equal to more than 50% of the coun­try’s GDP, a level of debt which is prob­a­bly unique in the de­vel­oped world and which many would say was in­dica­tive of poor bank reg­u­la­tion.

The ECB has re­peat­edly dis­claimed re­spon­si­bil­ity for the ELA decision. In the ar­ti­cle, the ECB’s ofen stated view is noted, to the ef­fect that: “such aid (ELA) is the re­spon­si­bil­ity of na­tional cen­tral banks…”. This is the po­si­tion re­peat­edly men­tioned by the ECB, par­tic­u­larly when the more em­bar­rass­ing de­tails of the bun­gled “res­cue” are dis­cussed. How­ever, the of­fi­cial jour­nal of the Euro­pean

Union treaties states: “ (Con­sol­i­dated Ver­sion of the Treaty on Euro­pean Union, Pro­to­col no.4 , ar­ti­cle 14.3, Of­fi­cial Jour­nal of the Euro­pean Union, 26 Oc­to­ber 2012).

Still re­fer­ring to the pow­ers of the na­tional cen­tral banks, The quotes the ECB as stat­ing: “the (ECB) cen­tral bank’s gov­ern­ing coun­cil re­tains veto power”.

In early 2012, the ELA debt of Laiki was still man­age­able. Had the bank been de­clared in­sol­vent and folded at that time, as many be­lieve should have been the case, the sub­se­quent bail-in by the Eurogroup might have been avoided. But it has long been main­tained by the then gov­er­nor of the Cyprus Cen­tral Bank, Pan­i­cos Deme­tri­ades, that Laiki was sol­vent and hence el­i­gi­ble for ELA.

The ar­ti­cle re­ports that the min­utes of the ECB show that Mr. Wei­d­mann, head of Ger­many’s Bun­des­bank and a mem­ber of the ECB gov­ern­ing coun­cil was op­posed to ex­tend­ing ELA to Laiki, stat­ing at a De­cem­ber 2012 meet­ing of the ECB coun­cil that: “It was not the gov­ern­ing coun­cil’s job to keep afloat banks that were await­ing re­cap­i­tal­i­sa­tion and were not cur­rently sol­vent”.

We may con­clude that firstly, at least one mem­ber of the ECB’s gov­ern­ing coun­cil felt that Laiki was not sol­vent at the time the decision was made to ex­tend ELA and, se­condly, that the Europan Cen­tral Bank must as­sume re­spon­si­bil­ity for the decision to con­tinue giv­ing ELA funds to Laiki beyond any limit which might qual­ify as pru­den­tial bank man­age­ment.

The ar­ti­cle cites the state­ment of an ECB of­fi­cial to the ef­fect that the ECB has changed its pro­ce­dures so that wind­ing down banks will now be the sub­ject of a “less dis­rup­tive process”. We can only hope so – but it is too late for Cyprus.

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