Cyprus: After the first confiscation, comes another

The citizens of Cyprus can consider themselves lucky.

They have the opportunity to see (and especially, to feel) closely how the history of world finance is being written.

The small island state seems to have become a true center of financial innovation, but which has it as its goal not to take us to new heights of development, but rather to try and plug the holes created by public policies and business decisions made by people to whom the word "caution" has been nothing more an exotic and outdated notion.

Whereas last year, the Cypriot authorities and the Troika of international creditors (the European Commission, the European Central Bank and the International Monetary Fund) have agreed to seize the depositors' money, using almost half of the unguaranteed deposits of Bank of Cyprus to recapitalize it, now the Government and the Central Bank in Nicosia (which were forcefully turned into shareholders) want to avoid giving shareholders the possibility to preserve their holdings which were shoved down their throats, as "compensation".

The management of Bank of Cyprus (BoC) announced on Friday, that the executives of the bank will start "exploring" the interest of the investors in a potential share capital increase.

"A capital increase is intended to accelerate the implementation of the restructuring plan of the Group (ed. note: Bank of Cyprus) and to continue strengthening it", according to a press release published on the website of Bank of Cyprus.

The document states that the executives of the bank will approach the investors directly, and the operation would be structured in such a way as to give the current shareholders the "opportunity" to participate.

The heads of Bank of Cyprus claim that the institution would try to get listed again on the stock exchanges of Cyprus and Athens, after the completion of the capital increase.

The issue of increasing the capital of BoC by one billion Euros has started a conflict between the Board of Directors on one hand, and the Directorate, the Central Bank of Cyprus and the Cypriot government, on the other hand, according to the Cypriot press.

The reason for the disagreement was that the authorities in Nicosia and the executive management of the bank wanted to prevent the existing shareholders from subscribing more than 20% of the titles offered as part of the share capital increase.

This has made some of the members of the Board of Directors of Bank of Cyprus, who represent the interests of some of the depositors whose savings have been turned into equity, through the procedure called "bail-in".

Among the shareholders who have publicly expressed their displeasure at the plan for the capitalization of BoC was also the Archdiocese of Cyprus, through the voice of Archbishop Chrysostomos, who said that the authorities of Cyprus favor hedge funds that want to buy the bank cheaply.

Cyprus Mail reported last week that the governor of the Central Bank of Cyprus, Chrystalla Georghadji, sent Christis Hassapis, the Chairman of the Board of Bank of Cyprus, a letter dated July 1st, asking him to stick to the initially agreed plan for the capital increase.

Even though the political parties in Cyprus have sided with the current shareholders, stating that their exclusion from the capital increase would be "inconceivable", given that Bank of Cyprus was kept alive through the confiscation of the money that the shareholders had deposited with the bank, the Central Bank and the Ministry of Finance remained unyielding.

The reason invoked by the two institutions to limit the participation of the current shareholders was the "need" to attract foreign capital in Cyprus and the need to strengthen the capital position of BoC, for the stress tests that the lender will be subjected by the European Central Bank.

The chairman of the Board of Bank of Cyprus, Christis Hassapis, last Thursday had a meeting with the president of Cyprus, Nicos Anastasiades, and on Friday morning had talks with the governor of the Central Bank and with the managing director of BoC, John Hourican.

After the completion of these talks, the managers of Bank of Cyprus have decided to conduct the share capital increase at the end of August, as the authorities want, rather than by September, as some of them would have wanted.

Cyprus News Agency, the national press agency of the island state, reported that in Friday's session, a compromise was reached that assumes the existing shareholders and new investors would be able to bid for shares of Bank of Cyprus, in the initial stage of the process.

Depending on the received bids, a price would be set for the offering.

In the second stage of the share capital increase, the current shareholders of BoC would be allowed to buy a maximum of 20% of the shares on offer, as part of an internal procedure, according to Cyprus News Agency.

Thus, the limitation to 20% of the new share capital remains.

• Călin Rechea: "Arbitrariness reigns in Cyprus"

The situation of Bank of Cyprus shows that contractual law no longer exists in Cyprus, economic analyst Călin Rechea says.

"We are dealing with the reign of arbitrariness, with decisions that are not accompanied by assessments of the impact they might have on the market", he told us.

Călin Rechea considers that the amount that would be raised would not be enough to put Bank of Cyprus on a healthy foundation, given that the bank has a portfolio of loans of 21.2 billion Euros and a rate of non-performing loans of 50%.

In turn, Alin Iacob, the president of the Board of Directors of the Association of Romanian Users of Financial Services (AURSF) and member of the Banking Stakeholder Group of the European Banking Authority, says that any unilateral decision affects the depositors' confidence in banks.

He said that according to the latest study concerning consumer perception drawn up by European Commission, financial institutions, and predominantly lenders, are ranked hold some of the lowest positions in the trust ranking.

Last year, in April, Cypriot president, Nicos Anastasiades, was accusing the governor of the French Central Bank, Christian Noyer, that Cyprus has been turned into a "Guinea pig", to experiment on.

The former was saying at the time that "the main goal of a precedent is to help set the norms to be repeatedly applied on a universal level".

In response, Christian Noyer told him that in the island state "an exceptional treatment was applied", which can not be called "a precedent or a model for the management of future crisis situations".

How truthful the words of the governor of the Central French Bank actually were we could see at the end of last year, when the member states of the European Union and the European Parliament decided that the "bail-in" would be used on a wide scale, to recapitalize the troubled banks.

It would seem that now, "the Guinea pig" has been reactivated, for a new experiment.

It remains to be seen how long it will take for this "exceptional treatment" to become generalized.