The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (57 page)

In April 2011 Orphanides gave an interview to Reuters. ‘I am puzzled by the continuing questioning of the sustainability of the Greek debt,’ he said. ‘In my mind, restructuring of the Greek debt is not necessary as long as Greece continues to implement the programme… Even in the highly unlikely situation… of imposing losses on the holdings of Greek debt, our banks would manage to weather that.’ Despite sitting, around that doughnut-shaped table, on the governing council of the European Central Bank, Orphanides called this wrongly. Greek debt restructuring was agreed within three months, and with each new negotiation the restructuring became more drastic. And, as it turned out, Cyprus’s private banks could
not
weather the storm.

The pattern of lending to Greece by Bank of Cyprus, the country’s largest, was truly astonishing. On the morning of 10 December 2009, BoC officially had negligible exposure to loans to the Greek government, after cutting back from a previous peak of €1.8 billion. According to an independent investigation, BoC then chose to take its lending to record highs,
after
Greece revealed its full woes, and eventually lost the bulk of the money in the Greek bond haircut. On the eve of the decision to burn Greece’s bondholders, BoC had built its holding back up to €2.4 billion. The bank was effectively using €3 billion of European Central Bank low-interest one-year loans not for the usual purpose of propping up the bank’s existing balance sheet, but instead to lend more money to near-bankrupt Greece at a higher interest rate. Traders call it a ‘carry trade’. It was a bet that Greece would never default on its bankers. That happened to be the public view of Governor Orphanides, perhaps influenced by the views of his colleagues on the European Central Bank governing board, who at the time believed in the inflexible honour of the Eurozone ‘sovereign signature’. BoC had in fact placed its head in the guillotine in the months leading up to the blade falling. For a time it earned a handsome profit. After a year and a half, it was a total disaster. What Cypriot banks suffered was not so much a haircut as a lobotomy.

At Laiki, Chris Pavlou spotted the problem. ‘There’s nothing wrong with buying government bonds, provided it is 10 to 15 per cent of one’s capital,’ he told me. ‘But what happened at our bank at the time, the Greek government bonds, instead of being 10 to 15 per cent of the capital, it was 150 per cent of the capital.’ He shook his head. ‘If you lose so much, then you cut it. Thus I understand that once or twice it was suggested to the top that they should sell this and just take the losses, 300 to 400 million euros, whatever.’ As it turned out, the loss came to €2.3 billion.

Effectively, Greek government debts worth €4.2 billion – about half the cost of the Athens Olympics – were shunted on to depositors at Cyprus’s big two banks. But the helping hand given by the Greek Cypriots to their big brothers and sisters in Greece went well beyond that.

After the losses incurred by the big two, I received an email from a leading Greek investment banker. ‘There’s a convenient story that Cyprus suffers from its investment in Greek bonds,’ he wrote, ‘and Greece is responsible for the plight of Cyprus. This is not the case, not even partially.’ He pointed to massive lending losses at Laiki, and a tangled web linking Cyprus, Greece and a bank called Marfin.

It was not the monks of Vatopaidi who brought down Greece. The Holy and Great Monastery of Vatopaidi is one of many monasteries on Mount Athos, a remote peninsula in the northeast of the country from which all women are banned. The only female animals allowed are cats.

But the Holy and Great Monastery of Vatopaidi
was
involved in a wider scandal concerning questionable land investments, a scandal that helped to bring down the conservative-led Greek government in 2009. It then led to the landslide election of George Papandreou, the revelation of cooked government borrowing books, and the start of the all-consuming Greek crisis. So the monks of Vatopaidi did play an inadvertent role in revealing Greece’s problems. The scandal, which was to see Abbot Ephraim serving a brief term in prison, concerned political pressure on Greek ministers over a dubious land swap. The abbot’s incarceration prompted diplomatic complaints from the government of Vladimir Putin in Russia, now strongly allied to the Orthodox Church. The Vatopaidi also had particularly strong connections to Cyprus. Their bankers for the deal were Marfin. In 2006 Marfin had effectively merged with Laiki and another Greek bank called Egnatia. An investigation by Reuters journalist Stephen Grey showed that the Vatopaidi land deal was also emblematic of wider questionable lending in Greece that would cause huge losses at Cypriot banks. In October 2010 a Greek parliamentary inquiry into the Vatopaidi deal suggested ‘serious conflicts of interest’, and that some Marfin loans to the monastery ended up benefiting bank shareholders and executives in a ‘heap of violations, perjury and possibly falsification of documents’. Deals like those done by Marfin with the Vatopaidi – involving questionable, opaque lending in Greece – were in fact more relevant for the calamities of Cyprus than for those of Greece, and were raised in June 2013 at a Cypriot investigation into its banking crisis. Marfin’s former owner told Reuters that the bank was cleared of wrongdoing by the Bank of Greece after an audit in 2009, and ‘nothing was substantiated’ by other investigators.

