Josef Ackermann used his clout as head of Deutsche Bank AG to help save the euro by negotiating the biggest debt restructuring in history. Now, he’s been tapped to resuscitate a victim of that deal.
Ackermann, who left Deutsche Bank in 2012, has been nominated as chairman of Bank of Cyprus Pcl. Deposits there were seized last year as part of a 10 billion-euro ($12.4 billion) international rescue after Germany balked at bailing out rich Russians with money in Cypriot banks. Shareholders are scheduled to meet Nov. 20 in Nicosia, Europe’s last divided capital, to approve the appointment.
Backing him are Viktor Vekselberg, the second-richest man in Russia, and Wilbur Ross, the U.S. billionaire who made money investing in Bank of Ireland Plc and sees opportunity in the stricken Cypriot lender. Almost half of the bank’s loans are souring, and capital controls, the only such restrictions in the euro area, are still in place. Ackermann, Ross says, is key.
“We made up a very small list of names, and the most prominent on the list was Josef Ackermann,” Ross, head of a group that invested 360 million euros in the country’s largest bank, said in an interview from New York. “He has a huge Rolodex. You can imagine he knows practically everybody in Europe, everybody in Eastern Europe and huge numbers of people in the U.S. and elsewhere.”
Ackermann, 66, who declined to be interviewed for the story, transformed Frankfurt-based Deutsche Bank into Europe’s largest investment bank during his decade as chief executive officer, steering it through global financial turmoil. As chairman at the time of the Washington-based Institute of International Finance, which represents more than 450 financial firms, he was central to a 2012 deal to persuade investors to take losses on restructuring Greece’s sovereign debt.
The Swiss-born banker — a perennial presence at the World Economic Forum in Davos, 60 miles from the town where he was born — fielded calls after midnight in Moscow to work out a compromise on Greece’s debt restructuring, avoiding what he had called a meltdown that could rival the 2008 collapse of Lehman Brothers Holdings Inc. As that arrangement unraveled along with the Greek government, Ackermann flew from Munich to Athens to Paris and other European capitals to tie up a final deal.
The rescue saddled Cyprus’s banks, big holders of Greek sovereign debt, with 4.5 billion euros in losses, which led to what the International Monetary Fund has called one of the largest banking-sector collapses on record.
After Russian President Vladimir Putin declined to throw Cyprus a financial lifeline, Bank of Cyprus was forced to absorb Cyprus Popular Bank Pcl and seize deposits. Shareholders, such as the Church of Cyprus, were almost wiped out as about 21,000 bank clients had almost half of their savings in excess of 100,000 euros converted into equity at 1 euro a share.
Many of them were Russians, drawn to Cyprus by treaties that turned the island into a tax shelter for individuals and businesses that reinvested back home, creating tight financial links. Cyprus is the biggest foreign investor in Russia with $69 billion through the end of last year, and the second-biggest destination for Russian investment at $33 billion, according to the Moscow-based Federal Statistics Service.
Ackermann, a regular visitor to the Putin-hosted St. Petersburg International Economic Forum while head of Deutsche Bank, is a director of Renova Management AG, an industrial holding company controlled by Vekselberg, 57, who was a beneficiary of Russia’s privatization program of the mid-1990s and owns stakes in Swiss equipment makers and United Co. Rusal, the world’s biggest aluminum producer.
Renova Management, based in Zurich, is part of Vekselberg’s closely held Renova Group, which emerged as the second-biggest single shareholder in Bank of Cyprus, with a 5.45 percent stake, after the July cash call that raised 1 billion euros. The largest block of stock is held by creditors of Cyprus Popular Bank. A Renova executive, Maksim Goldman, also has been nominated to the Bank of Cyprus board. A spokesman for Renova didn’t respond to an e-mail seeking comment.
Ross, whose group owns 17 percent of the bank, plans to share the vice-chairman post with Vladimir Strzhalkovskiy, who worked with Putin in the KGB in the 1980s. Strzhalkovskiy, the most prominent of the Russian businessmen who became shareholders after last year’s bail-in, is a former CEO of OAO GMK Norilsk Nickel. (GMKN) A spokesman for the bank said Strzhalkovskiy wouldn’t comment for this story.
The link with Vekselberg and the involvement of investors such as Ross helped convince Ackermann to take the post, according to a person with knowledge of the matter who asked not to be identified because the talks were private. Ackermann was seen as an obvious candidate after the bank attracted shareholders including Renova a year after completing the reorganization required by the central bank, the person said.
Investors from Europe, the U.S. and Russia are betting that Bank of Cyprus, with about one-sixtieth the assets of Deutsche Bank, can tackle the souring loans and escalating tensions between Europe and Russia that loom over a recovery in the euro area’s third-smallest economy. Last year’s banking crisis supplanted an unresolved 40-year dispute over the island’s division following a coup by supporters of union with Greece and a Turkish invasion.
“It doesn’t exactly look like a career-enhancing move, from a G7 economy to $22 billion Cyprus,” said Fiona Mullen, an economist based in Cyprus who runs a consulting firm. “They used to call Cyprus the graveyard for diplomats because of the Cyprus problem. Maybe it is now the graveyard for bankers.”
