articles | 30 July 2013

Cyprus bows to troika on haircut figure

The Central Bank of Cyprus (CBC) has agreed a 47.5% haircut with international lenders on deposits exceeding €100,000 in the Bank of Cyprus in an attempt to recapitalise it.

Deputy government spokesman Victoras Papadopoulos announced the deal after protracted talks spanning the weekend and yesterday. He intimated however that the administration was not too thrilled with the outcome. “The government considers that a smaller haircut rate wouldhave been sufficient to secure a necessary capital adequacy for the bank,” Papadopoulos told newsmen. Nevertheless, he added, the government welcomed the haircut decision as it paved the way for Bank of Cyprus (BoC) to finally exit administration. The official haircut figure is likely to be announced today by the Central Bank, which is also acting as the administrator for BoC. Decrees ending the status of administration for the BoC and also on the particulars of the haircut are due to be issued by the Central Bank sometime this week. The actual accounting deduction of an additional 10% from uninsured deposits will take place over the next few days.

Under the bail-in agreement concluded in March, large depositors were subject to a 37.5% haircut in exchange for equity (bank shares). The remaining 22.5% was held in reserve until a final audit of the unified BoC was concluded, after which the balance would also be converted to any one of the four classes of new shares to be issued. A further 30% had been ordered frozen by the CBC, in addition to the strict capital controls, resulting in many businesses losing access to vital capital. Until now, savers had only 10% of their uninsured deposits available to them.

The authorities will announce the freeing up of an additional 5.0% of the deposits frozen, effective immediately. That will give large savers access to a total 15% of their cash over and above the €100,000 threshold. A flurry of reports over the weekend had placed the haircut at anywhere from 42.5 to 47.5%, with media outlets reporting that the government was seeking a smaller haircut and the CBC was pushing for harsher measures. During the talks, sources said, the government had conceded to a 42.5% haircut (an additional 5.0% on that already levied), bringing BoC’s capital adequacy ratio (core tier 1 capital) to 11%. Tier 1 capital is core measure of a bank’s financial strength from a regulator’s point of view.

Sources close to the ruling DISY party said the government feels the troika of lenders backtracked on an earlier understanding that BoC’s core tier 1 capital would be fixed at 9.0%. During the talks, however, the troika insisted on a higher figure: a 47.5% haircut, corresponding to a core tier 1 capital ratio of 12.4% – as the bank’s balance sheet stands at the moment. In short, the lenders sought – and got – an additional buffer to ensure BoC’s capital adequacy ratio would not fall below 9.0% by the end of the bailout period. That time distinction between the capital adequacy now and at the end of the bailout programme is crucial, explained Alex Apostolides, who sits on the National Economic Council, an advisory body to the President. “There’s a misperception about the whole core tier 1 thing…the deal with the troika explicitly states that it must be 9.0% by the end of the [bailout] programme,” he said.

The memorandum of understanding (MoU) between Cyprus and its creditors back in April does state that the 9.0 per cent capital adequacywill be reached “by end-programme” – that is, by December 2015 when Cyprus will have received all of the €10 billion in bailout money. The MoU notes: “…to ensure that the capitalisation targets are met, a more detailed and updated independent valuation of the assets of Bank of Cyprus and Cyprus Popular Bank will be completed…Following that valuation, and if required, an additional conversion of uninsured deposits into class A shares will be undertaken to ensure that the core tier one target of 9.0% under stress by end-programme can be met. Should the bank be found to be overcapitalized relative to the target, a share-reversal process will be undertaken to refund depositors by the amount of over-capitalisation.”

With each percentage point amounting to about €80 million, a 47.5% accounts for roughly €3.8 billion raised in capital from the bail-in of uninsured depositors. While delicate talks were ongoing on Sunday, it was being leaked to the media that a 47.5% haircut had been locked. The leaks reportedly irked finance minister Harris Georgiades, who at one point threatened to walk out.

Reaction yesterday to the news of the final haircut was varied. Sophocles Michaelides, interim chairman of BoC, told the state broadcaster the figure was a ‘reasonable compromise’ for the depositors on the one hand, and the Central Bank and the troika on the other. Christopher Pissarides, who chairs the National Economic Council, said of the agreement that it was positive, since it would allow BoC to borrow money from the markets. On the capital restrictions, the Nobel laureate said these should be lifted gradually over a period of up to two years, to prevent an outflow of deposits until confidence in the banks is established. In a statement, ruling DISY complained about the extent of the haircut, but said that overall the development was a positive one for the bank. AKEL meanwhile again denounced the bail-in of depositors, calling it theft of property. The opposition party censured the government, saying its ‘celebrations’ over the size of the haircut was an insult to savers who have lost their money.

A 30-strong delegation from the European Commission, European Central Bank and the International Monetary Fund is on the island to assess whether the recession-hit country is meeting its troika-set targets as agreed in a memorandum of understanding with international lenders in March. The troika team have reportedly delivered their verdict to the government, which in turn will give its own feedback. “During the meeting today, in Nicosia, participants noted there was a hopeful stabilisation of the situation which will give an impetus to the economy to get back on track to exit the crisis,” the government spokesman said. “The evaluation is going well…we are optimistic,” he said in response to a question.

Source: Cyprus Mail

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