Cyprus, bank chief row grows
CYPRUS’s central bank governor said yesterday he was willing to work with the government to pull the island out of its economic crisis, provided the bank’s independence was respected.
The row erupted after the Cypriot government conditionally agreeing to sell part of the state’s gold holding. Governor Panicos Demetriades said on Friday the Cypriot government did not have the right to sell gold without his consent. He also signalled the government had not involved him in the plan.
A rift between Mr Demetriades, appointed last May by the communist former government, and the ruling centre-right government has deepened and pressure has grown on him to resign over his handling of the crisis.
Last week, the Cypriot parliament started an investigation against Mr Demetriades. President Nicos Anastasiades’s government withdrew the appointment of his trusted deputy and three central bank officials resigned.
The unfolding drama drew a scathing response from European Central Bank ( ECB) president Mario Draghi, who wrote to the Cypriot president telling him any attempt to sack the governor could land Cyprus in the European Court of Justice.
Mr Anastasiades, when asked by reporters yesterday to comment on the apparent feud between the two bodies, said he was “frankly, very saddened”.
“My intention to work with the country’s democratic institutions is a given,” Mr Demetriades, who sits on the ECB’s governing council, was quoted as saying in an interview with the Phileleftheros newspaper. “We are ready to respond to every call for cooperation and co-ordination for the benefit of this country always, however, within the framework of total respect towards the central bank’s independence, as stipulated by the ECB.”
Under European Union (EU) law, a governor can only be dismissed if he no longer fulfills the conditions required for the performance of his duties, or if he is guilty of serious misconduct.
The investigation launched by Cypriot legislators last week is seeking to find out whether Mr Demetriades supplied enough information during an investigation into the demise of Cyprus’s two biggest lenders, which left the economy in disarray. The collapse of the island’s banking system imposed large losses on depositors in order to qualify for a €10bn bail-out by the EU and International Monetary Fund.
The departures in the past week from the regulator’s board have slimmed the six-member board to two, including Mr Demetriades. But executive power rests with the governor so while they add to the pressure on Mr Demetriades to resign, they are not expected to affect policy making.
The government, in power for less than two months, has sought to play down accusations it was intervening in the central bank’s duties. Authorities have demanded Mr Demetriades take back comments he made that the bank’s independence was under attack. Sapa-AFP, Bloomberg
THOUGH the implosion of Cyprus’s banking system has put other eurozone economies with outsized financial sectors, such as Luxembourg and Malta, in the spotlight, loan quality is the real litmus test of a country’s financial stability.
Attracted by low taxes, high interest rates and light regulation, foreign deposits, largely from Russia and former Soviet states, pumped up the Cypriot banking sector to nearly eight times annual economic output, more than double the European average of 3.5 times.
Stripping out Russian banks and other international lenders, the three Cypriot banks for which the state was liable had assets amounting to more than five times gross domestic product (GDP), a huge proportion for an island of just 800,000 people.
What caused the problem, however, was that Cyprus’s two main banks used the gush of deposits to gamble on the Greek economy, leaving them horribly exposed when Europe imposed losses on Greek sovereign bonds. Greece’s implosion rotted their loans to that country.
“Banks don’t fail because they are big. Banks fail because they make bad lending decisions,” Standard & Poor’s European sovereign ratings director Frank Gill said. “It is important to understand that the Cypriot banking crisis was born on the asset, not the liability, side of the balance sheet.”
The Bank of Cyprus’s nonperforming loans shot up to 17% of its total book at the end of September last year.
Cyprus Popular Bank, known as Laiki, which is being shut down as part of the Cypriot bail-out, almost quadrupled its loan loss provisions to €400m in the third quarter of last year.
Officials from Luxembourg, anxious to protect the country’s reputation as a hub for international capital, are quick to draw the distinction between their risk exposure and Cyprus’s.
Though it has the largest banking sector in the eurozone, at an eye-watering 22 times GDP, and a population of only just over half-amillion people, roughly equivalent to Tucson, Arizona, the Grand Duchy is keen to emphasise that its banks are healthy and its liabilities much smaller than they appear on paper.