Ackermann’s return follows his stepping down as chairman of Zurich Insurance Group AG (ZURN) in August 2013, when he was mentioned in a suicide note by Chief Financial Officer Pierre Wauthier. Ackermann, who has dismissed the idea that he had any bearing on the suicide, later left the boards of Siemens AG and Royal Dutch Shell Plc. (RDSA) In September, he and other Deutsche Bank executives were charged with attempted fraud over the bank’s handling of a civil dispute dating back more than a decade.
Ronald Weichert, a spokesman for Deutsche Bank, said “the presumption of innocence prevails” for all current and former executives and that the bank couldn’t comment on pending cases. A spokesman for Ackermann said he had no comment on the matter.
Last month Deutsche Bank replaced its finance chief as mounting litigation expenses wiped out quarterly profit and the firm sought to settle probes into alleged market-rigging. The bank also is under investigation for doing business with countries subject to U.S. sanctions, including Iran. Some of the activities date back to when Ackermann was CEO. The bank has said it’s cooperating with authorities in the probes.
Ross, 76, has a positive view of Cyprus. The July share sale he backed, along with the European Bank for Research and Development and others, was the largest single foreign direct investment in the country and boosted the Nicosia-based bank’s common equity tier 1 ratio to 15.6 percent, helping it pass European stress tests last month.
Over the past 15 months, he said, the lender has cut dependence on central bank funding, sold assets and returned to profitability. Cyprus “has one of the better long-term prospects of southern Europe,” Ross said, explaining that the sale of airports and seaports will draw more tourists, and the island’s skilled workforce and tax treaties can make it a base for corporate services. The prospect of significant natural gas reserves is “the big game-changer longer-term.”
The IMF on Oct. 22 said the island’s economy will shrink 3.2 percent this year, less than a previous forecast of 4.2 percent, and return to growth of 0.4 percent next year.
“The bank is in effect like a warrant or a call on the Cyprus economy, and if the Cyprus economy does very well it’s hard to imagine that the bank won’t do very well,” Ross said. “They both very much need each other, and that was certainly true as well in the case of Ireland.”
WL Ross & Co., Ross’s private-equity firm, has circled euro-area financial firms for much of the crisis, investing in Bank of Ireland in 2011 eight months after the country sought a bailout for its banks. Earlier this year, Ross was part of a group that contributed 1.3 billion euros to Greece’s Eurobank Ergasias SA. (EUROB) He also has bought stakes in ailing U.S. banks such as Oregon’s Cascade Bancorp (CACB), New Jersey’s Sun Bancorp Inc. (SNBC) and union-owned Amalgamated Bank in New York, all of which required his financial aid after writing down bad real estate loans.
In Ireland, Ross accompanied CEO Richie Boucher to branches to talk with staff and gave pep talks to major clients.
Cyprus is still reeling from having deposits seized and banks shut for two weeks. Ross said he was surprised at the low take-up of stock offered to previous shareholders — those who lost their savings — saying it may be explained by the “trauma” of the bail-in.
Bank of Cyprus CEO John Hourican, a former Royal Bank of Scotland Group Plc executive, will have to restore depositors’ faith in the lender at the same time he tries to get Cypriots to repay loans in a shrinking economy. An Oct. 31 supreme court ruling on foreclosure laws promises to pave the way for more decisive action and eased payment of the next installment of loans to the country.
“People panic when they are 5 percent nonperforming loans, never mind 50,” said David Green, a former Bank of England official and member of an independent commission on Cyprus banking. “All that means is that those loans aren’t being serviced, so there’s a huge drag on profitability.”
An escalation in tension between Europe and Russia and the threat of more sanctions could pose another risk to the Cypriot recovery, the IMF said last month. Service exports to Russia, mostly tourism, account for more than 20 percent of Cyprus’s total, while Russian companies abandoning Cyprus as a base would hurt services and fiscal revenues, the IMF said.
Ross says it’s too early to say what Bank of Cyprus’s geographic strategy should be: The bank already has sold its Ukraine unit and its U.K. loan book and is selling its Romanian loan portfolio. Hourican, who’s marking a year in the job, said in an interview that the bank is considering options for Uniastrum, the Russia unit, which has 164 branches in Russia, more than in Cyprus. Deutsche Bank is advising on those options, he said.
Ackermann’s pending appointment signals “a real commitment to good governance,” the CEO said, a view echoed by Ross.
“Cyprus by its very nature, just as is true of Ireland, is and will continue to be a very internationalized economy,” Ross said. “That’s why it was important to have someone like Josef Ackermann and someone like myself and also Russian representation, because the realities are those are big constituencies for the bank.”
Bank of Cyprus shares, which have been suspended on the Greek and Cypriot exchanges since March 2013, may resume trading by the end of the year, according to Hourican. He said he wants to explore an alternative platform for the shares, as the firm’s Greek business was sold to a bank there as part of the bail-in.
Ackermann “has run banks in very difficult circumstances in the past,” Green said. “He’s got a lot of experience of workout situations of one kind or another, and he’s extraordinarily well-known. Whether he’s got special magic in Cyprus — that remains to be seen.” [Bloomberg]