The Anastasiades Letter and EU Inequity: There'll be ELA to pay

The letter sent by Cyprus's President Anastasiades to the EU/IMF/ECB troika last week has been extensively leaked and featured in a front-page FT article today.


In effect, the letter gives the troika warning that Cyprus may not be able to meet its obligations under the terms of the bailout.


For me one of the strongest parts of the letter (which should have been checked by someone who speaks English as their mother-tongue) concerns the fire-sale of the Greek operations of Cyprus's banks as a condition of the bailout.


I've covered this sale elsewhere and in the paper, 'Not so Lucky Laiki', which now needs a complete overahaul but provides some useful background.


Bascially the Anastasisades letter argues that Cyprus has been done an injustice.


Firstly, it argues that whilst accepting the need to ring-fence the Cyprus crisis to prevent the contagion of the enfeebled Greek banking system (by not including the Greek deposits of Cypriot banks in the bail-in haircut) it is concerned that no such anti-contagion consideration was shown Cyprus when the Greek PSI bond haircut wiped €4.5bn from the assets of Cypriot banks.


Secondly, it complains at the way that the central bank borrowing incurred to cover the Cypriot banks' Greek operations was not in effect transferred to the Greek bank that picked-up those operations - equivalent to a tenth of the Greek banking market - for a song (to the tune of just €524m).


So far. So familiar. What is less familiar is the detail on these issues that the letter provides.


What we learn is that of the total of €9bn-plus that Laiki bank had borrowed from the Central Bank of Cyprus in onerous Emergency Liquidity Assistance €4bn-plus of this was drawn down to cover a run on deposits from the Greek branches of the bank.


We also learn that once Laiki's Greek operations had been summarily disposed of it was left with a collateral shortfall of €3.8bn. In other words, Laiki's Greek assets had been used to cover nearly half of its ELA borrowing.


However, instead of allocating this borrowing to the purchaser of Laiki's Greek interests (and allocating the contingent liability to the Bank of Greece) it was lumped onto the Bank of Cyprus along with the remainder of the €9bn-plus of ELA.


So not only did Greek depositors in Laiki not have to share the pain of the bail-in haircut suffered by their Cypriot 'cousins' but also Piraeus Bank which snapped up Laiki's operations was not saddled with the yawning gap between Greek loans and deposits in Laiki that had been covered with €4bn of ELA.


To add insult to injury, and this is not covered by the Anastasiades letter,  shortly after Piraeus Bank had purchased the Greek operations of the three Cypriot banks (Laiki, Bank of Cyprus and Hellenic Bank) for €524m in late March 2013 it saw fit to adjust the value of the assets of that purchase - through a negative goodwill item in its quarterly accounts - by a positive increment of €3.4bn. 


And at the same time Piraeus Bank lowered its provisions for bad loans - that were forecast to arise largely from the Cypriot purchase - by €2.5bn.


Lastly, whilst Laiki and Bank of Cyprus have been denied acces to European Stability Mechanism funding (largely because of a German electoral-cycle hue-and-cry about Russian 'schwarzgeld' and money laundering - that is not without justification) Piraeus Bank has been a beneficiary of its predecessor, the European Financial Stability Facility, and its purchase of the Cypriot bank operations was bank-rolled with Hellenic Financial Stability Facility funds.


I am not a banker or a lawyer and I have been a pretty fierce critic of the mess Cyprus's banking system got itself into, let alone its government, but can someone please explain to me how this can possibly be representative of the fair, even-handed and principled solidarity to which the European Union aspires?

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