ECONOMY

Greek haircut takes its toll on Cypriot banks

Cyprus banks are dealing with the implications of the haircut on Greek bonds agreed on October 27. The island?s three largest lenders, Bank of Cyprus, Marfin Popular Bank and Hellenic Bank, which also operate branches in Greece, all own Greek bonds and are watching their balance sheets deteriorate, despite their continuing revenues and operational profits.

On September 30, Bank of Cyprus owned 2.092 billion euros in Greek bonds, Marfin Popular owned 3.083 billion and Hellenic 110 million euros. Managing the situation entails a good deal of collateral damage, given the amount of capital required to make up for the writedown, and it is hoped that the state will not have to provide extra support to the banks.

The overall economic mood is not good. The losses posted by the three banks in the third quarter were unusually high for Cypriot standards. Meanwhile, the Cypriot economy is going through a period of fiscal adjustment and rating agencies have issued grim forecasts about the prospects of the European Union country?s banking system.

Raising capital in the markets is not an easy task. In an interview with Kathimerini Cyprus, Andreas Vgenopoulos, chairman of Marfin Investment Group (MIG) and main shareholder of MPB, said that ?the cross-border merger of Marfin Laiki with Marfin Egnatia was a mistake; but keeping the bank headquarters in Cyprus instead of transferring it to Greece was an even bigger mistake.?

Marfin Popular has voiced grievances against the institutional framework of the Cypriot banking system. The company has suggested inviting asset manager BlackRock to inspect the portfolios and other balance sheet data of all banks in Cyprus.

?It?s unacceptable to ask private shareholders and investors to again put their money in banks without [offering them] some international guarantee,? Vgenopoulos said.

MPB is due to hold an extraordinary general assembly on January 17 to discuss a new management. Last week Efthimios Bouloutas resigned as CEO. He was replaced by the bank?s deputy chief executive officer, Christos Stylianides.

In light of developments, Bank of Cyprus is proceeding with a 1-billion-euro capital boost. An extraordinary general assembly last Monday approved a program of capital strengthening that was bigger than any other time in the past. Faced with deep skepticism from shareholders, Chairman Theodoros Aristodemou did not rule out a future share capital increase.

Apart from capital strengthening, BoC issued 1 billion euros of three-year covered bonds earlier this month and will issue another billion-euro bond in the first quarter of 2012, thereby further bolstering its liquidity.

Apart from their response to the Greek haircut, banks also have to deal with non-serviceable loans in Greece as well as Cyprus.