Did the troika defraud billions at the expense of thousands of depositors in Cyprus?

By Harald Schumann / Der Tagesspiegel

As an experienced politician, Nicolas Papadopoulos is accustomed to difficult times. He has been an MP and head of the Cypriot Parliamentary Finance Committee for nine years. He is also head of the socially liberal Democratic Party (DIKO) so no one can accuse him of being a political radical. But when the 41 year old tells this story, his voice breaks and his fury brings tears to his eyes. “My country,” he says, “is the victim of a daylight robbery.” “They stole three and a half billion euros from us and gave it to a Greek bank.” “People’s life savings, the money our citizens saved for their retirement.” Now many will even lose their homes. “The troika and the Eurogroup decided this, and we were forced to agree since they had a gun to our heads '. It was “one of the biggest scandals in the history of the Eurozone.”

So did Eurozone Finance Ministers and officials of the European Commission, the ECB and the IMF perpetrate a billion euro robbery?  It sounds absurd. But the allegation is based on facts and documents. They show that officials in Brussels and Frankfurt imposed a highly controversial agreement on the country, under the terms of which customers of the Cypriot banks lost three billion euros, which a Greek bank then received as profit. So far parliamentarians and the European courts have not dealt at all with this question, and one reason for this is that the Cypriot government does not dare to speak publicly. It is is dependent on the goodwill of the ECB and the European Commission. Now, however, hundreds of Cypriots have appealed to the European Court of Justice and the Central Bank of Cyprus intends to launch an investigation.

The road to the controversial agreement began with the economic collapse of the Republic of Cyprus in 2012. Until then, the small country of 800,000 inhabitants was one of the richest in Europe. With low taxes and flexible control mechanisms, the island had become a financial centre and tax haven. The wealthy from all over the world, though mainly from Russia, hid money from their domestic tax authorities in Cyprus, creating a strong banking sector in the country. The balance sheets of the three main banks, the Laiki Bank, the Hellenic Bank and the Bank of Cyprus, added up to eight times the country's GDP. Glossy palatial banks and hundreds of luxurious law offices in Nicosia testify to that imported wealth.

The blow came in April 2012. The Greek debt haircut caused Cypriot banks losses of four billion euros, nearly one quarter of GDP. The government of former President Demetris Christofias provided support of 1.8 billion euros to the Laiki Bank, which had taken a particularly fierce blow. Soon after the government itself faced difficulties to refinance its growing debt. As previously in Greece, Ireland and Portugal, so Cyprus had to submit a request for a loan and negotiate with officials from the Troika. But Cyprus had no friends in the EU.

Michalis Sarris found this out the hard way. Sarris, who today is 67 years old, became the Finance Minister in 2013 under emergency conditions. The leftist government of Christofias had lost the election because of their lamentable management of the crisis. The new conservative president Nikos Anastasiadis and his Minister of Finance tried to save what could be saved. Sarris, who on a personal level is charming and cosmopolitan, is a veteran of the banking system. For 30 years he was at the World Bank, he had a background as Finance Minister, and he had experience of managing a bank in crisis. But he says that what was waiting for him in Brussels was a situation he had never thought would be possible.

On March 3, 2013, just five days after taking office, he went to Europe's capital to negotiate the emergency loan. But from the very first meeting with his German colleague Wolfgang Schäuble and the heads of the Troika, he learned that there was nothing left to negotiate. “It had all already been decided” says Sarris. Yes, the Cypriot government would get credit to service its debts. But not a cent of that money could be used to cover the losses of their banks. Sarris was shocked. Without state aid, it was shareholders, creditors and ultimately customers that would bear the losses. Over the next fortnight, Sarris and the President of Cyprus argued that the loss of confidence would hit key Cypriot banks, and that the “bail-in” would be “economic suicide” for Cyprus, but their protest was ultimately futile.

Under pressure from the German government, the foreign ministers of the Eurozone wanted to turn Cyprus into an example. Chancellor Merkel promised that this time, unlike as in all other countries of the Eurozone “those who caused the problem would take responsibility,” i.e. those who trusted their money to ill-managed banks. In this case it was easy. The finance industry of other countries in the Eurozone had withdrawn their money, and German and French investors were not in danger.

