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George Vassiliou, the banks must be saved

FORMER president George Vassiliou has appealed for an end to the “war” against Cyprus’ banks, warning that loss of confidence in the sector would be catastrophic for the island.

 In an interview with the Sunday Mail, Vassiliou, who was also Cyprus’ chief negotiator during the EU accession talks, agreed that banks had made mistakes as regards the size of their Greek bond holdings - which led to their current troubles - but stressed that Cyprus as an international financial centre could cease to exist without them.

 “The war against the banking sector is a war against Cyprus,” he said. “To attack the banking sector as a whole works against the interests of Cyprus.”

 The island’s two main banks, Bank of Cyprus (BoC) - the biggest - and Popular Bank, suffered record 2011 losses as a result of a write-down in their portfolios of Greek sovereign debt, an impairment agreed by European leaders, including Cyprus’ president, to make Greece’s debt more sustainable.

 The decision proved costly for the island, with the Popular Bank needing at least €1.8 billion from the state, while BoC has asked for €500 million.

 Imposing the haircut on holders of Greek sovereign debt essentially pushed Cyprus - already shut out of international capital markets for a year and in recession - to seek international aid.

 At the same time, the government and opposition have been engaged in fierce public debate over who is to blame. The government claims it’s the banks while opposition parties said it’s the administration’s mismanagement of the economy.

 “No one can say the government was infallible nor can one say the banks were infallible; but this is not the essence of the problem at the moment,” Vassiliou said.

 Vassiliou says the main reason for Cyprus’ travails is the “Greek tragedy” which naturally affects Cyprus because of the links between the two countries’ economies.

The former president said the two lenders could have avoided buying such a large continued from page one

number of bonds - €5.0 billion-worth combined - despite them being officially considered and promoted as a zero risk investment.

 But they couldn’t have bought none at all.

 “You cannot operate in a country without buying its bonds,” he said. 

 He agrees there were “errors in judgement”, although the Popular Bank is a more complicated case.

 “The mistake was when they (Popular Bank) agreed to join forces with Marfin Egnatia,” he said.

 But the biggest mistake of them all was the decision by EU leaders to impose a haircut on the Greek debt, he said - a view shared by former Central Bank governor Athanasios Orphanides and other central bankers at the European Central Bank.

 The banks can be criticised for buying such a large number of bonds but attacking the sector as a whole would only hurt Cyprus, Vassiliou, said.

 The banking sector alone employees around 13,000 people and provides financing to 60,000 businesses.

 He said Cyprus’ strength is its financial services sector - which has an unlimited scope for growth - and banks were an integral part.

 At 10 per cent, Cyprus has the lowest corporate tax in the EU - a comparative advantage over its peers.

 For Vassiliou, it is not just the tax regime but the whole package, which makes Cyprus an attractive base for international firms.

 “In my opinion a good tax system cannot stand on its own,” he said. 

 Companies also need banks, lawyers, accountants and other related services.

 “Now, if you destroy the banking sector, you destroy everything,” Vassiliou said.

 Half of the around €60 billion deposited in commercial banks is foreign money, he said.

 Vassiliou warned that the constant negativity about the sector could make foreign clients to start doubting the safety and respectability of the banks.

 “If foreigners start losing confidence its game over,” he said. “We have to take care of the banking sector.

 “In my opinion, priority number one is to stop the blame game,” the former president said, of the sparring between government and opposition.

 Vassiliou said the three Cypriot banks - BoC, Popular and Hellenic - had around 211,000 shareholders between them - suggesting that most households owned stock one way or another.

 Their stock that has seen its value go down the drain in the past couple of years or so. BoC shares traded at €3.40 in 2010, €0.26 today - Popular shares were worth €1.53, now €0.08, and Hellenic’s were down to €0.18 from €0.95 in 2010.

 “Is there a bigger punishment?” Vassiliou asked.

 He said Cyprus now needed everyone to work together and convey the message that Cypriots stand united on matters currently under the focus of officials from the European Commission, the IMF and the European Central Bank, known collectively as the “troika”.

 Troika inspectors have been collecting data in a bid to assess how much money Cyprus would need as part of its bailout.

 One of the issues concerning the banks is the way non performing loans (NPLs) are defined.

 It is understood that banks do not count as non-performing, any loan that has not been serviced in 90 days but is fully secure. The Troika may want to count them as NPLs.

 This would immediately raise the amount needed for the banks’ recapitalisation.

 There are also the loans backed by shares and property, whose current values are lower than when the agreement was made.

 Vassiliou says if provisions are made for all of these, several more billions would be needed and “you are simply making sure that Cyprus would never recover.”

 “If we want to fight it, we have to be together.”