By Panayiotis Tsaggaris

Prime Minister Antonis Samaras has reportedly promised Cypriot President Dimitris Christofias that he will consider his request for the transformation of Greek lender Marfin Egnatia Bank from a local branch of Cyprus Popular Bank back into a subsidiary of the Nicosia-based lender. That would relieve the Cypriot government of having to guarantee some 4 billion euros of bad loans that it seems to have shouldered overnight a year-and-a-half ago.

In March 2011 the central banks of Greece and Cyprus approved the merger of Cyprus Popular and Marfin Egnatia, when the latter’s portfolio included bad loans totaling some 4 billion euros. Kathimerini has been informed by sources that this burden, concerning loans that were for the acquisition of shares and had no collateral or other forms of guarantee, was immediately transferred from Greece’s central bank to its Cypriot counterpart.

The same sources told Kathimerini that loans worth hundreds of millions of euros were provided to “monasteries and convents” without adequate collateral or in some cases without any guarantee at all.

It is clear that had Marfin Egnatia remained a subsidiary, it would have continued to be monitored by the Bank of Greece. That would automatically mean that the guarantees for deposits in Greece would be the obligation of Hellenic Deposit Protection Fund and the subsidiary would have the right to recapitalization from the Hellenic Financial Stability Fund (HFSF) as well as access to the Greek emergency liquidity assistance (ELA) to tackle any cash flow problems.

A Cypriot diplomatic source has informed Kathimerini that Christofias asked Samaras during the former’s recent visit to Athens to annul the March 2011 decision so that the Republic of Cyprus will not have to cover the amount of 4 billion euros. Samaras reportedly appeared willing to examine the issue.

Kathimerini also understands that the governor of the Bank of Greece, Giorgos Provopoulos, recently told Greek state officials that “as a matter of principle,” he is not against Marfin Egnatia becoming a subsidiary again.

Another source said that Athens-listed Cyprus Popular is conducting a legal check to establish whether the March 2011 decision could be canceled. The issue has generated intense discussions within the Cypriot banking sector about whether the Republic of Cyprus would have been able to avoid any losses had Marfin Egnatia remained as a subsidiary of Cyprus Popular Bank, or whether Cyprus would still have had to cover the losses regardless of Marfin Egnatia’s status.

The question remains as to how the Bank of Greece allowed Marfin Egnatia -- which, as a Greek subsidiary of Cyprus Popular, was under its own jurisdiction -- to issue loans without collateral or other forms of guarantee, and how the Central Bank of Cyprus approved the transformation of Marfin Egnatia from a subsidiary into a local branch during a period when the Greek lender had so many loans without guarantees in its portfolio.