So much the worse for clients of the Cypriot banks. Any balance above 100,000 euros went towards covering the eight billion in losses. But the punishment of Cyprus contained an enormous risk: Approximately one third of the turnover of Cypriot banks originated in Greece and therefore thousands of Greek depositors had their money in Cypriot banks in Greece. But if they too were forced to pay, ECB experts warned of a bank run in Greece that would lead to a collapse of the Greek banking system, a scenario that the ministers of the Eurozone and the troika definitely want to avoid. They had just given the Greek state 40 billion Euros from the ESM support mechanism to avoid the failure of banks that had become insolvent following the haircut.

Thus, the ECB and the European Commission devised an ambitious plan. They wanted to force Cypriot banks to sell their branches in Greece in order to guard the Greeks from the Cypriot shock. The protection of property, a fundamental right across the EU, in this case did not apply.

Upon assuming his duties Sarris knew nothing of this, although it had been planned for months. As early as January 2013, before the elections in Cyprus, a team in the ECB had examined the scenario of  an “involuntary” division of the Cypriot banks. They had drafted an extensive memorandum, classified as “confidential” and “restricted” which they circulated to a select circle. In this group was a Greek lawyer who had close relations with a legal firm representing Piraeus Bank – a relationship that would subsequently prove controversial. The fearsome conclusion of the memorandum: If the Greek subsidiaries of Cypriot banks were sold at a price that takes into account all possible future losses, then the parent companies of the Laiki Bank and the Bank of Cyprus would be “technically bankrupt”. That is, a compulsory sale of this nature would crush the Cypriot banks.

Initially Sarris learned nothing of this, only receiving an ultimatum from the Eurogroup under which Cyprus would not get loans if Cypriot banks didn’t sell their branches in Greece. “We had to get out of the Greek market, immediately, even though this would usually take several months of preparation and the support of experienced investment bankers,” said Sarris. They gave him just twelve days.

 
The ECB immediately went about writing the necessary legislation. Under the guidance of then member of the ECB Board, Jörg Asmussen, the legal department created a law allowing the Cypriot Central Bank to take over the management of banks in crisis, and thus oblige them to sell their foreign branches. The law was presented to the Cypriot Parliament by the Greek legal representative of the ECB, whose script had been pre-prepared. However, as MP Papadopoulos remembers it,  he “did not say a word” about the proposed mandatory sale of the Greek branches. This was fairly logical, since he would have been faced with the crucial question: at what price? In normal business transactions, this would be whatever the buyer agrees with the vendor. But in this case they weren’t even sitting at the negotiating table, because as  a parliamentary committee noted later, “the Troika disagreed”. So it wasn’t the bank governors who went to Athens on March 9, 2013 to negotiate, but civil servants of the Cypriot Ministry of Finance and the Central Bank of Cyprus. Pulling the strings in Athens was the controversial but powerful governor of the Bank of Greece. George Provopoulos is particularly connected with Piraeus Bank and its Chairman, Michael Sallas, who he had previously worked under. The relationship was soon to bear fruit.
 

Under the auspices of Provopoulos, “the Greek side took advantage of our situation” said one of the Cypriot participants. At that time, the value of the banks (net asset value) was calculated by the Central Bank of Cyprus at nearly eight billion. But the Greeks offered only 500 million. Sarris says that when negotiations collapsed, the Eurogroup assigned the role of mediator to the former Competition Commissioner, Joaquin Almunia.

But then something strange happened. The supposed mediators did not seek any compromise but took the side of Greece. According to later testimonies to the Parliamentary Investigative Committee by executives of the Central Bank of Cyprus, the proposals of the mediators systematically underestimated the value of branches in Greece. As in the ECB’s earlier confidential report, they put forward the worst case scenario for possible future losses. Thus, the value of the assets sold was devalued by 3 billion Euros. Also, the sellers, .i.e the Cypriot banks, were forced to donate to the Greek buyer half of the required equity. When they were informed, the heads of the three banks directly rejected the problematic proposal. “Greece was the heart of our business” recounts Andreas Artemis, who was then president of the Board of the Bank of Cyprus. “Why would we sell it at a fraction of its value?” Even Sarris at first did not want to put his signature.

But the Eurozone finance ministers did not cate about the disputed valuation and left the Cypriot Finance Minister and his President Anastasiadis with no alternative. When the decisions were taken in Brussels on the night of 15 to 16 March, 2013, Cyprus had to accept not only the bail-in at the cost of the depositors but also the mandatory fire sale of the Greek branches. During the session, Asmussen even threatened to stop providing liquidity from the ECB, and that Cyprus would be expelled from the Eurozone. “That would have been an even greater disaster,” said Sarris. “So for us it meant, sink or swim”. 

