How trading blame led to death threats for ECB’s Cypriot banker

When Panicos Demetriades’s phone rang at about 7 a.m. on March 16, the Cypriot central bank governor had already read the bad news he was about to hear.

On the line was his then deputy, Spyros Stavrinakis, passing on details of a deal the Cypriot president had agreed to overnight 2,000 miles away in Brussels: Every bank account on the island would be raided to help pay for a rescue that already amounted to 10 billion euros ($12.9 billion) of foreign aid.

While the bailout terms were subsequently eased, life for Demetriades became harder. A year after the 54-year-old left his professorship in England, he remains engulfed by a standoff unprecedented in the euro’s 14-year history. Death threats and a parliamentary probe ensued, with European Central Bank President Mario Draghi now embroiled in the political and personal feud.

“As an academic, you don’t get this sort of pressure,” said Professor Stephen Hall, a former colleague of Demetriades at Leicester University and an adviser to the Bank of Greece. “He feels that if he resigns now, that would be like admitting the things they are saying about him are true.”

A committee of lawmakers in Cyprus may consider this week a bill put forward by the ruling party that could dilute the power of the governor on the central bank’s board.


Demetriades’s story is one of how an academic who spent more than two decades teaching at English universities found himself at the center of his native land’s biggest crisis since the Turkish invasion that divided the island in 1974.

He took the central bank post in May 2012 after being appointed by the previous government, inheriting an economy struggling with a widening budget deficit and locked out of international debt markets.

After stocking up on the government debt of Greece even as that country entered a downward spiral that would bring it close to leaving the euro, Cypriot banks were bleeding from losses equivalent to as much as 25 percent of gross domestic product.

As the damage to the banking industry became clear, the relationship between Demetriades and the new government of Nicos Anastasiades went from bad to worse, deteriorating to the point where the government committed to sell the country’s gold without informing its treasurer, the central bank.


The thought that a euro-area country could sell its gold reserves helped push global prices for the metal to their lowest level in more than two years.

“Central bank independence is important for financial markets as it provides shelter from political interference,” said Anatoli Annenkov, senior European economist at Societe Generale in London. “It is of course not helpful when major policy institutions are at loggerheads.”

For the time being, Demetriades is digging in. With his family in exile and two public investigations hanging over him, he says he’s done nothing wrong. As part of his position, he sits on the Governing Council of the ECB in Frankfurt.

“There have been daily allegations by various government officials and members of parliament alleging that I have committed criminal offenses,” Demetriades, in a gray, open-necked shirt and gray slacks, said in an interview in Dublin on April 13. The political wrangling “is hampering my ability to manage a very difficult situation,” he said.


The primary complaint against him, described in a letter dated April 15 from President Anastasiades to Draghi, is that he kept the now-defunct Laiki Bank artificially afloat throughout the second half of 2012 to enable the country to reach elections in February 2013 without needing a bailout.

The charges mirror Cypriot politics. The fact that Demetriades was hired by the previous, nominally communist government hobbled him from the moment Anastasiades, from the centre-right Disy party, won a presidential election this year.

“The support he would have got from the government that appointed him is not what he is getting from the current administration,” said Hall at Leicester University.

Government spokesman Christos Stylianides declined to comment on central bank affairs when contacted this week.

While Demetriades declined to comment for this story, the central bank denied any culpability of its chief in a statement distributed on April 29. “The governor, with his timely statements and actions, prevented a disorderly bankruptcy of Laiki bank and consequently the country itself,” it said.

Predecessor speaks

That was followed by an attack by his predecessor, Athanasios Orphanides, who ran the central bank from 2007 to 2012. He said Demetriades then deliberately exaggerated the recapitalization needs of banks to disguise the fact that the government of Demetris Christofias, who came to power in 2008 until this year, had overspent.

“You had the central bank starting to characterize the banking system in Cyprus as “Casino banking,”’ Orphanides, now a senior lecturer at the MIT Sloan School of Management, said in London on May 15. “They actually succeeded in creating the image that the banking system was so severely undercapitalized that the debt of the country would be unsustainable.”

Cypriot banks were headed for trouble long before Demetriades was appointed. They swelled to more than five times the island’s GDP partly through being a safe-hold for Russian funds and a financial services hub for nearby countries like Lebanon. Cyprus adopted the euro in 2008.

Then came the losses because of holdings of Greek bonds banks had snapped up to make money from the difference in yield over other parts of the euro region. Greece became in April 2010 the first member of the common currency to ask for a bailout. Less than two years later, it restructured its bonds.