The wider problem for Laiki, now merged with Marfin, was a web of lending to connected parties by the latter. Chris Pavlou, then the just-resigned Chair of the bank’s Audit Committee, described to me how ‘a big party started’ after the UK bank HSBC was rebuffed from buying Laiki by the government of Cyprus in 2005. HSBC had held a 25 per cent stake since 1972, but sold to Greek investors. Laiki set out extraordinary ambitions to become the biggest bank in southern Europe, aiming to overtake BoC and to buy up banks across the Mediterranean. ‘It’s very sad having to think about it, but everything to do with governance was destroyed. When I got in the bank, in late 2011, in December 2011, I walked in on a Saturday morning and I couldn’t believe what I saw in front of me. I couldn’t find a balance sheet of the bank, I couldn’t see any governance whatsoever, I couldn’t see any lending limits. They were from the Greek subsidiary… In some of the loans in Greece, there was absolutely nothing behind it. Collateral was almost zero, and very low interest rates.’ I asked Pavlou about sketchy connections, maybe, between the bankers and the loan recipients? ‘One could find evidence of some connections there, yes. A conflict of interest. I think some of the lending there, some of the practices were very dodgy,’ Pavlou told me.

The original intention in 2006 was for the merged bank to be headquartered in Athens alongside the bulk of its operations. Political concern in Cyprus saw the HQ transfer to Nicosia – and the liabilities from Greece would effectively transfer to Cyprus too. The merger deal closed in March 2011. The larger Greek unit, replete with rotting government bonds and dodgy loans, was now a mere branch of a smaller Cypriot bank.

Back to Lent 2013. The Hilton Nicosia played host to a bizarre mix of international journalists, thirty-something Troika officials, accountants, management consultants and beefy Russians with their stillettoed girlfriends. There was also a crack team of Greeks working for Piraeus Bank. Piraeus knew a thing or two about bailouts. In the previous year it had received €7 billion from the European bailout funds allocated to Greece. All in all, more than a third of this Luxembourg-based bailout fund, the European Financial Stability Fund (EFSF), had been used to help the Greek banking system. Less than a year before the collapse of its own banks, Cyprus had been one of the guarantors of the bailout for the banks of its larger neighbour.

The banks in Cyprus were never offered the same deal, either by the EFSF or by its permanent successor, the European Stability Mechanism. In addition, the Eurogroup’s approach to Cyprus prioritised the protection of the Greek units of Cypriot banks. Effectively, the €5 billion of Greek deposits in Cypriot banks were ring-fenced and guaranteed for Greeks, even though the bulk of the losses were incurred in Greece. So Greece would keep the deposits, the Cypriots would get an even more drastic haircut, and Cyprus would get the rotten liabilities. The Greek units of both Laiki and BoC would be sold to the Piraeus bankers waiting at the Hilton at a fraction of their book value. Not only had Piraeus itself been saved by EU bailout money partly funded by Cyprus, but the actual fire-sale purchase of the Greek units of Laiki and the Bank of Cyprus was funded by the Hellenic Financial Stability Fund, itself entirely funded by EU bailout cash. The Eurogroup was willing to give Greece bailout cash (partly backed by Cyprus) to support its parts of the Cypriot system. But it was not willing to bail out Cyprus itself.

At best, there was a staggering inequity in the treatment of Cypriot and Greek banks. At worst, the EU specifically intervened to protect Greece, and to export part of its own dodgy loan default over the sea to Cyprus. As a by-product, Cyprus was destroyed as an offshore financial centre. Certainly at the height of fevered negotiations, the issue of the treatment of the Greek units was at the very top of the concerns being expressed from Brussels about laws being passed in Nicosia. Bank queues could be tolerated in Nicosia. But not in Athens.