It took a week and another new meeting of the Eurogroup to crush the Cypriot resistance. After the affair ended, Cypriot banks were forced to sell their Greek branches for just 524 million euros. The buyer was Piraeus Bank. The Bank of Cyprus lost more than two billion euros, its total equity capital. That was the sole reason for its bankruptcy, as predicted by the ECB scenario as early as January. Laiki Bank also lost about a billion. As planned, the Central Bank of Cyprus put the two banks under emergency management and merged them, while depositors were forced to exchange approximately 6 billion euros with bank shares, which didn’t correspond even to one tenth of the value of deposits. Two-thirds of the losses were covered by depositors from abroad. But the remaining two billion belonged to ordinary savers, pensioners, pension funds, universities and companies, even if the account had the salaries of staff for the following month. The Cypriot economy then fell into a deep recession and thousands of people lost their jobs.

In contrast, in Athens, Michalis Sallas, head of Piraeus Bank, and George Provopoulos, governor of the Bank of Greece, had reason to celebrate. In the next quarterly statement, Piraeus reported a profit of 3.4 billion Euros, “from the acquisition of the network of Cypriot banks in Greece.” The Troika, too, had one problem less. Piraeus Bank Group, which until then was itself bankrupt because of the Greek debt haircut, was again solvent, and became the largest Greek bank overnight. The share price rose by 400%.

So did the troika collaborate with a Greek bank? Or was it coincidence? The ECB and the European Commission could answer these questions easily. But both institutions refuse to disclose any information. A long list of questions sent by the Tagesspiegel was not answered, in spite of the promises of the spokespersons. Thus it's not only the MP Papadopoulos who doesn't believe in coincidence. The lawyer Kypros Chrysostomidis also believes that the operations were simply “illegal”. Chrysostomidis has appealed to the European Court on behalf of 120 clients, most of them “ordinary savers” and is seeking compensation of 100 million Euros.

It smells” says even the economist Stavros Zenios, member of the new governing council of the Central Bank of Cyprus. “I cannot judge whether it was corruption or incompetence” says Zenios. Therefore, it is urgent to carry out “a study at the European level.” “The case can not be left hanging over the European institutions without a resolution”.

  • This article by Harald Schumann was originally published by the Berlin newspaper Tagesspiegel and is translated and republished here with the author’s permission.
  • Translated by Alexia Eastwood
  • The Tagesspiegel article is based on the documentary ‘Troika: Power without control’ by Arpad Bondy and Harald Schumann, produced by ARTE and ARD.
  • The research for the documentary was conducted by Nikolas Leontopoulos, João Pedro Plácido and Elisa Simantke.

Harald Schumann

Acclaimed journalist and author Harald Schumann is one of the few in Germany that did not accept the “national” narrative of the Euro-crisis dictated by the German political and economic leadership and repeated in most German media. He has put forward his alternative narrative and interpretation of the crisis in his articles for the Berlin newspaper Tagesspiegel, and also in two documentaries: “

The secret bank bailout“, which has been awarded the highest journalistic award in Germany and the “Troika: Power without Control” which has just been screened by the Arte channel in France and Germany.

Schumann’s findings in the case of the Cypriot banks sale was the result of his research for his documentary about the troika. The Greek media of course, with few exceptions, didn’t even dream of mentioning it. The anti-troika reflex fades away each time the Greek business interests side with the ‘evil troika’, as here with Piraeus Bank.

More documents

The PressProject also here presents the reports drafted by the Cypriot authorities. Amongst them, the confidential findings of emergency research requested by President Anastasiadis on the role played by the political system and the Laiki Bank in manipulating the ” Cyprus Scenario “. This report was first published by the journalist and researcher Landon Thomas, of the New York Times.

At the end of this report you will find evidence of the control of PWC, internal documents of the CBC, etc.

We suggest that you read the report and the documents before coming to any conclusions . Sometimes the same facts can lead to different conclusions…

Preliminary committee report of the Cypriot parliament

Supplementary committee report of the Cypriot parliament

Secret report about Laiki Bank ordered from President Anastasiadis