Sudden pain

The early-morning phone call Demetriades took in Nicosia came at the start of two weeks of political and market turmoil on the Mediterranean island after the decision to tax bank deposits as part of the rescue opened the latest chapter in Europe’s management of a debt crisis now in its fourth year.

In the following days, the country’s parliament would reject the bill, setting the clock counting down to the March 25 deadline when the ECB in Frankfurt would demand an end to central bank funding to the banks if no deal was reached.

The impact on the Cyprus was “painful and sudden,” and the country now found itself at “the most critical moment,” according to a statement sent that day by then-Bank of Cyprus Chairman Andreas Artemis.

A second agreement was signed in Brussels at the 11th hour that protected deposits under 100,000 euros. The banking industry shrank to three times GDP as Laiki, the second-largest, was shuttered and folded into the larger Bank of Cyprus.

Death threats

Having spent much of his academic life teasing out a theory of how the growth of finance in developing countries can aid the economy, Demetriades now found himself having to manage the decline of his own country’s banks.

Cyprus was about to join Greece, Ireland and Portugal in having to implement spending cuts in return for aid. He estimated that through crunching the banks, the bailout will shrink the Cypriot economy by almost 9 percent this year alone. The death threats started.

A letter, dated March 20 and addressed to both Demetriades and President Anastasiades, turned up in early April. According to the Cyprus Mail, which published excerpts, the “Deposit Rescue Group” pledged revenge on their families unless haircuts on deposits were stopped.

Two more threats on Demetriades’s life were sent, one to the central bank and one to a local newspaper. He moved his wife, a fellow academic, and their children out of the country.

Blame game

As the government and the central bank fought to impose order in the financial system, the blame game began.

On April 2, Anastasiades, a trained lawyer, appointed three former Supreme Court judges to investigate “a series of acts or omissions by individuals authorized to manage the economy and its banking system led the country to the brink of bankruptcy and to the dissolution of one of its largest banks.”

The provision of so-called Emergency Liquidity Assistance for so long “raises questions” over the central bank’s independence and the governor’s relationship with the previous government, according to a letter from Anastasiades to Draghi dated April 15.

Anastasiades wrote to Draghi that confidence in the island’s central bank governor had drained away, demonstrated by the fact that by April 15 three board members, Haralambos Akhniotis, Andreas Matsis and Louis Christofides, had resigned. Anastasiades had revoked the appointment of Deputy Governor Stavrinakis three days earlier.

No Trust?

“I believe these resignations clearly indicate that Governor Demetriades does not even enjoy the trust and confidence of the institution he is running,” he said.

Replacements Alexandros Michalides, Michalis Spanos, Stelios Koiliaris were named to the board for five-year terms on May 24, the Cypriot Press Ministry said this week.

In Frankfurt, the collapse of the board looked like political interference in central bank affairs, a cardinal sin in Europe since the euro’s founding treaty.

In a letter sent in April, Draghi warned Anastasiades that Cyprus could find itself before the European Court of Justice if allegations against Demetriades continued. The details of the letter were published by media in Cyprus.

A new fault line then emerged over the sale of some of Cyprus’s gold reserves. The government initially agreed with euro-area finance ministers to sell 400 million euros of gold reserves. Yet politicians hadn’t asked the central bank, which like all such institutions in the euro area is trusted with the management of the national reserves.

Dublin meeting

“The government seems to have committed to a sale of state gold without consulting the central bank,” said Demetriades, visibly agitated, during the interview on April 13 in Dublin where European finance ministers and central bankers had convened. “The independence of the central bank of Cyprus is being attacked at this time.”

While Demetriades attempts to reduce the first capital controls in the euro’s history, new threats are emerging.

A bill sponsored by Disy, the president’s party, has been proposed that would give the government the right to appoint more members to the board of the central bank than it does now, two of whom would have executive powers.

With parliamentary and judicial investigations hanging over him, Demetriades is staying put. He described a meeting with Anastasiades on April 25 as “creative.”

Cambridge years

As a post-graduate student at Cambridge University in the mid-1980s, Demetriades was “more of the engaged type,” said Hesham Pesaran, now emeritus professor of economics at Cambridge, who supervised part of his doctorate on the costs of inflation. “He was open to discussion, even at a younger age, and still is,” Pesaran said by telephone from Los Angeles.

Yet the breakdown in trust has laid bare the strains when countries need a bailout, said Christofides, one of the board members of the Central Bank of Cyprus who resigned in April.

“Independence of the central bank is a tricky affair,” Christofides, a professor of economics at the University of Cyprus in Nicosia, said in an interview. “It was conceived as concerning a single issue, namely price stability, but things are very much more complex now. It’s inconceivable that the central bank wouldn’t be in touch with the government.” [Bloomberg]