“In all the articles of the last few weeks, you have this famous bar chart measuring the size of the financial sector against GDP. It is not the way it should be looked at,” said Association of the Luxembourg Fund Industry chairman Marc Saluzzi.
“If you look at Luxembourg, our centre is much more diversified; it is run by 142 banks, which are essentially subsidiaries of very large foreign banks, with solvency ratios above 15%. We are agents and not principals.”
Stripping out international banks, the core of Luxembourg’s financial system is based around three banks — state-owned BCEE, BGL BNP Paribas, in which French bank BNP Paribas has a majority stake, and Banque Internationale a Luxembourg, which is majority owned by Qatar’s AlThani royal family.
“Like the Cypriot banks, they do have fairly large external assets,” Mr Gill said of those three banks. “Our estimate is just under €100bn of external assets, which is 45% of GDP, but these are almost exclusively holdings of
It is important to understand that the Cypriot banking crisis was born on the asset, not the liability, side of balance sheet
tradable, financial, highly liquid assets, securities they could realistically convert into liquidity almost instantly.
“They are not claims on an insolvent economy.”
According to the International Monetary Fund (IMF), just 0.4% of loans in Luxembourg were nonperforming as of June last year.
After Luxembourg, Malta has proportionately the next largest financial sector in the eurozone, at around eight times its GDP.
But this statistic is misleading. Stripping out international banks, including some Turkish lenders that book a lot of their loans through Malta for tax reasons and do not take domestic deposits or lend domestically, the local banking sector has assets equivalent to under 300% of GDP and is dominated by two lenders — Bank of Valletta and HSBC Malta.
If trouble hit, HSBC Malta would likely have the support of its parent, HSBC, Europe’s largest bank, leaving Bank of Valletta with assets equivalent to about 1.4 times GDP.
Malta’s domestic banks had nonperforming loans equivalent to 8.2% of the loan book as of June last year, according to the IMF.
While the domestic banks in Malta have limited foreign exposure and have so far sidestepped any fallout from the eurozone crisis, the central bank this week called for them to raise their provisioning to better cushion them from potential losses.
The vulnerability for Malta is the uncertainty caused by the Cypriot bail-out, which for the first time forced large depositors and holders of senior bank debt to take losses — a “bail-in”, as the jargon has it.
“The key risk facing Malta is that its international offshore investors begin to relocate in light of the policy uncertainty created by the Cypriot bail-in,” Pacific Investment Management Company portfolio manager Myles Bradshaw said.
“This would have significant negative economic effects that could in turn create a problem with domestic banks’ asset quality. Together with the deep recession, this could force Malta to seek external assistance.”
Markets are betting that Slovenia, a country of 2-million on Italy’s northeast border, will be the next eurozone country to succumb to a bail-out.
In contrast to Cyprus, Slovenia’s banking system is not large — about 1.4 times as big as the economy — and there are negligible foreign depositors.
But the Slovenian banks, most
Simply saying this won’t happen again is not enough — it’s the ‘Fool me once, shame on you. Fool me twice, shame on me’
of which are state-owned, are crippled with bad loans, which comprised 14.4% of their loan books last year. Like Cyprus, Slovenia does not have the money to recapitalise them.
The Organisation for Economic Co-operation and Development heaped pressure on Slovenia this week when it said the level of bad loans at Nova Ljubljanska, Nova KBM and Abanka Vipa could be much bigger than previously thought and capital needs could be “significantly higher”.
If Slovenia needs a bail-out, investors will be watching to see if Europe stays true to its word that the Cypriot bail-out was unique.
A Cyprus-style rescue involving losses on large depositors and banks’ senior bonds would reignite the risk of contagion, particularly for countries with large banking sectors.
“Cyprus has sent a strong message to a lot of people,” said asset management firm Altana Wealth founder Lee Robinson.
“Non-Europeans will be asking themselves whether they have exposure to any of these other countries where the financial sector looks dangerously large relative to GDP.
“Simply saying this won’t happen again is not enough — it’s the ‘Fool me once, shame on you. Fool me twice, shame on me’,” said Mr Robinson. Reuters