A probe suggests that the crisis in the Cypriot economy was a result of the interdependence of the banking system and public finances and the state’s inability to support the banks.

This is what one member of the investigating committee probing causes of the financial meltdown believes happened.
According to Nicolaou, the relationship between the banks and state finances is central to the investigation in light of the government’s inability to support cash-strapped banks, and the lack of awareness from both sides regarding that relationship.
“In Cyprus most banks are Cypriot which means a burden for the state with guarantees that become more cumbersome with the extension of the banking sector,” said Nicolaou.
“One of the elements which contributed to the crisis and potentially caused the conditions under which the banks collapsed, is the ignorance or insufficient knowledge regarding this interactive relationship between the state and the banks,” she added.
She also pointed out that this is evident from the fact that the banks decided to expand beyond the island’s borders without taking into account the government’s ability to guarantee their stability.
According to Nicolaou, the important losses that the banks suffered were a result of political decisions, the consequences of which were suffered by the banks and by extension the taxpayer.
More specifically, she referred to the Emergency Liquidity Assistance (ELA) worth €9.2 million which was granted to insolvent Laiki bank in violation with European Central Bank regulations, which also led to losses from Laiki branches in Greece worth €3.8 million.
In addition, Bank of Cyprus which maintained its solvency until its branches in Greece were sold in March 2013, was unnecessarily granted €1 billion at the instruction of the Central Bank in 2013, at a time when its liquidity reached €1.55 billion.
Finally, the additional report also referred to the vital role that the Pimco stress test for the banking system’s worse case scenario played in the development of the crisis in Cyprus.
Nicolaou argued its projections were detrimental to the management of the problem and contributed to the decision to haircut deposits, due to the estimated needs of the banks which in combination with fiscal requirements rendered the debt unsustainable.
“Witnesses have expressed their doubts concerning the accuracy of Pimco’s findings and three additional reports showed that it had overestimated losses by at least €2.5 billion.
“It is also noted that a critical analysis by Black Rock which occurred at the request of the Central Bank could have been used to argue the reduced needs of the Cypriot bailout programme,” Nicolaou said.
The report also establishes that the sale of the Laiki and BoC branches in Greece was a loss of wealth for Cyprus, although the issue was only partly investigated by the committee.
The other two members of the committee George Pikis and Andreas Kramvis said that they do not concur with the conclusions of the additional report, while Nicolaou has also co-signed the main findings.

 

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