On the middle Monday of that nightmare Lent, there was a planned bank holiday in Cyprus, to celebrate Greek Independence Day. Most Cypriots felt there was little to celebrate, and much to bemoan – primarily, their country’s rotten dependence on an EU with uncertain motives and questionable competence. On Greek Independence Day, teenagers marched through Nicosia representing the city’s schools, youth groups and sports teams – including those from across the Green Line. The march finished near the European Union house, resplendent with large banners celebrating the EU’s recent receipt of the Nobel Peace Prize. But the parents lining the route were pensive. Inside, their feelings of national pride were replaced by a sense of emptiness, of loss or anxiety for the future. The tail end of the march was joined by protesters shouting ‘Wake up Cyprus!’ The next day, at 11 a.m., most of the same teenagers emptied out of Nicosia’s classrooms and rushed onto the streets, marching in their thousands on the presidential palace to vent their anger at Cyprus’s financial collapse and against the Troika bailout deal. ‘
Exo i Troika tora!
’ (‘Troika go home now!’) they chanted to the tune of the White Stripes’ ‘Seven Nation Army’. Banners declared

Your mistakes

Our future.

Schoolkids and students, organising themselves through Facebook and Twitter, really did think that the European Union and the IMF were stealing their future. ‘We can no longer afford to take loans to study,’ said Christina, a student at a private English school. ‘Fight on, with all your voice until you can’t shout anymore,’ she says. ‘For your country, for your parents!’ shouts another young girl protester. In Nicosia there was none of the violence seen in Athens. The police were relaxed, chatting with the kids. The riot squad kept out of sight behind the trees. But there was the same anger.

President Anastasiades had returned to Brussels for a second negotiation, after finance minister Michael Sarris’s talks in Russia had collapsed without even a meeting with President Putin. At one point during his negotiations in Brussels, an emotional Anastasiades threatened to resign and to call a referendum on the deal – as Greece had briefly suggested in 2011. He also threatened to block the sale of the Greek branches of Laiki and BoC to Piraeus. Ultimately, however, Cyprus had even less bargaining power than the week before. Not only did the Cypriot mess cause no financial contagion to Eurozone bonds, but there was scant evidence of human contagion, of people in other countries rushing to their banks to withdraw their money. Cyprus came closer to euro exit than any other nation. Some EU finance ministers were entirely prepared for that eventuality, should it arise. However, Chancellor Merkel, unlike her finance minister, believed there was a geopolitical rationale for keeping Cyprus in the euro.

Eventually a compromise was reached. All deposits under €100,000 would be protected, but larger deposits in Laiki and BoC were now to take a stratospheric hit of 40 per cent to 80 per cent. Laiki was to be wound down, and BoC self-capitalised by raiding large deposits. The government was desperate to protect BoC and so preserve some residue of Cyprus’s international financial services industry. The fact that many MPs had their savings in BoC may also have concentrated minds. In the end, many thousands of Cypriots were to lose hundreds of thousands of euros. From the Eurogroup perspective, it became clear that the first deal – involving raids on even the smallest depositors – had been an unmitigated disaster. Now, one week later, the Eurogroup finance ministers said that the first deal they’d signed off was ‘against European principles’. The president of the European Central Bank had not been present at the first negotiation, and described the initial decision to hit small deposits as ‘not smart, to say the least’, but insisted this mistake was quickly corrected the following day in a teleconference of Eurogroup ministers.

A few weeks later I spoke to the new Eurogroup president, Dutch finance minister Jeroen Dijsselbloem. He was unrepentant. ‘The way we dealt with Cyprus,’ he told me, ‘especially in the second outcome, was inevitable. It dealt with problems in Cyprus in a very direct way, focusing on the banks where the main problems have arisen.’ He said that the debt burden imposed on Cyprus by the second deal was not more than they could afford. ‘So debt sustainability is guaranteed,’ he continued, ‘and it’s dealing with the problems in a way that deals with the source of the problem.’

Throughout the EU, however, those anti-European parties that had previously been on the fringe of politics were now cock-a-hoop at the attempted deposit grab. In their wildest fantasies, they could never have imagined Brussels actually sanctioning the seizure of the money of ordinary citizens – even temporarily.