Cypriot President Nicos Anastasiades has launched scathing criticism over the terms of an international bailout which forced massive losses on bank deposits, saying the support lenders displayed to Greece was absent in the case of Cyprus.
Cyprus, one of the smallest economies in the euro zone, was forced to wind down one bank, and seize savings in a second to qualify for a 10 billion euro aid package from the International Monetary Fund and the EU in March.
In a letter to lenders, collectively known as the troika, Anastasiades expressed concern onerous conditions for aid were a stranglehold over an economy facing deep recession, with legacy debt from the wound-down bank adding to the vulnerability of the banking system.
To prevent financial collapse and be eligible for aid, Cyprus is closing down Popular Bank, also known as Laiki, and converting sizeable deposits in Bank of Cyprus into equity to help recapitalise that bank.
The process, known as a ‘bail-in’, was a first in the history of the euro zone debt crisis. Thousands of depositors lost their savings, and subsequent capital controls were imposed to prevent a drain on remaining deposits. Those controls are largely still in place.
“It is my humble submission that the bail-in was implemented without careful preparation,» Anastasiades says in the letter, reported by Cypriot financial website Stockwatch and other local media outlets.
Cypriot finance minister Haris Georgiades, who Anastasiades said had already alerted lenders to potential pitfalls without receiving a response, declined comment on the matter.
As part of the aid package, Laiki and Bank of Cyprus were forced to sell their Greek branches, while deposits the banks had in that country were exempt from the bail-in, to avoid contagion to Greece.
“As understandable as ring-fencing may be, this was absent at the time of deciding the Greek PSI (Private Sector Involvement) in relation to Greek government bonds which cost Cyprus 25 percent of its GDP,» Anastasiades wrote.
He was referring to a Greek sovereign debt restructuring which imposed heavy losses on Cypriot banks in early 2012.
“The heavy burden placed on Cyprus by the restructuring of Greek debt was not taken into consideration when it was Cyprus’s turn to seek help,» Anastasiades said.
Bank of Cyprus, which is assuming some of Laiki’s assets, was also forced to assume Laiki’s emergency liquidity assistance (ELA) liability, a funding lifeline provided from the European Central Bank.