CYPRUS was censured by top EU officials yesterday for its foot-dragging over a bailout from as early as November 2011 when the first warnings were issued, to the clinching of a deal some 16 months later, a timeframe, which had only made things worse, they said.
European Commissioner for Economic and Monetary Affairs, and vice president of the European Commission, Olli Rehn were briefing members of the European Parliament (MEPs) at the committee on economic and monetary affairs.
Rehn said the Commission warned Cyprus about its accumulating problems early on. Warnings and policy guidance to tackle the banking problems and consequent fiscal and macroeconomic imbalances were included in the reports and Country-Specific Recommendations under the first European Semester in June 2011, he said.
In November 2011, the Commission has communicated to the Cypriot authorities that a financial assistance programme would be unavoidable, unless the persistent economic problems were immediately addressed.
Eventually, Cyprus asked for financial assistance, but only in June 2012, said Rehn.
“It is unfortunate that it took Cyprus more than half a year to accept the gravity of the situation and the unsustainability of its business model. And it is similarly unfortunate that it took Cyprus another nine months to reach an agreement with the Eurogroup,” he said.
Rehn said the Commission had worked hard for a more gradual adjustment of the Cypriot banking system and real economy, while aiming to ensure debt sustainability and adequate financing.
“However, indecisiveness, delays and a very firm financial constraint severely limited the options available,” he added.
“By March [2013], the economic situation had deteriorated so badly that the scenario of the more gradual economic adjustment was not on the cards any more. Especially, the state of the banks worsened rapidly.”
He said the banking problems were aggravated by poor practices of risk management, and that lacking adequate oversight, the largest Cypriot banks built up excessive risk exposures.
“In Cyprus, and I speak with some experience of years of crisis management, we saw the usual pattern of a country in front of an impossible situation and leading to a programme,” Rehn said.
“First there is a sense of denial, which leads to delays. Then there is a draining of funding.”
But while Cyprus managed to buy time by securing a loan from Russia in 2011, the authorities did not use it to implement structural reforms, Rehn added.
“By the time the government finally asked for a bailout in June last year, the people of Cyprus were forced to face “a very painful process of negotiations with even more limited options,” Rehn said.
European Central Bank Executive Board member Joerg Asmussen who also addressed the MEP’s talked of an inflated but poorly supervised banking sector that attracted deposits by offering high deposit rates and fuelled a domestic boom that left banks – after the bubble burst – with non-performing loans. And when the banks incurred losses following a Greek debt restructuring, the government’s rising fiscal deficit and public debt left them unable to support the banks, Asmussen said.
References during the briefing by either Asmussen or Rehn over the unprecedented and controversial Eurogroup decision on March 16 to tax insured depositors remained vague however.
Rehn said that with the EU ready to offer up to €10 billion, Cyprus was expected to mobilise resources “through a range of fiscal measures and by sharing the burden with the creditors of its banking sector”.
Skipping over parliament’s rejection of the decision to impose a levy on both insured and uninsured depositors to raise the funds to recapitalise the banks, Rehn said that by March it had become clear that “the second biggest bank, Laiki, had to be resolved immediately” to prevent the banking system’s collapse “and a disorderly default of the sovereign.”
The “final decision” to wind-down Laiki and restructure the Bank of Cyprus “does not include this kind of levy and protects secured deposits as indeed it must protect,” Rehn said.
The most pointed question yesterday came by Greek MEP Thodoros Skylakakis who asked the ECB’s Asmussen why Laiki was allowed to accumulate emergency liquidity assistance to the tune of €9.6 billion, or more than half of Cyprus’ yearly economic output. The emergency assistance is given to banks that are solvent but need liquidity. Under what criteria was Laiki considered solvent? Skylakakis asked.
Asmussen said the decision was fair given the bank’s Greek debt exposure, and that the emergency assistance was given on the belief that Laiki could “become solvent again while it (was) being recapitalised as part of an adjustment programme.” “But the negotiation on the memorandum of understanding (for the bailout) took extremely long,” he said.
He also said short-term risks were high in Cyprus, as the deep recession was expected to take a toll on banks' balance sheets.
"The reliance of the largest bank on emergency liquidity assistance (ELA) continues to be exceptionally high," he said, referring to the Bank of Cyprus.
Olli Rehn, the European Commissioner in charge of Economic and Monetary Affairs