In response to my blog of yesterday on the palpable inequity in the treatment of Cyprus's banks I was pointed towards two well-argued pieces by Karl Whelan at University College, Dublin. These suggest a possible and pragmatic course of action with regard to the €11bn ELA burden carried by the Bank of Cyprus.
In essence Whelan argues that the resolution of Anglo-Irish Bank in Ireland has set a precedent for a conversion of ELA into long-term bonds, provided these are sold off to the private sector.
In the case of Anglo Irish this involved the establishment of a separate vehicle to hold the ELA. This then defaulted. The ELA liability reverted to the Irish Central Bank which then converted the debt into long-term (27-40 year) bonds.
In order to counter the accusation of monetary financing the Central Bank then pledges a schedule of sales to the private sector.
There are pros and cons to the appproach which Whelan carefully analyses.
This is not a cost-free option but it shifts the debt burden 'down the road' and would transfer the burden from the Bank of Cyprus, and its hair-cut depositors, onto the broader shoulders of the Cypriot taxpayer, thus allowing the Bank of Cyprus to get on with being a bank rather than a pile of frozen pre-pledged collateral.
From my non-specialist viewpoint I can see two objections to such a strategy.
Firstly, the Irish example developed in an organic way - the solution was more stumbled-upon than planned from the outset. Forwarned the ECB board might be less tractable when confronted with an Anglo Irish à la Nicosia.
Secondly there is the sheer size of the ELA-pile in Cyprus. At €11bn it is over half annual GDP and issues of debt-sustainability following a bond conversion would come rapidly to the fore.
Which is where the relationship with Greece comes in.
As I argued yestereday and earlier the fire-sale of Cypriot bank operations in Greece to Piraeus Bank does not pass, as Whelan would put it, the sniff test for fairness.
Anastasiades' letter of last week spelt out the sum of ELA (€4bn-plus) that Laiki alone held to cover a deposit run from its Greek branches. Yet on the sale of those branches the ELA stayed with Laiki and was subsequently transferred to BofC.
As all this was going on Piraeus Bank was making a negative goodwill adjustment of a whopping €3.4bn to the asset value of its fire-sale acquisition while at the same time reducing loan provisioning on the book taken over from the Cypriot banks.
Piraeus Bank through its assiduous takeovers and merger is now the biggest bank in Greece, has been successfully recapitalised, and has been the beneficiary of considerable EFSF funding to achieve this.
What better bank to do a bit of heavy-lifting on behalf of Cyprus?
Of course, this is fantasy land but in the schedule of the ELA-originated bond sales to the private sector drawn up by the Central Bank of Cyprus Piraeus Bank agrees to be marked down to buy up-front and at a premium CBC-issued 'Cyprus solidarity' bonds to the value of at least €3.4bn.
NB For the record there was a Cyprus elephant. A dense concentration of bones from the Pygmy Hippopotamus (phanourios minutus) and the endemic Dwarf Elephant (elephas cypriote) were found in the cave at the neolithic settlement of Akrotiri-Aetokremnos.
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